July 2001
Jule Questions & Answers and July Graph
by Joel Emes
Q: All of the discussion about taxes seems to be about recent personal income tax cuts; have any taxes increased recently?A: Yes, Canada and Quebec Pension Plan (CPP/QPP) contributions have increased significantly in recent years and will continue to increase until the contribution rate reaches its long-run, steady state of 9.9 percent of insurable earnings. The Tax Freedom Day article in this month's Forum notes that the increase in CPP and QPP contributions between 2000 and 2001 offset over 80 percent of the decrease in personal income taxes for the average Canadian family. Specifically, income taxes paid by the average Canadian family fell by $542 while CPP/QPP contributions increased by $452. As the Quebec Pension Plan is essentially a small version of the Canada Pension Plan, the rest of the article discusses only the CPP. The observations made about the CPP also hold for the QPP.
Q: How is the CPP calculated? How have the maximum contribution rate and contribution changed over the last few years? How are the maximum contribution rate and contribution expected to change over the next few years?
A: Canada Pension Plan contributions for an employee are calculated by subtracting an exemption from the employee's income (which is subject to a ceiling) and multiplying the result of this subtraction by the contribution rate. For 2001, the exemption is $3,500, maximum pensionable earnings are $38,300, and the contribution rate is 4.3 percent; the maximum employee contribution is therefore $38,300 less $3,500 multiplied by 0.043 which yields $1,496.40. As an employee's compensation comes out of the total amount of money that the employer is willing to pay for any specific employee, a payroll tax necessarily decreases the amount of money available to pay the employee's salary. As such, the employee also bears the burden of the employer portion of the CPP contribution, which is equal to the employee contribution. Thus, the maximum amount for the CPP contribution in 2001 is $2,992.80. Anyone earning more than $38,300 in 2001 makes the maximum contribution. Table 1 shows the amount of the CPP contribution for individuals earning $4,000, $20,000, $38,300, and $50,000. Table 2 shows the contribution rate, exemption, maximum pensionable earnings, and maximum contribution from 1995 through 2003. This month's graph shows the growth in CPP contributions for three income groups between 1995 and 2003.
Q: How does the maximum CPP contribution compare to the amounts that people voluntarily put away in their personal retirement savings?
A: In 1997, the year for which the most recent statistics are available, 9,411,460 taxpayers made $31.5 billion in contributions to Registered Retirement Savings Plans (RRSPs) and registered Pension Plans (RPPs) for an average contribution of $3,349. People earning under $40,000 made an average contribution of $1,983. If we allow for 5 percent annual growth in the average contribution by the under $40,000 group, $1,983 grows to $2,410 by 2001, $583 less than the maximum total CPP/QPP contribution for 2001. Even though an answer is beyond the scope of this article, it is interesting to ask what the average individual RRSP/RPP contribution would be if a portion or all of the CPP/QPP "contributions" were eliminated.
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