The QPP enhancement reverses a strong trend observed in recent years in terms of public retirement programs. (Photo: 123RF)
GUEST EXPERT. Since January 1, 2019, the Quebec Pension Plan (QPP) has been improved. Even if the application of this improvement is very gradual and the material effects will take time to be felt, the fact remains that this improvement is very probably the most important improvement of the plan since its creation.
In addition, this improvement reverses a strong trend observed in recent years in terms of public pension programs, that is to say various forms of tightening of the rules (cost increases without additional benefits, increase in penalties in the event of early retirement, announcement of the postponement of the age of eligibility for Old Age Security benefits from 65 to 67; this announcement was subsequently reversed, but still). Here are some thoughts on this bonus.
Brief description of the bonus
In fact, we created an additional plan to the basic QPP plan that already existed. In two steps, we will increase the retirement benefits payable:
• Since January 1, 2019, the income replacement rate provided by the plan has been gradually increased from 25% to 33% of the eligible salary, that is to say the salary up to the Maximum eligible earnings (the MPE, $ 61,600 in 2021). This is the first part of the bonus.
• Then, from 2024, the salary recognized by the QPP will be increased over two years. This limit will go from the MPE mentioned in the first point, to the Maximum additional pensionable earnings (the MSGA, estimated at $ 70,200 in 2021 dollars). This is the second part of the bonus.
We will therefore move from a plan that currently replaces a maximum of 25% of an eligible salary subject to a ceiling of $ 61,600 to a plan that will replace a maximum of 33% of an eligible salary subject to a ceiling of 70,200 $ (in 2021 dollars). Even if the changes will be applied gradually, over 40 years, it must be recognized that, in the long term, it will be a very material increase.
Gradual aspect of the bonus
As mentioned, these improvements will be done very gradually, that is to say at the rate of 1/40 of the improvement per year. Only participants who have accumulated 40 years of contributions to the additional plan will benefit from the full increase in benefits. We are therefore talking about 2065 before having reached full improvement in the diet. For example, someone who has contributed only 10 years to the additional scheme will essentially receive only 10/40 of the improvement. It should also be noted that both in terms of the additional contributions required and the level of additional benefits acquired, we have opted for a gradual implementation which materializes as follows for each component:
• For the 1st part, the required annual additional contribution of 1.00% has been adjusted so as not to create a tariff shock. We therefore contributed 0.15% more in 2019, 0.30% more in 2020 and we will contribute 0.50% more in 2021 and 0.75% more in 2022. It is only in 2023 that we will reach the 1.00% of additional contributions.
• For the second component, the contributions payable will also be gradually increased over two years, ie 2024 and 2025.
The enhanced benefits resulting from these years will be modulated in essentially the same way.
Costs versus benefits
Some say that participants who will receive their QPP retirement benefits in the next few years will see little improvement after all. This last observation is quite correct. Take the example of a 65-year-old member who would be entitled to the maximum benefit at the start of 2021. Had it not been for the plan enhancement, he would have been able to receive an annual benefit of $ 14,445. With the bonus, he will be able to receive a benefit of $ 14,499, or $ 54 more per year.
Even if this represents a modest improvement, he will still have paid only $ 246.45 ($ 80.85 in 2019 and $ 165.60 in 2020) for this additional pension which, let us not forget, will be paid to him. for the rest of his life. Dollar for dollar, this participant will have made a good deal. Take the example to the extreme: a member who turns 65 in 2065 will have contributed about 30% more to the plan, but will receive an additional maximum benefit of about 52% higher. He too is getting a good deal.
These new QPP components will have to be fully funded as the years go by. This financing will be done separately from the basic plan. The supplemental plan will be funded much like a private pension plan. This addition to the QPP will therefore not have the effect of worsening the financial situation of the current plan and will not constitute an intergenerational transfer either. These are two great news!
Unlike employee contributions to the basic QPP plan, contributions paid by employees to the additional components are deductible from taxable income. This is the reason why many Quebecers have noticed new deductions in their tax returns (a maximum of $ 80.85 in 2019 and $ 165.60 in 2020). Thanks to this mechanism, which is similar to that of RRSPs or registered pension plans, these contributions are very tax efficient.
Also, since the contributions will have no impact on the RRSP contribution room (in particular, they will not cause an Equivalence Factor or PA), we can conclude that they will allow a greater potential of income. at retirement (an increased QPP pension without reducing the available RRSP contribution room).
Salary against dividends
The QPP contribution is compulsory for most Quebec workers. However, some individuals have the indirect choice of contributing or not to this plan. Indeed, individuals who are incorporated (entrepreneurs, doctors, etc.) have the freedom to pay each other salaries, dividends or a combination of both. By paying themselves dividends exclusively, these individuals avoid contributing to the QPP. However, by avoiding contributing to the QPP, they do not accumulate rights to this plan.
There are a very large number of variables to consider when deciding whether to pay yourself a salary or dividends. One of these variables is the value of the QPP. For those who were already paying themselves a salary, the QPP bonus should only strengthen their decision. For those who paid themselves exclusively dividends, the QPP enhancement is such that it appears to us sufficient to reverse the conclusion. These individuals would very likely benefit from revisiting past analyzes.
Much has been said about the enhancement of the QPP; on several levels, this is very good news.
Martin Dupras, ASA, Pl. Fin., M. Fisc., ASC
Fellow of the IQPF