CPP reform would benefit millions of Canadians by providing something they sorely lack: a predictable payout at retirement, according to CIBC CEO Gerry McCaughey. This is quite surprising to hear, especially coming from one of Canada’s big banks. You’d think CIBC would be more concerned with investment products like RRSPs and the incoming Pooled Registered Pension Plans (PRPPs). It just goes to show you how important savings are.
Savings Rate vs. Rate of Return
Today Canadians are a lot savvier when it comes to their investments. Low-fee investments like Exchange Traded Funds (ETFs) and index funds have exploded in popularity, as Canadians look at ways to improve their investment returns. While rate of return is important, your savings rate is equally important. If you’re not putting enough money aside on a regular basis, how do you expect to meet your retirement goals? “Today, for many Canadians, there’s a bigger emphasis placed on investing – on rates of return – than on the critical need to actually set aside money. Individuals are more focused on how they’re investing their money rather than on how much they’re putting away, and for how long,” warns McCaughey.
A Bleak Retirement Prognosis
If you expect the same lavish lifestyle enjoyed by your parents in retirement, think again. Based on current savings rates, young adults in their late 20s and early 30s should be prepared for a 30 per cent drop in standard of living, according to CIBC economists. A lack of savings isn’t the only reason – defined benefit pension plans, which guarantee a set amount of income at retirement, are quickly fading. Employers, looking for cost certainty, are increasingly closing their defined benefit pension plans and switching to less-generous defined contribution plans. Unlike defined benefit, defined contribution plans don’t provide any certainty for Canadians at retirement – your retirement income is solely based on your long-term investment returns.
Is CPP Reform the Answer?
While Canadians are big on home ownership, saving for retirement has been put on the backburner. While nearly 70 per cent of Canadians own their own home, the average savings rate is only five per cent. So why are Canadians choosing home ownership over savings? “Because Canadians understand it. It’s date-certain and amount-certain. It’s predictable and transparent. There’s good governance. And the outcomes are clear,” says McCaughey.
While McCaughley doesn’t provide any hard numbers on how much CPP should be expanded, he recommends allowing Canadians to make voluntary contributions to top-up their CPP entitlement. “It would give Canadians the choice to put aside more – a little at a time – with the confidence of clearly knowing what benefits it will bring,” says McCaughey. “It would improve the future of Canadians who choose to opt in – through forced savings and no withdrawals – over the arc of 40 years.”
Even baby boomers with gold-plated pensions are delaying retirement. Only 27 per cent of Canadians expect to be retired at age 66. The financial crisis in 2008 coupled with prolonged low interest rates have made Canadians think twice about retiring. It just goes to show how important it is to start saving early and regularly. While homeownership is important, saving for retirement isn’t to be forgotten. By paying yourself forward and saving 10 per cent of your income, you will set yourself on the path to financial freedom at 65. Even if you choose to work longer that’s fine, but at least you’ll have the choice.
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