Is an expanded Canada Pension Plan (CPP) the answer to Canada’s looming retirement crisis? The finance ministers in Canada’s 10 provinces sure think so. Pensions are fast becoming a luxury rather than the norm – only 40 per cent of Canadians have the benefit of a workplace pension. Canadians aren’t coping well to the shift in responsibility for retirement savings, either – only 26 per cent believe they are saving enough to meet their retirement needs, a recent survey by Angus Reid found.
Will Expanding CPP Fill The Gap?
The possibility of an expansion of the CPP looks like it could soon become a reality. Even provinces like Alberta and Quebec, who were once lukewarm to the proposal, are coming on board after the November 1st meeting. Although we don’t have anything concrete, the provincial finance ministers will meet again with federal Finance Minister Jim Flaherty in December, to try to inch closer to a deal. So what does CPP look like today and what could an expanded CPP look like tomorrow? Let’s take a look.
The Basics of CPP
CPP is a contributory retirement pension that provides monthly pensions to retirees. Workers in Canada who make at least one contribution qualify for CPP. The normal retirement age is 65; although you start CPP as early as age 60 (at a reduced rate), or retire after 65 and receive permanent pension increases up to age 70. The maximum CPP amount is adjusted each year in January based on the Consumer Price Index (CPI). The maximum CPP in 2013 is $1,012.50, although Canadians only receive on average $528.49.
What an Expanded CPP Might Look Like
Boomers nearing retirement hoping for a boost in their CPP will likely be out of luck. Any improvements made to CPP are likely to be fully funded, meaning they will only apply to future service. This is good news for younger workers, though there are concerns that an expanded CPP would mean higher contributions to fund those nearing retirement that haven’t saved enough.
An Increase In Earnings
The average wage, otherwise known as the Year’s Maximum Pensionable Earnings (YMPE), currently sits at $51,100. Canada’s smallest province PEI, is pushing for an earnings ceiling up to $102,000 to be covered by CPP. In terms of dollars and cents, CPP’s maximum contributions would increase from $2,356.20 to $4,681.20 and the maximum annual benefit would go up from $12,150 to $23,400. An increase in the CPP payout has also been discussed – currently retirees receive 25 per cent of the average earnings in their last three years before retirement. The possibility of 30 per cent or 35 per cent isn’t out of the question. This again would put more dollars in the pockets of retirees.
High-Income Retirees Come Out Ahead
If you thought CPP expansion would benefit low-income Canadians most, you’d be wrong. CPP expansion could actually result in benefit clawbacks from the Guaranteed Income Supplement for the most vulnerable Canadians relying on CPP alone. Although some in the middle-class would benefit, about a third of those with income above the average wage of $51,100 would see their standard of living drop. This is because CPP only covers earnings up to the average wage – if this figure was increased as PEI has suggested, this would solve this shortfall.
Additional Tips for Retirement Savings to Supplement CPP
A common metaphor for retirement savings is a three-legged stool. Your retirement savings should come from three sources: employer-sponsored pension plans, government benefits such as CPP, GIS and OAS, and personal savings. If you aren’t fortunate enough to have a registered pension plan with your employer, you’ll have to make up the shortfall through personal savings.
By contributing to your RRSP, you’ll defer paying tax until you start withdrawing in retirement, usually in the form of a RRIF. With the TFSA, although you don’t receive an immediate tax refund, any income earned inside your account is tax-free. If you expect your income to be lower in retirement, contributing to an RRSP makes the most sense, but if you expect your income to higher, you’ll pay less tax investing in a TFSA. For those with higher income in retirement, investing in your TFSA is a good strategy to avoid the OAS clawback.