Taxes
The Canada Pension Plan (CPP) provides a basic guaranteed monthly pension amount based on working Canadians' contributions to the plan until retirement. Anyone who makes at least one valid contribution during their lifetime is eligible to receive benefits. Quebec residents have a similar program, called the QPP, that's also changing to reflect CP changes.
The new CPP enhancement, announced in 2016, is underway in 2019. The goals of the improvement are:
- To ensure the CPP can continue to fund pension benefits for future generations. For decades, the plan had ongoing demographic challenges: fewer contributors, lower birth rates, more beneficiaries and an aging population. People are also living and collecting CPP benefits longer.
- To replace up to a third (up from a quarter) of pre-retirement income up to a "ceiling" and add a second, higher-income ceiling. This new "investment" Canadians are making, as the government describes it, attempts to address Canadians' low levels of retirement savings and provides a better safety net.
Increased contributions kicked off the first phase in 2019. Increases will continue until 2025. Read on to find out how the roll-out of initial CPP enhancements could affect your income and your retirement.
How did we get here?
The CPP is a big deal for all Canadians, even if they don't realize it. It affects them when they start their first job to their last years of retirement. The CPP investment fund manages over $300 billion and serves 20 million current and future beneficiaries (excluding residents of Quebec).
Despite its size, the CPP's ability to fund future pensions depends heavily on changes in demographics. In Canada‚ and all other industrialized nations‚ the average age of the population started increasing decades ago. At the same time, the birth rate fell to less than two children (currently 1.6).
An aging population drains more and more benefits from the CPP every year. To make matters worse, fewer births in Canada translates into fewer CPP contributors down the road. It's a double whammy with severe consequences.
To make sure the CPP doesn't run out of money, the government can either increase contributions or decrease benefits, or both. Reducing benefits isn't an option. That would go against the government's goal of reducing poverty among seniors. Also, it would be a very unpopular move for any politician who values their job.
And so, the government raises contribution rates every decade or so to offset shortfalls in contributions versus a growing number of beneficiaries. But the 2016 changes to the CPP go further than preventing the plan from temporarily running out of money. They also attempt to alleviate the gap in Canadians' retirement savings by boosting maximum benefits significantly by 2065.
How does the CPP stack up?
The CPP is among the largest state-run pension plans on the planet but still faces considerable survival challenges every few years. In addition, Canadians don't have nearly enough saved up for retirement. Some experts, such as former Standard Life Canada CEO Joseph Iannicelli, believe workplace retirement savings plans like group RRSPs should be mandatory, even for small businesses.
Australia made radical changes to its pension laws 30 years ago. The government made retirement savings plans mandatory for companies with at least 18 employees. Moreover, the government manages or strictly controls investment choices for most retirement savings in the country. This move gives plan members access to risk-averse top-tier institutional pension management at virtually no cost.
In Canada, employer-sponsored group RRSP plans aren't mandatory. Many smaller companies don't offer retirement programs to employees. And companies that have plans may have limited investment choices and high fees.
Also, because plans are optional, people can opt out. And those who join make their own investment choices. Employees might not have to knowledge or desire to properly manage their investments. But for better or for worse, their retirement and their family's future lie in their own hands.
Will the CPP or QPP cover my retirement?
The short answer is "probably not." It depends on lifestyle choices and whether you have a spouse. But one thing's for sure, retirement without any savings would be a no-frills existence.
A retired couple receiving maximum benefits might have a better chance of getting by on roughly $30,000 of maximum yearly CPP and Old Age Security benefits. But that's if both individuals qualify for the maximum. However, the average CPP payment of $640 per month is nowhere near that maximum.
For someone who lives alone, retirement would be even more challenging. With a maximum of $15,000 in benefits, but similar expenses to pay, they would be at or below the poverty line. Maximum benefits will rise slowly until 2065, to reach 150% of what they are today. However, inflation over the next 45 years will eat into part of the increase.
You can call Service Canada (1-800-277-9914) if you have questions about the CPP and to get a Statement of Contributions that estimates your benefits at retirement.
How much do I need when I retire?
Whether you're self-employed or a salaried employee, it's best to start thinking about retirement options as early as possible. Middle-class Canadian couples might plan on roughly $50-70K (including CPP) of joint income for an average retirement lifestyle. That corresponds to $350K-$1M in savings, spread over 20 or more years of retirement.
Canadians are living longer than ever, so understanding how much you need is essential. You can start by trying a retirement savings calculator. Most Canadian financial institutions have one on their website. According to Sun Life, "on average, retired Canadians are living on 62% of what they earned before leaving the workforce." If a couple earned $100,000 of gross income before retirement, 62% would be right in the middle of that range, at $62K.
In 2018, CIBC surveyed 1,532 adults in different age groups. The results show how unprepared many Canadians are for retirement. The results are telling:
- 90% of respondents did not have a retirement plan of any kind, and 37% had never thought about retirement needs.
- Respondents figured they would need $756,000 or more for retirement on average. The older group of baby boomers thought $518,000 in savings would be enough, and the youngest group's estimate was $917,000.
- 32% of respondents nearing retirement (ages 45-64) had no savings, while most of those with savings had less than $250,000.
5% of all respondents had the savings they thought they would need.
