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Ask the Readers: Increase in Canada Pension Plan (CPP)?





With the big news these days about our national Finance Minister pushing for Canada Pension Plan reform, it got me thinking about the consequences of the idea.  The proposed legislation is to increase Canada Pension Plan (CPP) benefits, thus increase the associated contributions.  However, full details have not yet been released.

CPP Background Information

For 2010, employees contribute 4.95% of their salary to CPP up to a maximum pensionable earnings of  $47,200.  After accounting for the $3,500 deductible and assuming that the employee has a salary of at least $47,200, it equates to the real dollars of a $2,163.15 paid to CPP annually.  In addition to this, the employer is required to match the contribution (although tax deductible) which means that $4,326.30 in total goes towards the CPP pot.  The employee and employer will continue to contribute to the CPP capital pool until the employee elects to start obtaining benefits (age 60 or older).

CPP benefits are calculated using a formula that averages the employees salary over his/her working career up to the maximum pensionable earnings, for a more accurate description, you can use the government calculator here.  As of 2010, if the retiree qualifies for maximum CPP and Old Age Security (OAS), he/she can receive an annual benefit of approximately $17,400 per year.

Why the Increase?

The issue lies in the amount of  government seniors benefits when seniors haven’t saved enough, or at all, for retirement.  As seniors benefits in Canada are only meant to fund a “portion” of retirement, it appears that it just isn’t enough.

As mentioned, max CPP and OAS will bring about $17,400 per year which is well below poverty line for a single senior, but a couple can potentially bring in around $35,000 per year.  A household income of $35k can likely support a modest lifestyle providing that all other debt is paid off (including mortgage).

Consequences

The idea of an increase in CPP benefits comes with an increase in CPP premiums.  This means a higher payroll tax for both the employee and the employer (significant for large companies) but how they plan to do it is yet to be seen.  I think that increasing the maximum pensionable amount is palatable, which would keep the contribution rate the same, but would perhaps be seen as a CPP change that only benefit the rich.  The only way to increase the CPP benefit for lower income  Canadians, is to increase the contribution percentage.

My opinion is that Canadians should take responsibility for their own retirements and not depend entirely on the Government for support. It’s probably not fair to assume that everyone is financially savvy, however, I do believe that the basic concept of spending less than you earn should be followed by everyone.  The combination of saving 10-15% of your income during working years, paying off all debt, and using government programs as a supplement is a recipe for a comfortable retirement.

What do you think about an increase in CPP?





64 Comments, Comment or Ping

  1. 1. GeniusBoy

    FT:

    I think increasing the CPP makes sense. It’s essentially a forced savings methodology and assuming the government make sensible decisions with your savings will stead people well when they retire.

  2. I’m firmly of the opinion that I don’t know. :)

    I do support the idea that people who don’t have much money in retirement should be helped, but the idea of increasing CPP at the upper end means that middle class people will be getting the benefit.

    In my opinion – a middle class person/family that chooses not to save and has to downgrade their lifestyle in retirement is not a “retirement crisis”.

    I think if we want to help “poor” people then GIS should be increased.

  3. 3. Jesse Hallam

    I despise the thought of forced savings. I have little confidence that the government will invest said money wisely, or even have it around when I’m “due” to claim it.

    Now, if that savings were sitting in some special kind of account, where I could control how I invest it, and watch it accumulate, but couldn’t withdraw it, I might consider the idea.

    Ultimately, whether people fail or succeed financially ought to be up to them. No matter how hard you try, you can’t tax common sense from the wise and educate the ignorant.

  4. 5. Scott

    If you didn’t plan for retirement too bad. Scrap CPP and let me invest in my own future.

  5. 6. GeniusBoy

    I think for most of us who care about money, it won’t be difficult to get to the end point, but for the majority of people who have little financial literacy … it certainly does make a difference.

    So, if you have a large proportion of poor seniors, what would the implications be? What impacts will it have on society and on our health care system?

    I think increasing the general welfare of the population to do things they wouldn’t naturally do is a role for government. Forcing the savings is one way to improve things.

  6. 7. Brad

    Increasing CPP puts too much of a burden on employers and will have negative ramifications on employment and potential pay increases for employees. I keep thinking that people assume that the increases will not affect them. It will.

    The onus should be on the individual to save for their own retirement. I know this may sound crazy, but I think the government should tax the top 10% of every persons income at a 95% rate unless that money is put into an RRSP or other pension plan. That will ensure that people will save.

  7. 8. Steve

    One thing that was touched on lightly in the article is actually of severe importance. Any changes that increase the amount paid by employees also increases the amount paid by their employers.

    This makes Canadian companies less competitive as they pay more taxes.

    As long as CPP is a defined benefit structure, just like every other defined benefit pension plan it is essentially a pyramid scheme.

    Unfortunately, most people are too stupid to manage their own investments wisely and if it was defined contribution (like locked RRSP) I’m sure people would have loaded up on Bre-X, Nortel, Enron, etc. and we’d still have a senior poverty problem.

  8. 9. Alexandra

    I don’t think the CPP should increase. The CPP is meant to supplement retirement, which is exactly what is does today. It is not meant to be the main source of retirement income for anyone.

    We do not need any more government hand-holding in the form of higher taxes. I can spend and save my money well enough on my own, thank-you.

  9. 10. tom

    My wife and I have sizable RRSP and non-registered savings already. However, as I am self-employed and trying to increase my revenue stream, paying more to CPP (X2 as I am self-employed) because others have failed to save does not really appeal to me. We should have the option to stay with the current plan or join up for the “enhanced” plan and pay more into it.

  10. 11. Connie

    I am currently receiving CPP-D and long term disability from an insurance company. If CPP-D benefits go up the amount my insurance company sends me will go down. So for me it will only affect me once I turn 65. And I believe that I am moving well towards a comfortable retirement.

    My husband is self-employed, he pays his CPP amount come April 30th. So we see the amount coming out of the bank account (and it hurts already, I am bracing for it to become higher). I would far rather the RRSP limits be changed but I guess it is only because I am financially literate.

    I feel for the people who haven’t paid attention to their finances and end up having a drastic change in income when they turn 65. Are there a lot of these people, I don’t know any so I am just wondering.

  11. 12. Rachelle

    I see too many seniors without adequate income to think an increase wouldn’t benefit us all.

    One thing I really think should be removed is clawbacks on senior income. They paid for that benefit and should receive it regardless of if they choose to work or not or saved or not.

    By providing a disincentive to work we are allowing the most experienced members of our society to lie fallow rather than use their skills.

    Anyone who works by themselves will tell you one of the nicest thing about a job is the social aspect of it. Seniors can easily become isolated.

    Even a part time job would provide benefits to seniors and employers alike and as seniors live longer and longer it gives them something to do and could increase their standard of living.

  12. 13. Scott

    Take a look at it this way:

    Say you just turn 25, fresh outta whatever school and land a great job paying $47,200. You are now forced to pay the government $2,163.15 every year for the next 40 years (everything held static). That’s a total of $86,500 paid.

    You start collecting at age 65 for the rest of your life, say another 20 years. That’s $11,208 per year (max.) for a total pay out of $224,100.

    Let’s say all your initial contributions were invested during the 40-year contribution period and then held static during the pay-out period.

    On your very last cheque before you die, the government has managed a whopping 2.4% annual return on your forced contributions.

    Another FINE government boondoggle.
    They can’t even match inflation!
    Forced CPP contribution is making you POORER!

    Let ME put MY contribution in a government-beating 5-yr RSP GIC @ 3.25% and forget about it!

    This is politics, not governance.

  13. Although it is unfortunate I think an increase in CPP contribution rates is needed to protect people from themselves.

    Society has changed over the years and not a lot of people are looking as far forward as they should. A few will complain, but it will help the masses.

  14. 15. Scott

    p.s. — re: my calculations…you will most likely be paid out LESS than the final figure, if the gov’t calculates on contributions starting at age 18 (or whatever…). Being short a few years will decrease your net return. Thanks gov’t. :)

  15. 16. canucktuary

    Scott – the contribution inbalance is due to generational inequality…we’re paying for the baby boomer generation’s retirement.

  16. Another interesting question is, how does this affect the Public Pensions on the Federal and Provincial sides of things, which are pro-rated against CPP? If CPP increases what happens to the Associate Pension Plan?

  17. 18. StopRelyingOnGovernment

    I really hope this one doesnt fly. I had enough money taken out of my paycheque already … I dont need government to enforce more things on how I choose to spend or save my money.

    People should really learn to take their own responsibility rather than relying on government to rescue them every time. Stop blaming and/or relying government – they are not your parents who need to clean up your mess.

  18. 19. Andrew F

    My perspective is that the CPP should ensure a base level of retirement income for people who had high enough lifetime incomes, so that they can self-fund their retirement. In this way, we can avoid paying GIS to people who ought to have saved enough to fund their own retirement. I think this would call for a reduction in pensionable earnings to perhaps $30k – $35k and increasing the contribution rate to provide a replacement income of about 70% of this, or $21k – $24.5k in retirement income. I expect this would work out to a 15%-20% combined contribution rate. If an individual did not contribute the maximum in previous working years, in any subsequent year in which they earn more than the maximum pensionable income they would be required to top up their previous undercontributions.

    GIS payments would fall somewhat, but I would also advocate a gradual scrapping of OAS, which is a totally illogical income support for mid and high income retirees. Thus, anyone with high enough lifetime income will have self-funded their retirement and be ineligible for government aid, and everyone will have a stable base of inflation-indexed retirement income, allowing more aggressive investment during their working years. For middle and upper-income Canadians, I would support a voluntary Canada Supplementary Pension Plan, which would be a DC plan offering understandable, tailored investment plans, professional, low-cost management, and ease of contribution and management. Contributions to this plan would consume RRSP contribution room.

  19. I agree as well that we should take action for our own retirement funds but sometimes a person’s situation might not all for that as unfortunate as it is. Things come up. Family emergencies and such where a person will have to pull their retirement fund with a penalty for early withdrawal. However, getting more money deducted from our salary is not good either.

  20. 21. Andrew F

    Scott: Your calculation suggests a real, after inflation rate of 2.4%. It also features inflation and longevity insurance. So a 4.4% return is not awful, considering the risk reduction.

  21. 22. Greg

    The CPP thing sucks, but: The vast majority of the population is not financially savvy. We will have an aging population, which will be the most active one voting, and of a socialist opinion, because they didn’t save and want a free ride now. People will look and say “hey, that guy has money, I don’t have money, it’s not fair!”. Ignoring completely the fact that you have no money because you spent it on scratch and wins, and paying high interest on your sears card.
    I think Flaherty was right when he said those that save will be called upon to bail out those that didn’t. This has always been the case.
    I think there should be an opt out way. Pass a financial test, prove that you’re saving already, and you don’t get screwed over.

  22. 23. My2cents

    Unfortunately, the companies employing people are making a killing (in most cases) and directors are getting paid millions, while the worker is getting min wage or a bit more. These people will need assistance as they probably do not have the income to save 10-15% away and manage it themselves. The middle income educated earners are paying a lot of tax, student loans and if its a one income family they are almost no better off then the poor and the rich should be paying more taxes. The other unfortunate thing about our system is that companies are getting away or not offering pensions, if you are with a big company and lucky or unionized you may have a pension. 1% of the population own like 95 or 99% of the wealth in this country which could be spread out a bit more.
    Savers should be rewarded though and I like the first 10% rule about being taxed 95% unless saved. The TFSA will help IF you are able to afford all the other things that come in life like LOTS of rising taxes and less services. I think the gov should allow people who take charge of their investments to open a locked in account (which I have from a company pension plan a few years back) and have the same rules as CPP, so when you retire, its yours and you cannot touch it until your are ~60 (or same rules as CPP) that way, investors could get a better return than 2.4% minus inflation.
    Downside would be as mentioned before, Nortel, Bre-X, and its all gone, then the gov is stuck paying for you anyway. We have enough tax coming off of our cheques, but it is probably a necessity to pay more into CPP in the long run even though the gov takes enough from us.
    my 2 cents

  23. I have to admit I’m ok with some changes to the CPP. First raising the maximum would be hugely useful to most of the middle class. I also don’t mind the idea of slowly raising the rates if I get a better payout, but ONLY if the extra payout is self-funding (ie: I’m not paying to have my father get a better CPP payout).

    I think people forget the majority of people aren’t saving, so as purely practical move you need some kind of forced saving program increase. The only only alternative is to do nothing and have more people getting the GIS which is paid by your tax dollars which would only raise taxes in the long run. Guess what, if we do nothing you still pay so we are better off collectively with a forced savings program.

    My two cents,
    Tim

  24. 25. jared

    One point..
    If i contribute to CPP and die early, the government gets the extra money.

    If it’s in my RSP, at least my kids can get the money. I would rather put the extra in my name, and pass to my kids, than in the governments name.

    If they do implement, i would like to see an opt-out clause.

  25. CPP is a pyramid scheme.

    The only reform I’d like to see is an opt out option.

  26. 27. Elbyron

    I agree with those who think a locked RRSP would be better, but as Steve said, there are people who are too stupid to properly manage their investments. So why not further lock them down to only allow GICs or other forms of guaranteed investment, or even setup some kind of goverment managed investment vehicle (though Scott indicated that they aren’t very good at that). Though if everyone was buying GICs with the banks, then the gonverment wouldn’t have those funds to pay current seniors with, while the banks earn even more profits.
    But the advantage of this very limited RRSP over the current CPP is that the account is strictly yours and cannot be touched by anyone until you retire or die. And as Jared suggests, any money in the account when you die should go to next of kin… not to the government. But again, we would need some way for the government to pay the current seniors!

  27. 28. kevin

    If a retiree is in a 20% marginal tax rate then he is really entitled to only 80% of what his CPP benefits should be, not the entire amount since income tax applies to CPP. GIS is given to low income retirees who don’t receive enough income from CPP, OAS, and other moneys. So if any benefit should increase to help the poorer seniors, shouldn’t it be GIS? It may increase taxes but at least the responsibility is spread across to everyone in Canada, not just to companies and employees.

  28. 29. Future Money-Bags

    Eventhough many said it already, also would like to see an opt-out option. Despite the fact that I do save over 60% of every paycheck, and try to become more financially savvy every day, you never know what could happen in the future.
    I may see a big investment opportunity and the market may crash or a housing bubble may happen, or interest rates sky rocket, or I become disabled, or can get laid off, etc etc.There are countless events that could take place that you least expect; Things that you can’t plan for.
    CPP is not meant to be a source of income to rely on solely, but it’s there to assist us in retirement right? Insead of increasing CPP from every paycheck, lets keep it the same.
    People are ALREADY able to automatically have PAC deductions from their accounts or paychecks, that go into RRSP and investments of their choices. When the government comes up with these ‘ideas’ to ‘help senior citizens’ they are in it for the money as well. INSEAD of taking more of our money, why not teach people about money and how to get better returns while investing in our country? That seems like it would benefit many factors.

    Many people assume that if an extra $100 were to be taken off their paycheck, (and invested at 7-8% which they don’t even realize is easy to find) that they can’t afford it and need every penny they can get. When in reality they were doing just fine last year before the 5% raise they got from their boss…

    All of this rambling under the table:
    Keep Cpp the way it is.
    Make an option to pay more to cpp, if people really want to..
    Teach people about money, how it works, how to get better returns, and how to manage your money for retirement.

    My 11 cents.

  29. Go ahead and increase it, as long as I get part of that pie when I’m older. If not, and there is no assurance of that, count me out now and I’ll plan for myself! Bold, but I’m being honest here.

    If CPP doesn’t increase (contributions), can you imagine the influx the banking and financial community will see with investors coming their way???

    Another good reason to own Canadian bank stocks.

    Another option, and I agree with Future Money Bags on this, if people want to contribute more because they can’t do squat and have no financial discipline on their own, let ‘em do it. The vast majority of Canadians can’t save and just overspend. They owe $7K on their credit cards and take vacations they can’t afford. If these types of spenders need the government to hold-their-retirement-hands, folks with any sort of income at all should pay for it. Otherwise, keep the social security safety net in place for only those seniors below the poverty line who REALLY need it.

    Good post Frugal. Keep these ones coming :)

  30. 31. morgan

    26. Dividend Lover

    “CPP is a pyramid scheme.

    The only reform I’d like to see is an opt out option.”

    yes sir, agreed….

  31. 32. DogsFan

    The problem with saying there should be a voluntary opt-in CPP is that nobody would do it. The people on this forum wouldn’t do it because we are all financially savvy enough to take care of our own retirement. You assume that the ‘financially challenged’ will just voluntarily take an extra $50 or $100 off of their paycheques so that the government can invest it for them? If they are living pay cheque to pay cheque, or choose not to live within their means, I’m certain they would not voluntarily pay into a delayed gratification program. It’s not that they can’t do it, it’s that they choose not to do it.

    And I don’t think we should voluntarily pay into a program that will only help those who didn’t look after themselves to begin with. Which doesn’t really solve the CPP problem, does it?

  32. 33. virtual_ted

    First Post, I understand the importance of providing a minimum std of living, but I feel uneasy counting on politicians to manage the money properly. My confidence is so low, I would err on the side of no increase.

  33. 34. Scott

    One other thing which irks me is how, now with all the Baby Boomers retiring (or wishing to retire, but can’t), it’s of such urgency to up contributions of many aspects to cover the huge pension load that is on the way.

    Doesn’t the government hire actuaries that are supposed to be able to figure these things out more than 2-3 years in advance?

    Let’s see…we have this social pension plan…we have X amount of people who are going to retire in X amount of years…how much do we need in the pot?

    I feel like writing a letter to someone about this.

    p.s. – any accountant types have any corrections on my earlier calculations (#13)? I love to know how much of my hard earned money the government is loosing me. :)

  34. 35. Andrew F

    No one is suggesting an immediate increase in benefits. All serious suggestions have been to increase contribution rates so that these can fund gradually increasing benefits over the next 30 years, to the extent that current workers have paid for the increased benefit.

  35. 36. Dorothy

    I totally support increasing CPP benefits to Canadians and expanding the program; CPP has a stellar track record of investments as far as I understand is more than fully funded. I think work places can absolutely absorb the extra costs – the benefits far outweigh the costs I believe.

    Another fabulous example of why it’s fantastic being Canadian; look at our competitive advantage with a fully funded pension fund, over funded Employment insurance; Health care, debt ratio per citizen compared to our neighbors below the 49th Parallel and in general steady economy.

    We should definitely expand the CPP.

  36. While an increase in CPP may be large in an absolute scale for large companies, the relative percentage burden for SME is what would really be concerning. You solve one issue by creating another one unless you then off-set corporate taxes to make the exercise tax neutral.

    The larger question not being asked by us, the taxpayer, is what kind of society and economy do we want? If we want self-dependent producers of wealth, then a tax and social program system can be designed to push the country in that direction. If we want a society of wage earning contributors of wealth, then we can continue on substantially the current system. There is no right or wrong answer since there are advantages/disadvantages to both. Just some tough choices that we have to make and not delegate to others.

  37. 38. ghostryder

    “25. jared
    One point..
    If i contribute to CPP and die early, the government gets the extra money.

    If it’s in my RSP, at least my kids can get the money. I would rather put the extra in my name, and pass to my kids, than in the governments name.”

    That is incorrect. If you die early the money stays in CPP. It will be used to pay live pensioners, like your other family members. Keep in mind that contribution rates are set based on the recommendations of actuaries who of course factor in that some people won’t live to collect.

    If CPP was funded without this assumption, contribution rates would have to be higher.

  38. 39. ghostryder

    When this topic has come up elsewhere I originally thought there should be an “optional contribution” provision to allow people who don’t want to take the time to manage their own affairs a simple way to increase their retirement savings.

    I have thought of another option that may work better.

    1. Double employee contribution rates. But with an “opt- out” provision for half of the contribution. The average lazy person won’t bother opting out and it will come off their paycheque the same current contributions do, forcing them to save. People who want to manage their own affairs could opt-out of half of the higher rate. CPP would be the same as it is now for them.

    2. Keep employer contributions at 4.95%, but alllow them to match the other half of the higher contribution if they want to. This would allow smaller employers an easy and inexpensive way to offer a pension plan to their employees with minimum overhead. They wouldn’t have to do anything other than remit a matching contribution with their current payroll remittances.

    3. The age at which people begin collecting full CPP needs to change. Seriously. When CPP was started, people began collecting at 65 and avg life expectancy was what? 69? We should be gradually raising CPP age to keep pace with life expectancy. Provisions to collect early (with a reduction) that exist now should remain.

    4. Mandatory reporting to the Soylent Green factory at age 85. If you are, or ever have been a Member of Parliament or Provincial Legislature you must report by the end of the year you turn 65.

  39. 40. Brendan

    I’m with money smarts. A middle class who chooses not to save, and then has to downgrade lifestyle in retirement is NOT a crises.

    As yee sow, so shall yee reap.

  40. 41. Peter B

    Where are the details on this plan? I agree with one of the posts that this increase should NOT be used to increase current benefits, rather it should be a user pay system for future benefits.

    An optional top up program for employees only would be great. Certainly better than the Canada Savings Bonds program they are currently offering.

  41. 42. GeniusBoy

    I love ghostryder’s suggestions. They’re pragmatical or extremely funny. I think (#4) deserves a best of the year suggestion award.

    I especially like the concept of the increasing CPP age category, with opt out options depending on how soon you decide to retire.

    My father retired relatively young (55), but would have a claw back based on his CPP, which really never made sense to me. Perhaps, the government should be more transparent. What you put in is what you get back plus a rate of inflation.

    It’d also be more useful if CPP was a little more transparent to the general public.

  42. I got at least as much from the comments here as I did from the post itself. Ghostryder’s suggestions were very interesting, and several others were quite right in noting that, in a perfect world, people should have the option to save for retirement themselves rather than having it forced by Government.

    But the unfortunate reality of course is that our world is far from ideal, and even those who have every intention of saving will often not do so, or may be stung by schemes that sounded secure but cost them their savings. While the CPP has its faults, it is nevertheless the most secure option. And I can’t help but think that that alone makes it well worth having.

  43. 44. Scott

    Maybe it’s because the gov’t wants to ensure none of its citizens retire too far under the poverty line.

    I don’t feel like I should pay health care taxes that go towards medical services for people who willingly smoke, but….it might turn scary if we start to pick and choose.

    Can’t please everyone all the time, right? Right?

  44. I look at CPP as a type of defined benefit plan. As someone who teaches retirement planning through my financial education in the workplace programs, I have come to realize how important pensions are to retirement. Statistically, people with pensions are far better off in retirement than people who are not simply because this savings was forced upon them. Most people with pensions will tell you they would have never saved that money unless it was mandatory. CPP is another one of these pensions that is forced upon people but I continue to wonder if people would have saved this money if it was not forced upon them. I am very compassionate to those who are self motivated and good natural savers and why they would not want to be forced to put more into CPP. I might argue that I am one of these people. Unfortunately, I think there is a bigger group of people who need to be forced to save.
    Great post FT

  45. 46. Steve

    I like the idea of an opt-out but it needs to be controlled such that you can’t opt out and then retire with no monye anyway, and you can’t blow all your cash on bad investments and have no money.

    My problem with CPP is the guarenteed benefits are not guarenteed. Benefits could be reduced when I retire in 35 years and god forbid I die early, my wife would be entitled to very little from my pension because she is likely to have maxed out her CPP as well.

    I hate that survivors of pensioners don’t get 100% of the deceased pension. That’s robbery imho.

    1) Here’s how a reasonable opt out would work. You have a registered, locked-in RRSP. Based on your age, you must have some minimum avg net value for the previous year. This avg would be the ‘present worth’ of what your CPP benefits would be.

    2) Any years where my locked in RRSP net worth exceeds this ‘CPP present value threshold’, I can opt out essentially by geting refunded my CPP contributions.

    The benefits is my heirs get ALL my retirement savings, and if I am not saving enough, or I make bad investment choices, I don’t get my CPP refunded that year. Basically, any year where I do not do my share, the government keeps the CPP I already paid. The key here is it’s not a fixed amount per age, it’s compared directly against your own CPP present worth which CPP already calculates and knows.

    THe downside is CPP deductions would have to increase because part of hte funding model accounts for people who die early or dont’ collect for very long which is used offset those bastards who live forever ;-)

    What do you guys think?

  46. 47. sco

    I would agree with a significant increase in manadatory pension contributions (for both employers and workers), but the worker should be given the choice to manage his pension money himself (without the withdrawal option before retirement). Otherwise, I am against it.

  47. 48. DG

    Maybe CPP doesn’t need to be a pure defined benefit pension, why not have an option to allocate some portion of your CPP payment to a defined contribution plan? By default, 100% should go to the DB side, but for those who know what they are doing, up to some max % can be directed to their DC plan.

    Sweden has a defined contribution component to their pension system, so why can’t we do that too?

  48. 49. kasmca

    Instead of changing the CPP amount, the government should fix the root cause of the problem – Education Reform. Personal Finance should be a mandatory course in high school for every Canadian which should include topics such as balancing an account, applying for a loan, living below your means, planning for retirement, basic investment skills, creating a home budget, etc.

  49. 50. ledtim

    Here are some calculations I originally posted at http://www.canadiancapitalist.com/modest-cpp-changes-in-the-works/: Any corrections to my calculations are welcome.

    Sheet 1:
    I got curious and crunched the numbers in Excel. Assumptions:
    1. you start contributing at age 25 (since 15% of your lowest earning years are left out of calculation for CPP benefits, or 7 years if you are working from 18-65, let’s assume your earnings from 18-24 are 0) until the age 65.
    2. You claim a tax credit of 20% (federal 15% and around 5% your province which varies).
    3. The YMPE (your CPP contribution and benefits) increase 2% per year, and inflation is the same rate.
    4. When you start receiving the benefits, your marginal tax rate is 20% per year (I’m assuming you’ve retired).
    5. You receive benefits from age 65 to 82.

    Your nominal return would instead be 2.6% aftertax, assuming 40% marginal tax rate.
    http://www.mediafire.com/download.php?mmzmik5iywe

  50. 51. ledtim

    Sheet 2:
    Another interesting thing I’ve found out playing around with Excel:
    Let’s say instead of contributing to CPP, you contributed the same amount into your RRSP every year, at an interest rate of 5% (return of 5 year GICs more or less), until the age of 65.

    Then, let’s say you move your investment into a more liquid and stable instruments with interest rate of 3% (bonds and savings accounts) and start withdrawing from it at the same rate as you’d get from CPP benefits. Your RRSP savings will last you until age 107 if you withdraw the same amount each year as you’d get with CPP benefits. So, if you plan to live longer than age 107, you should be happy about a CPP increase. Otherwise, not really.
    http://www.mediafire.com/download.php?1yolwjmmjcm

    Sheet 3:
    Let’s compare the case between receiving CPP vs purchasing a joint life no guarantee annuity at age 65 with the amount you’ve contributed to CPP over 40 years. I’m assuming such annuity would yield 6.56% annually as listed here:
    http://www.canadianbusiness.com/my_money/rates/annuity_joint_life_no_guarantee/index.jsp
    Let’s say the discount/interest rate is an extremely conservative 3% and let’s assume inflation rate is 2%.

    My calculations indicate that if you live to be 83, the present value of CPP benefits at age 65 would be $434,731 vs $493,485.38 for the annuity. The difference would be even greater if you get more realistically bold with the discount/interest rate.

    http://www.mediafire.com/download.php?drdltqj4jkn

  51. 52. Malcolm F Palmer

    It’s a no brainer. For most Canadians, the alternative is mutual funds or ETF’s with 1% to 2.75% management fees. CPP has less than 0.5%, which means a more money going into their retirement investment funds. And, it’s a well-known fact that most investors shoot themselves in the foot by panicking whenever the market goes down.

  52. 53. Darren

    Force us to save but allow us to do it in a locked in retirement account where we can control our own investments. As self employed I have to pay both the employer and employee portion of the CPP. This is 10%!! I do not want this increased. In fact, let me invest that 10% and I guarantee you I would have a lot more than the CPP will give me when I retire. Forcing me to put even more into the CPP means even less money people can invest for themselves. I know a lot of people just don’t invest which is why a forced savings would be good, but allow us to keep control of it and use a Locked In Plan. Then everybody can invest as they see fit with their own money.

  53. RE: Comment# 26. Dividend Lover

    “CPP is a pyramid scheme.

    The only reform I’d like to see is an opt out option.”

    Correction, CPP was a pyramid scheme. That was mostly fixed in 1996 or was it 1997 (?) when they changed to a pay as you go system. So any new increase would have to be self funded.

    RE: Comment #49

    I agree I would love to see a PF course for every high school student. Only problem is there is no Federal Departement of Education..it’s solely a provinical responsiblity. So let me know how you are going to get 13 ministers of education to agree on this.

    Tim

  54. My concern is that people paying CPP premiums may not get them back to the extent they expect. Government-run operations are typically mismanaged, riddled with misappropriations, and open to political interference.

    Look at the Quebec Pension Plan. It is now in financial difficulty – even though contribution rates were hiked to 9.9% in recent years — thanks to unwisely using funds to invest in Quebec’s industrial policy.

    Here is an example of graft in U.S. public pension plans.
    http://pensionpulse.blogspot.com/2009/05/systemic-fraud-at-public-pension-funds.html

    Within the next 10-15 years or so, I wouldn’t be surprised to see the age for CPP benefits raised to 67 or so, and benefits cut back in a variety of ways (e.g. decision in 1998 to de-index the CPP death benefit and $3,500 income exemption).

    How about letting us keep more of our salary and save on our own?http://blog.canadianbusiness.com/will-you-get-your-cpp-premiums-back

  55. 56. Jim Lewis

    As I am presently collecting both CPP & OAS increases wouldn’t effect me but what may effect you and your retirement is bill C-428, introduced by the Liberal MP Ruby Dhalla to have the residency requirement for immigrants reduced to 3 years from 10

  56. 57. ghostryder

    “56. Jim Lewis
    As I am presently collecting both CPP & OAS increases wouldn’t effect me but what may effect you and your retirement is bill C-428, introduced by the Liberal MP Ruby Dhalla to have the residency requirement for immigrants reduced to 3 years from 10″

    Why would this matter. The residency requirement would change. The formula for calculating how much OAS you get would not. It would still be

    (Yrs of residency / 40) X max OAS

    I can’t see people with 3 yrs residency getting 38 dollars a month making a big impact on OAS. I can’t see a huge number of 62 yr old immigrants flooding the border. I would guess that the majority of immigrants that age are being sponsored by family who are already here anyway. And families who sponsor relatives have to show they can support the immigrant if the immigrant doesn’t have their own means.

    This bill would have no effect on CPP.

    50. ledtim
    Here are some calculations I originally posted at http://www.canadiancapitalist.com/modest-cpp-changes-in-the-works/: Any corrections to my calculations are welcome.

    —–

    To be more accurate in the comparison you would also have to buy some disability insurance as well since CPP includes this.

    55. larry macdonald
    My concern is that people paying CPP premiums may not get them back to the extent they expect.

    —-

    CPP isn’t a savings account though. You are essentially buying an annuity. If you die early you don’t “get your money back” and if you take longer to die you benefit. Just like buying a regular annuity.

  57. 58. Andy In Vancouver

    Keep the CPP system and adjust the funding levels if you like.

    Just make sure people who put in more at the start get out more at the end.

    That way, if my government takes more of my money while I am working, it has to give back more later on.

    That’s the only fair way to do it, and it wouldn’t discourage me from working because my taxes are too high.

  58. 57 ghostryder
    The CPP is a hybrid between pay-as-you go and a regular pension plan. The reserve fund that is invested was set up to just keep premiums from rising not create a fully funded plan. One example of the kind of “cuts” we could see down the road is hikes in the retirement age from 65 to 67 or 68 (as is happening now in Europe).

  59. 60. Jeff S

    I recently wrote to Jim Flaherty regarding this issue – here is what I wrote.

    With respect to the current issue regarding CPP, I would like to put forth two concerns that I have.

    I work in the financial services operating my own small practice. I am incorporated and my wife runs the office. I have to pay both the employer and employee portion for CPP and while a small increase may not seem costly, for us every dollar increase is in fact a four dollar increase. My second issue surrounds a largely forgotten segment of society – single people.

    Mr. Flaherty, if you are a 59 year you likely contributed tens of thousands to the CPP. Assume you never married, or had children and pass away suddenly; your estate receives $2500 from CPP. That’s it! However, if you are a married 25 year old with 2 kids and 3 years of contributions, the CPP stands to pay out (over time) almost $300,000 to your wife and children. I realize the situations are different, but please consider the inequities of the system prior to making any changes.

  60. 61. Jeff S

    To #52. Malcolm F Palmer

    Do you really think that all of the extra money would go to a pension plan? I wonder how much of the contributions go to cover the costs of a disability benefit and spousal benefits.

  61. 62. mp

    CPP gives people a defined benefit pension, with business contributions to it as defined contributions. The best of both worlds. Expanding it means there will be fewer future seniors in poverty. And folks, don’t be talking about OAS and GIS helping keep seniors out of poverty. That’s today’s taxpayer paying for people who haven’t saved for retirement and business who haven’t provided private pension plans.
    CPP – workers and employers pay now to provide some dignity in retirement. It is a retirement savings plan that has no government subsidy.
    OAS and GIS are government subsidies and are paid for by taxpayers. Don’t improve CPP now for future retirees and your children will be stuck with a bigger OAS and GIS bill because no one will accept as public policy seniors in poverty.

  62. Hmm.. doubtful that rate is going to go up now, maybe later, but not now… the increase payment for Businesses is basically like increasing the tax, and punishing them (twice?) for paying their workers well.

  63. 64. Don S

    One thing I haven’t seen in the posts are the CPP concequences of men who were unable to please their wife and they decided to take up with someone else. She gets half of his CPP as a result of no-fault divorce. How does one ‘responsibly plan for retirement’ when a simple whim or emotion can render those plans nul? The two CCP incomes are now split between 2 housholds.

    My previous landlord was well into his seventies and still had to work every day because of a cheating wife and having jobs that were not well paying and lacking company pension plans. During the working years most income is tied up supporting a wife, and the children until their early twenties, as is mandated by our divorce courts these days.

    There are also people who get debilitating illnesses that force them out of the workforce (sometimes related to their occupation, but not directly enough to be compensated). Do we just throw these people into a gas chamber when they reach the age of 65 so they are not a burden to society?

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