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).
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.
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