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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?

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 64 comments… add one }

  • ledtim June 24, 2010, 7:32 pm

    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

  • Malcolm F Palmer June 25, 2010, 10:43 am

    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.

  • Darren June 25, 2010, 2:04 pm

    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.

  • Canadian Dream June 25, 2010, 3:56 pm

    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

  • larry macdonald June 25, 2010, 7:03 pm

    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

  • Jim Lewis June 25, 2010, 8:53 pm

    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

  • ghostryder June 25, 2010, 10:40 pm

    “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.

  • Andy In Vancouver June 26, 2010, 8:38 pm

    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.

  • larry macdonald June 27, 2010, 12:21 pm

    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).

  • Jeff S June 27, 2010, 5:20 pm

    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.

  • Jeff S June 27, 2010, 5:23 pm

    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.

  • mp June 29, 2010, 11:56 pm

    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.

  • Michael A. Robson December 24, 2010, 2:53 am

    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.

  • Don S October 23, 2011, 12:06 am

    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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