With expanded Canada Pension Plan your future self thanks you

Canada has been facing a pension crisis for many years. Millions of Canadians do not have a workplace pension plan.

According to this article, Canadians without an employee pension plan represent about 47% of those aged 55-64.  This means this cohort will have to do one or more of these things to stay out of poverty in retirement:  save on their own (likely more than they thought), work longer or spend less as they get older.

While all sorts of registered accounts (examples:  RRSPs, TFSAs) exist to help Canadians stash money away tax-deferred or tax-free for retirement few Canadians have the “savings gene” to do so.  Back to the article to demonstrate:  “the value of retirement assets for those without employee pensions are shockingly low. Canadians making $20,000-$50,000 have an average of $250 saved for their golden years. Half of the demographic has less than half a year’s income saved. The average single senior falls $5,600 below the poverty line, with a median income of under $20,000.”

Those are scary numbers for many Canadians.

More sad savings stats

Another statistic – according to the Financial Consumer Agency of Canada, “Canada’s personal saving rate (savings as a share of after-tax income)—around four percent in 2015—has fallen sharply from 20 percent in the early 1980s.”  A working-Canadian-couple saving 4% of their hypothetical, combined take-home income of $60,000 per year wouldn’t generate much for retirement.  Some quick math tells me 4% of $60,000 per year is $2,400.  That $2,400 invested each year into an RRSP (for tax-deferred retirement money) would amount to only $250,000 after 30 years at 7% average rate of return.  While $250,000 might seem like a good chunk of cash for retirement I would prefer this amount for us to be far safer.  While some costs like saving for retirement will be gone in retirement, other costs like property taxes, healthcare, utilities, insurance and food prices are not going down in your financial future.  When you think about costs in your financial future never forget about the silent portfolio killer – inflation.

Trying to live the dream

Competing with today’s retirement savings is the dream of home ownership in Canada, and our Bank of Canada is doing everything it can to keep interest rates low to keep that dream alive for us.  Depending upon how you see it, our dirt-low interest rates are keeping some semblance of housing affordable in many Canadian cities – Toronto and especially Vancouver excluded.  I believe most Canadians entering the housing market today are foregoing retirement savings to buy into the aforementioned dream but owning a home is not a retirement plan – far from it.

The decision to expand our Canada Pension Plan (CPP) is absolutely the right thing to do.  Workplace pensions for Canadians are becoming extinct, we’re living longer, and on the personal side of savings, we’re saving far less that we used to. Expanding the CPP insulates Canadians from bad saving behaviour, our lust for home ownership and the mantra of living for today.  Living for today is great but planning for tomorrow is important too.

Employers and employees will need to dig deeper into their pockets to pay for their enhanced pension plan but fast forward a few decades from now and your future self will definitely thank you.

31 Responses to "With expanded Canada Pension Plan your future self thanks you"

  1. As this is Canada Day, we should acknowledge that the CPP funds are separated from the general government spending funds, not like the US. We at least know and can find out the status of the CPP monies and know if it can support potential payouts. Those poor sods in the US are being deluded when they think or feel Social Security will be available in the long term. It’s just a long-term liability which the gov’t doesn’t have the money to pay and only new contributions are being used to meet short term payments. (doesn’t that sound like a ponzi scheme?).

  2. Currently our CPP\OAS is about $31k which represent about 55% of our annual expense. The loss or partial loss of it would mean I’d have to draw or spend more of our RRIF withdrawals rather than re-investing it. It still wouldn’t affect our long-term position as our total dividends are over 90k.per year and growing.

    Everyone hates to give up money, especially as we paid into the program, but why can’t someone earning $100k and more from other sources take less from CPP. If one makes over $200k why take any?

    1. Making over $90 per year in dividends is outstanding. Few seniors will ever come close to that, you’re the 1% of 1% for senior wealth.

      I’m just not a fan of seniors (or anyone) getting a government handout for money they don’t really need. OAS is a prime example. I can see CPP because some of your contributions are in there but even that likely needs more reform – but this was a good start that will help many Canadians who can and who cannot save on their own.

      I have no problem paying my share to help the disadvantaged – it’s the right thing to do. The OAS set-up I struggle with.

      1. “I’m just not a fan of seniors (or anyone) getting a government handout for money they don’t really need.” The problem is gov’t money is really tax money where every pays or contributes. Yes there should be limits, but just as important there should be controls on gov’t spending and political waste.

  3. Mark, I just posted this at Financial Wisdom forum:

    “Rather than re-writing the CPP why don’t they combine CPP & OAS and place an earnings clawback to the combination. That way the rich or those with other sources of income and really don’t need CPP\OAS would lose part of the income. The low income people could than be given a bit more.

    I fall into the higher income and would probably lose some, but it may be fairer method to give more to those who need it most.”

    1. I think it’s time to overhaul OAS:

      I would be a fan of one program, minimum payment threshold and income-tested for those individuals that make over $70k per year, then no government handout at all – a hard-cap. While I hope to be one of those seniors that has OAS clawed-back, the big problem is, OAS should not subsidizing wealthy seniors. That makes no sense.

      Cannew – a different take? I would be curious since you’re doing well yourself.

      1. Mark. The $70k is low because of the dividend gross up of 1.38%. That’s why I mentioned a starting point of $100k and maybe max of $150k or $200k where no pension payment is received. Even the higher earners should still be entitled to some benefit.

        1. Yes, if they have paid in, I have no problem with that; re: gov’t money is really tax money where every pays or contributes.

          Yes, as part of limits who gets the money; the government needs to minimize waste.

  4. I really think everyone is caught up in the hype of the “expanded” CPP. Instead of playing into a headline. Do the math on a person that say started working at $30,000 a year and slowly worked up to $55,000 and plug in the numbers. Better yet go to the Government of Canada website and look up your own “CPP statement of contributions”.
    When the AVERAGE payout today (per month) is maybe $650.00, what do you think the below average one will be? Even with the expansion – who can live off even $950.00 a month without other supplements 10 years from now with inflation? “Headline reader”s might now all be under the impression their getting $17,000 a year. They might put even less effort in to saving on their own because of this…

    “Amount of contributions – Every year you work and contribute to CPP between the age of 18 and 65, you add to your benefit. To qualify for the maximum, you must not only contribute to CPP for 39 years but you must also contribute ‘enough’ in each of those years. CPP uses something called the Yearly Maximum Pensionable Earnings (YMPE) to determine whether you contributed enough.” That number in 2016 is $54,900.00…

    Do we know the new rules yet? Will that threshold be even higher now with the expansion? Are the changes really what they have been made to sound like?

    1. Oh I agree Paul, nobody can live on $950 per month but for those aren’t saving a penny (and I suspect many 30 and 40-somethings are not) at least this is some grace for them.

      To answer your questions I don’t think the changes are really that great but unfortunately to my article, people blowing their brains out on mortgages, YOLO (you only live once) and other material goods – some CPP may save their a$$ in another few decades. The reality is, we’re paying for it now via higher employer and employee premiums so there is no free lunch 🙂

  5. “ompeting with today’s retirement savings is the dream of home ownership in Canada, and our Bank of Canada is doing everything it can to keep interest rates low to keep that dream alive for us”

    I’ve always said that “home ownership” is one of the biggest and long standing modern Western marketing schemes around (it actually was a marketing scheme initiated by a US real estate developer to sell the suburban houses to returning WWII soldiers and their families). Some 65+ years on, and at the end of a 35+ year decline rate cycle, price is no longer a factor, it’s all about the payment (yet another marketing ploy). Residential real estate won’t be enjoying the decades of appreciation it’s used to and those piling in now are in for a rude awakening.

    As for the saving rate…with interest rates so low, it’s easy to see why the average person i) would not save, and ii) would indulge in very cheap credit. That, coupled with an amped up fear of any/all financial markets, leaves people in a bad state.

    It all seems like one massive scramble to catch the falling tea cup (or to try and Krazy Glue it back together).

    1. I suspect things will change once the demographic shift really takes hold and Boomers will be looking to unload their houses at the same time, causing more supply than demand. We’ll see. I suspect those days are about 10 years away.

      There is really no incentive to save unless you want to retire early. Otherwise, I feel most people blow their brains out when it comes to spending money they don’t have. I’m just not wired that way. Maybe the issue is me? 🙂

    2. I’m with you 100% on this one SST. I think every mortgage document should come with some spread sheets. The first one should show what each payment entails at the existing interest rate. The next one should show what each payment would entail if/when interest rates rise. I’d suggest an increase to 5% just so that one grasps exactly what an increase will do to their payments. I always had spreadsheets for every loan I ever had. They also included an “extra payment” function to show what would be saved by paying more off ASAP. This encouraged me to not waste overtime income on frivolous things and pay off debt very quickly.

  6. Very interesting. It looks like savings rates are plummeting across the board. I am curious how people with low/no savings will be able to retire.

    Do you have an idea of how much your CPP will be in retirement? How long do you have to work, to get the benefit?

    I would think that Canada has good demographics, as immigration is “easier” than immigration to the US ( per my understanding of the situation)

    In the US, you can log on to the Social Security Administration website, and see how much you may be able to earn under the current formulas for estimating benefits. Mine may cover roughly half of my expenses in many decades. If my expenses double or the formula is adjusted downward, SS may cover much less than that ;-(

    1. Saving rates are not great in Canada. I doubt it’s better State-side 🙁

      I figure our CPP will be about $500 per month in retirement, give or take, in today’s dollars. That’s OK to pay for some property taxes in our future but that’s it. I still need to eat, wear clothing, put hydro through the house and actually live my life.

      Too many Canadians rely on government intervention to solve problems they can solve on their own. The problem this causes is higher general taxation. So, overall, we dilute government responsibility and we pay more for it in the process. Not very smart but I alone cannot change things. I can simply write a blog and voice my opinion 🙂

  7. Too many kids and even the parents have grown up on a Want and Get attitude. Unfortunately much of that is paid for by others or bought on credit. Is it hopeless? I don’t think so. It’s never too late to change but it’s never easy. At some point those with extreme debt or without savings must find the fortitude, assuming they recognize their situation and do what must be done to turn things around.

    Relying on Gov’t isn’t the answer and never will be. That’s also a mind set which too many people fall into.

    1. I can’t tell you how many times I’ve heard kids (we don’t have any) that say “gimme”. It’s rude and displays a young behaviour of greed. Unless the parents curb that behaviour you live what you learn.

      Relying on the government seems to be the way of the world these days. I think government should be responsible for a minimum standard of healthcare, education and financial assistance in that order. Everything else, you’re on your own. Smaller government is better government overall.

      1. Mark: ” I think government should be responsible for a minimum standard of healthcare, education and financial assistance in that order.”

        That probably accounts for 80% of gov’t budget and debt. Guess by providing a min std for all it helps provide for many who elsewise count not afford any of those. But I think it also fuels the thinking that gov’t should provide much more.

        Many talk about the old days when people took care of themselves and their own. I think there needs to be a happy medium but people must do more to take care of themselves. By changing their attitude from gov’t to themselves, that’s when you’ll see less spending and more savings.

        1. Maybe you’re right….but there’s still 20% efficiency to be gained if so 🙂

          “By changing their attitude from gov’t to themselves, that’s when you’ll see less spending and more savings.” – will I see that in my lifetime? Not likely. I think those “good ol’ days” are gone.

          1. “will I see that in my lifetime? Not likely. I think those “good ol’ days” are gone.”

            It’s a question when reality hits home. I think it will happen within the next 15- 20 years. People are resilient and their options (because by that time inflation may be much higher, gov’t debt higher, and who knows what other changes) may be limited. Take charge or suffer in poverty.

  8. I think we have to acknowledge the issue that a LOT of Canadians are not only financially ignorant but they don’t care to even try to learn anything either. This reform of the CPP will have absolute zero effect on me but I can see that it is necessary for a large portion of the population. Hopefully it works.

    1. Lloyd — I might not put the burden of ignorance on the citizen; I don’t know, I flip flop constantly on this topic. Basic economics/finance (personal and otherwise) education is not overly emphasisized or pushed in grade school, and if it is, it may not be taught in a digestable manner (it is math based, after all). Thus, most people start their financial lives way behind the eight ball.

      As well, as much as the financial sector espouses financial education, they don’t really do a whole lot to make financial truths readily available or easy; in fact, they run contrary to their lip service by operating their business the way they do — it’s our ignorance which fuels their bottom line.

      Yes, people must take responsibility for their own lives, but when they are put at a continusal and systemic disadvantage almost from the outset…it becomes a great challenge to overcome.

      I might change my mind on the subject later today. 😉

      1. I would normally give the benefit of the doubt to the people as well but with staggering personal debts, lack of financial awareness and a complete lack of good sense, I am left with no option but to acknowledge that a lot of Canadians are just basically dumb when it comes to financial affairs. Given the current availability of information on the internet, I don’t think we can use the excuse we weren’t taught that in school. Sure some of the intricate details of some programs may be dificult to grasp but the basics will serve the vast majority of people sufficiently.

    2. Financially ignorant is likely putting it kindly. Could we be saving more? Sure. But we’re already saving 25% of our (net) salary every year excluding our extra mortgage payments. That’s pretty good. I can’t imagine us saving less.

      I know some people that have simply banked on their workplace pension (not gold-plated) and government handouts. They feel entitled to spend the rest. That bothers me – there seems to be no personal responsibility.

      Thanks for your comments.

  9. We live in such an entitled and greedy society I don’t think anything the government does will save us from ourselves. The gap between the haves and have nots is widening everyday. You mention $250,000. as not being near enough but at interest rates in my early years of 6 or 8% that would pay a retiree $15 to $20. k per year. I fear for the next generations but as they say “what goes around comes around”! Keep up the great work Mark; you always spark discussion.

    1. Very entitled. I suspect marketing and consumerism causes that – no? I don’t think $250k is very much for retirement personally. Inflation and a few bad market cycles might kill that in 10 years for many retirees. Then it’s cat food after that. No thanks for me!

      I fear for my generation and the next. The Boomers had it made 🙂

  10. Completely agree. As a retail banking financial advisor, I know this all too well. “Sir let’s start saving with $25 a month.” “$25 a month??? Are you insane I don’t have that kind of money. I don’t care about RRSPs… I’ll get my CPP!!!” It’s a grind my friends…

    1. Thanks CanadianJ. It’s very sad many Canadians can’t find $25 per month to save for retirement. Sad, but true. What consequences do people need to change their behaviour? A time machine to see their future?

    1. That might be wishful thinking going forward. I’m hoping for 4% real return (after inflation) myself. I would be very happy with that for the next 20-30 years.


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