Tuesday, 21 June 2016

The New CPP


As you may or may not have heard, there was a big meeting of the federal and provincial finance ministers yesterday to discuss changes to the Canada Pension Plan and it looks like reform is going ahead. The decision is nothing if not controversial (the government taking more of our money always is isn’t it) but I’m sitting on the pro side of the fence this time and it sounds like the majority of Canadians are too. In a recent poll completed by Angus Reid 75% of Canadians were in favour of at least moderate changes to CPP. Savings rates in Canada are really low and very few of us have employers that are still offering a pension plan. Many of our retired parents have money coming in the door every month not only from CPP and OAS but also from a defined benefit pension they paid into for years. Rarely is this an option in today’s world so I don’t think it’s a bad thing that the government is trying to bridge that gap a little. Running out of money in retirement is something that should concern all of us and having that guaranteed amount will help ease (at least a little) the burden that low-income retirees can place on the system.

Key Points
-CPP premiums will increase 1% for employers and employees once fully phased in
-increases will be phased in over 7 years, starting in 2019
-a $55,000 income earner will see an increased premium of $7/month in 2019 that will end up at $34/month by 2023
-currently CPP replaces 25% of income up to a maximum of $13,100 per year; under the new plan it will replace about 33% of income and the maximum benefit will increase by about $4,000 per year
-deal was signed by 8 provinces, Quebec and Manitoba did not sign
-CPP premiums have only been increased one time in the last 20 years

Pros
-Guaranteed income in retirement, no matter how long you live. This is a biggie and makes planning that much easier. Using your own savings for retirement means you have to speculate on how long you will live to know how long your money is going to last. Living until 105 vs 80 will have a HUGE impact on how much money you need but with guaranteed income like CPP or a defined benefit pension you will continue to get paid.
-Premiums are taken straight off your pay cheque so you never see the money in the first place. This is probably the number one tip anyone can give you about saving; make it automatic to avoid temptation!
-The graduated increase will make it less noticeable. If you’re around that $55,000 income level I talked about above I can’t imagine you are really going to notice that extra $7 you’ll be paying at the beginning…just one less trip to Starbucks a month guys. My property taxes seem to go up significantly more than that each year and I can be hard pressed to see how those extra dollars are making the city better. At least this increased payment will be coming back to me when I’m living it up in retirement.
-The household savings rate in Canada is at a scarily low 3.9% (down almost a full percent from one year ago!!!) I get it, debt levels are really high and the job market isn’t exactly flourishing (especially here in Alberta) but saving for retirement cannot be considered optional and with the government accepting this new CPP plan they are now forcing your hand. Don’t just go and now think I’m giving you permission not to save at all because of this, you still have to if you want to live comfortably in retirement but it’ll help.

Cons
-It will cost businesses quite a bit more when it comes to payroll, and this is especially challenging when the economic conditions are as poor as they are right now. I’m hopeful that things will have brightened a little by the time the new CPP rules come into play in 2019 but there’s no guarantees.
-Those you are self-employed will take the biggest premium hike as they are responsible for contributing both the employer and employee portion of CPP premiums.
-You lose control of your money by giving it to the government. This is a big con for people who are avid investors and want to be able to pick and choose what investments make up their retirement portfolio. Sure CPP is run by investment managers who have it invested in all sorts of areas of the market but you get zero say in how that’s done. For some people this isn’t a bad thing (not everyone has the desire to manage their own investments) but for others it can be real problem.
-This isn’t exactly a con but it is something to think about, that extra CPP amount you will now be getting in retirement COULD push you up into a higher tax bracket in retirement and limit the advantage of RRSP contributions. The advantage of RRSP’s is that you put the money in when you are in a high tax bracket (when you’re working) and then pay the tax when you are in a lower tax bracket (in retirement). If you end up being in the same tax bracket at both times there’s really no advantage. Having extra money in retirement is never a bad thing but this could alter your planning a little.

There you have it, a breakdown of the changes to CPP and my take on the whole situation. What do you guys think? Are you happy about the new amendments or are you hating on the government today? 

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