Back in the eighteenth century, Benjamin Franklin coined the term "There are no gains without pains." Over the years, this term has been better known as "no pain, no gain,"
With our industry a buzz in discussions about pension reform and what will be best for our nation, this phrase of Ben Franklin's comes frequently to mind.
Experts question whether CPP enhancements will soften the job market for an already weak Canadian economy. They wonder if the CPP expansion is more of a tax hike likely costing families more instead of facilitating an accelerated ability to save.
Will jobs be eliminated because of rising premiums? The increase to 5.95% from each of employers and employees over a 5 year period beginning on January 1, 2019 may seem like more of a calculated gamble. It is one that the Federal government believes is worth taking especially when it is estimated that 1.1 million Canadian families are reportedly not saving enough for retirement.
The goal is to eventually provide future retirees with one third of their average incomes (up from one quarter) through the CPP, This reform also provides a tax deduction instead of a tax credit on the increased contributions, which will reduce government revenues.
Small business owners share mixed feelings on the subject and worry that CPP premium increases will damage our struggling economy and force them to eliminate jobs.
The Finance Department's projections indicate that CPP reform will create an economic lift to help future generations of retirees. It is a longer term strategic approach that may, in the short term, create a softening in the job market. The plan appears akin to Ben's belief -- there are no gains without pains. The looming question may well be, "Are Canadians ready to accept short term pains with the belief that CPP reform will generate longer term gains?"
Regardless of what side of the CPP reform fence you may be on, it is a topic that concerns Canadians particularly as the Baby Boomer generation continues its rapid trek toward retirement. As per Statistics Canada, we have more people over the age of 65 than under 15 and this greying generation makes up 27% of the population -- double what it was in 1971.
It isn't a simple situation, but it is one that our team is well positioned to address. We have the experience and expertise to discuss ways to help you manage risk and develop sustainable cost management strategies. We invite you to contact us. We're here to help so that you can focus on what you do best.
At one time, defined benefit pension plans were the norm. This might have been considered the post World War II golden age when workers stayed with one employer their entire career, had retirement farewell gatherings, were given a company watch and were reassured that their retirement annuity cheque would arrive monthly for the rest of their lives as a reward for their long years of service and dedication. According to Stats Canada, back in 1971, almost 50% of company pension plans for male workers were defined benefit arrangements. Fast forward to 2011 and that percentage drops to 25. Aside from the public sector, the shift away from defined benefit pension plans has been strong and steady. Many existing plans have also introduced grandfathering for retiree benefits.
It seems that the topic of pension reform has been much talked for almost a decade now. It is also well recognized that a widening gap exists for what public sector pension arrangements are able to offer Canadians workers during their golden years.
Several previous attempts at CPP reform failed. Now, with 8 of 10 provinces on board — excluding Manitoba’s Tory government who is still too new, and Quebec, with its separate approach through QPP — we appear to be moving ahead at full steam.
Something needed to be done given household debt in Canada leads the industrialized world. Perhaps we’ve been lulled into a false sense of predictable low interest rates allowing us to carry even higher amounts of debt.
In Ontario, the ORPP was set to launch in 2019 and if nothing else, it created more motivation for the feds to try again and seek the support of at least 7 of the 10 provinces representing at least 2/3 of the country’s population. In Ontario, we are ready to put ORPP plans on the shelf as CPP expansion was always the preferred approach to foster Canadians’ ability to save for retirement.
While not able to address those close to retirement or those who didn’t contribute much or anything and are now retired or quickly facing retirement, CPP reform will more fully support the savings needs of younger workers as well as those earners in the middle category who are earning in the range of $50,000 to $80,000.
Workers under age 45 and at these middle income levels appear to be most at risk. There are a number of possible contributing factors that result in an incapacity to save due to stronger competing forces vying for a limited pool of funds. Whether it is lingering student debt, mortgage payments, credit card bills or simply keeping up with The Joneses, the reality remains that many middle class workers aren’t saving enough for retirement and without the help of CPP reform, they might not easily find a way to change their behaviour in order to create favourable savings outcomes.
Major CPP reform changes at-a-glance:
Employers play a key role in the savings scenario too as many seek to educate employees and raise their level of financial literacy. We’ve been working with group pension plans and employers for over 2 decades now and invite you to contact us. We’re here to help so that you can focus on what you do best.
Following the ebbs and flows of the Baby Boomer generation (born between 1947-1964) can be an interesting and insightful experience whether you are of this generational slice of the workforce pie or not. Baby Boomers continue to be studied, surveyed, and analyzed for their preferences, buying habits, and saving patterns. Regardless of the industry, the behaviours of this demographic makeup of our society simply can't be overlooked and particularly not with 10,000 North American Boomers celebrating their 65th birthday every day for the next 20 years. (Source: Pew Research Center).
In the pension and benefits world, the life event milestones of Boomers demand greater attention and strategic thinking. More focus is being placed on what benefits coverage will be appropriate as well as how to best to draw down on investment income in their post workforce participation world. With decumulation, the question becomes not whether a person saved enough for retirement, but how best to draw down regular income post workforce participation and not run out of money before death. It comes down to balancing acceptable risk versus a sustainable withdrawal rate.
There are various methods to help people draw down on their investment assets. Looking at the cost, risk and flexibility as well as understanding the person's personal preferences related to their finances is important. As this topic heats up, some questions to consider when planning a withdrawal from workforce participation include:
1) Are there any debts that should be paid off so there are no payments taken from retirement income?
2) How much if any of a "rainy day" emergency fund is needed?
3) Are there any funds to be set aside for specific bequests?
4) What other assets should be factored in (e.g. house)?
5) What type of expenses exist and how should they be broken down based on essential (necessary for survival), basic (ability to travel south each winter) and discretionary (like make charitable donations)?
When addressing the decumulation strategy, thought should also be given to one's 1) private pension, 2) government sponsored benefits, 3) any continued workforce participation, 4) taxation, 5) investment costs, interest rates and the rollercoaster ride given by stock markets.
There are several decumulation methods and each varies when it comes to cost, risk, and flexibility associated with them. They include:
1) working with a financial advisor
2) lifetime annuity or term annuity
3) draw down pension and/or target date funds with a decumulation feature
4) home equity release
5) Shifting investments to TFSAs
6) RRSP "meltdown" - making RRSP withdrawals earlier in life if you'll face tax at a lower rate than anticipated in the year of your death.
Increasingly, approaches to addressing decumulation will take center stage where accumulation discussions previously dominated. There is much to unbundle and address on the decumulation topic particularly as it pertains to what can be withdrawn on a tax-free basis and the different age limitations related to annuitizing or converting assets. We invite you to contact us to discuss what decumulation strategies would work best for your corporate pension plan arrangement as well as best practices related to educating your plan members.
We're here to help so you can focus on what you do best.
What will you be doing this summer?
Recently, I read that Finance Minister Joe Oliver intends to consult experts and stakeholders regarding ways to explore giving people options to boost the Canada Pension Plan (CPP) during the summer of 2015. The issue of enhancements to CPP has been a topic of much debate in recent years as the various political parties wrestle with the best approach for Canadians.
Now, Prime Minister Harper wishes to consider giving us the option of hiking CPP contributions as a way to boost our retirement savings through voluntary add-ons. In the past, it has been the New Democratic Party (NDP) and the Liberals who have waved the flag regarding the need to enhance CPP.
While this debate rages on at a federal level, the necessity of change and helping Canadians save enough for retirement is felt at the provincial level as well. In Ontario, the Ontario Registered Pension Plan (ORPP) legislation was introduced earlier in 2015. I've written on this topic a number of times. See these posts for ORPP details:
The change in the Tories opinion about CPP enhancements has many Canadians and the Progressive Conservative's opponents wondering if their decision has anything to do with the upcoming election. Regardless of their motivation, all of the parties seem onside, at least fundamentally, with the need to expand this greatly valued government-sponsored retirement benefit.
Whether or not these changes will take hold is yet to be seen, but who can fault a government for wanting our retirement system to be among the best in the world?
There never seems to be a panacea to solve this important and much discussed issue, but the reality prevails that Canadians need more options to make saving for retirement as easy and painless as possible. In a world where there are too many distractions lobbying for us to spend our money, creating a nest egg that one can rely on when the time arrives can't be a bad idea.
The debate seems to explode around the concept of forcing Canadians to save. Some would say that if we don't force people to save, they won't. As of March 2015, the maximum monthly payout of CPP is $1,065.00. Will that be enough for retired Canadians to live on?
The announcement from the Harper government is relatively vague, but shows a concern for the topic in a matter that they haven't broached to this extent in the past. Whether you're in favour of boosting the CPP or not, the matter of saving for retirement continues to be a concern. Within group benefit plans, there are lots of options for voluntary contributions such as group RRSPs and TFSAs. The more informed employees are about their choices and the importance of saving, the better the experience for all. We're here to help you create these conversations and build the tools that drive awareness at all levels of your organization. Contact us to help so you can focus on what you do best.
On November 1, the Canada Revenue Agency announced that the maximum pensionable earnings under the Canada Pension Plan (CPP) for 2014 would increase. This means that effective January 1, 2014 the new ceiling moves from its current level at $51,100 to $52,500.
The $1400 change takes into consideration the growth in average weekly wages and salaries in Canada. The ceiling means that eligible contributors to CPP who earn over $52,500 in 2014 will not be required or permitted to make additional contributions to the CPP.
Other important figures to remember:
2014 Maximum annual contributions to CPP:
For questions about legislative updates including CPP or Old Age Security quarterly updates, please contact us. We're here to help so that you can focus on what you do best.
Dave Dickinson, B.Comm, CFP, CLU, CHFC
Experienced Benefits Specialist ready to optimize your group benefits and pension plans.