What do you think of pension reform in Canada?
Fifty percent of Canadians will be feeling the burn as they face big cuts to their standard of living at retirement and despite pension reform, there appears to be no relief in sight.
Public pensions are one of the largest single items of government spending in most industrialized countries. Now we have a perfect storm of aging populations, slowing economic growth, and disappearing private pensions. This is putting pensioners, policymakers, and politicians between a rock and a hard place.
Building a pension platform
Let’s take a look at the history of government pensions in Canada:
- In 1952, the Old Age Security (OAS) for people 70 and over became the first universal old-age pension in Canada. Those 65 to 69 could get the income-tested Old Age Assistance.
- In 1957, the Registered Retirement Savings Plan (RRSP) gave a vehicle for tax-deductible contributions that would be taxed upon withdrawal during lower-income retirement years. At age 71, the pensioner needs to convert them in some way. These can be converted to a Registered Retirement Income Fund (RRIF) at age 71.
- In 1965, the Canada Pension Plan (CPP) legislation passed and the OAS age qualification went down to age 65. The CPP still is compulsory, earnings-related and deducted from pay. The self-employed pay double.
- In 1966, the income-tested Guaranteed Income Supplement (GIS) was created with payments starting in 1967.
- In 1985, then Prime Minister Brian Mulroney attempted to cut back the public pension system but met with Grey Power opposition forcing him to back away from that idea.
- In 2008, the Tax-Free Savings Account came about to provide tax-free growth with the maximum contribution now at $46,500. This can contain eligible investments and is NOT just a savings account.
What are the pension reform issues today?
There’s no surprise about the key issues that we face with regards to pensions and retirement:
- We have an aging population increasing the ratio of retirees to workers reducing the tax base thus upping the dependency rate.
- Debt levels are even higher than in 2008 when the warning bell went off about the dangers of this high debt.
- Canadians have very low savings rates especially dangerous for the $30,000-$100,000 middle-class income levels.
- Employer pensions, especially defined benefit ones, have been disappearing steadily.
- We have slow economic growth with no upticks insight.
- Rates of unionization have fallen with 27 percent of full-time Canadian workers unionized and only 14 percent in the private sector. Union membership means higher wages for many and that good income plus pension scenario is eroding.
ADDING IT ALL UP
Canadians collecting Old Age Securityreceive $570.52 monthly and it is indexed and adjusted quarterly.
Not everyone wants or needs an RRSP as their income is too low to benefit, they have other uses for their funds at the stage of life they are at, a TFSA would suit them better and so on. The participation rate is roughly 55-65 percent but not everyone fully funds their RRSPs by any means.
The Canada Pension Plan (CPP) is likely the best way to boost middle-income earners’ retirement incomes and the Liberals did talk about this in their campaign. However, 7 out of 10 provinces representing 66 percent of the population would need to be on board. Not likely to happen. Ontario is going it alone in developing the ORPP for 2018, Quebec has its own pension, while Saskatchewan and Manitoba say no way.
For information on the GIS, go to servicecanada.gc.ca.
As for the Tax-Free Savings Account (TFSA), only 7 percent of Canadians have made maximum contributions. Only 41 percent have one at all. That leaves 59 percent of Canadians without one. Not the panacea the government hoped it would be!
Do you have suggestions for policymakers and politicians?
As one of the 7% who has managed to max out my TFSA, and as someone who went to school for personal finance I think it should be optional. I’d love to opt out of CPP entirely, I’d invest that money myself into my own investments. Like anything if you do it your self and know what you’re doing you can get a much better return investing on your own than what CPP will pay you. I get most people don’t save enough and that’s why there’s a problem, maybe the government should do more to incentivize saving, like with an RRSP if you wait till 65 to withdraw, you only pay 25% tax no matter how much you take out. Or maybe the government could match you 3% into your RRSP like an employer might do.
Unfortunately, many people are uneducated about personal finance. The closest thing many people hear is about how to spend for instant satisfaction. The CPP was never designed to be the only source of income for people in retirement. I am actually okay with the way the current CPP is run and managed. It gives some income and is managed outside of government hands so the money is actually there as opposed to many government plans around the world.
People need to be educated that they need to prepare for their future, whether that be through finding an employer that provides a pension plan or by settong it up themselves separate from the company they work for. People cannot continually look to the government to provide for them. This could also include family looking after family. And yes this could mean that you will not be able to take that month long tour of Europe this year. There are too many people trying to “keep up with the Kardashians” these days.
Is the Benefit of OAS + GIS will change…???? if someone move from Ontario to New Brunswick. Your advise will most welcome.
Definitely a polarizing topic.
The first change I would initiate is to change the name to Canada Pension Supplement and Emergency Plan. Not catchy, but less misleading than calling it a pension plan.
Paul mentioned education about managing finances in general and retirement in particular. That is the most critical change I would initiate at secondary and university levels.
Mandatory courses that would explain why 20% and 30% compound interest on credit cards is a really bad thing.
But on the other hand, compound interest is very beneficial to savings and investments. The rule of 72 for instance would become a simple tool for everyone who can do simple division.
Self-employed people don’t pay double contributions for the CPP. They pay the usual employee portion and they pay the employer portion. Most employees are not aware that the employer is contributing to its employees’ CPP. Employers also pay an equal amount for EI; most employees are not aware of that either.
Increasing the contributions or postponing the retirement age will not fix anything. If only 7% can fully fund their TFSA, they just don’t have the disposable income to pay more CPP. Since the bottom line of all employers would also affected, there’s an immediate impact on profits (less income tax) and higher costs on exports (less competitive).
Some beneficial changes have already been implement at the CPPIB level. There was a time when the CPPIB was limited to fixed income investments; today they buy shopping malls and toll highways that generate substantial cash flow and profit opportunities.
The boomers impact will end. I’m not sure when the peak will be but it won’t last very long.
Too many decisions by politicians are vote motivated and short-sighted. When the politicians are gone, they’re only around for a short time after all, many of their policies get reversed; but the money is never refunded to the citizens.
Making changes to the CPP requires defining what the real problem is and how long it will last; then clearly defining the impact on employers, inflation and exports. According to the (Mutual Fund) financial advisors I have encountered over the decades, the CPP was to be broke a few decades ago. Ta-daaaa!
The CPP is currently paying about 1% in cost of living increases, but earns over 10% every year from its investments while collecting premiums from a larger and larger workforce.
People need to learn to manage their own money; they don’t need to become Day-Traders or financial advisors.
I’ve contributed $39,000 to my TFSA, so far. I’ve re-invested the cash dividends. My monthly income in 2016 from the TFSA is currently $569 a month or about 18% on the original cash invested. It’s due to education, using the Internet, spreadsheets, focusing/determination on monthly income needs rather than capital preservation (cash flow rather than emotion). It’s from stocks and closed end funds, no actual savings accounts nor mutual funds, zero debt.
Stop living life through borrowing to keep up with the “Jones'” or get the best toys, trips. One thing not said enough. Pay all your debts off asap and especially by retirement. Imagine, with no mortgage, credit card, personal loans etc. How much people would be better off! Advertisers, and business want you to buy now, pay later, but does it occur? My grandparents had a frugal but affordable retirement and never did go needing or wanting.
Imagine, a mortgage payment of even $1000 mo.gone. What amount of capital would you need to provide income of $12000 yr. Get the point? And most mortgages are much higher plus people have personal loans, credit, etc.
In early retirement people spend more at the beginning and
then spending drops quite a bit mid retirement.
With CPP, OAS and either personal pension or work pension with no debt some people can even live better in retirement then before. Even if you aren’t one of those people, freedom of debt can make your life much better! It used to be the standard advice in retirement planning. Pay off mortgage, debts, then retire. Now we don’t hear it all all. I have a degree in finance at Wilfrid Laurier, experience in banking, loans, retirement and a degree in Computer Programming.
I like your idea of leave the RRSP to 65 and get a tax break!
I agree that education is key. That is why this website is one I support. It is also why I di Retirement Readiness courses and workshops!
The OAS and GIS are federal programs and so remain the same province to province!