Yesterday Federal Finance Minister Bill Morneau shared the federal government’s plans for an overhauled and updated CPP (Canadian Pension Plan). Why’d he do this? Because the government sees that many, many Canadians are not saving enough for retirement and there is concern over 1.1 million Canadians retiring with a significantly lower standard of living compared to when they were working.
Here’s what you need to know, as well as a refresher Q&A in how CPP works:
First of all, what is the CPP?
The Canadian Pension Plan is a retirement savings plan that the government has set up for all Canadians. It is a mandatory savings program, with contributions taken out of your monthly paycheque, or if you act as a contractor, contributions are made with your quarterly or annual tax payments. CPP provides pension and benefits upon retirement, disability or death.
Does the government provide any contributions, or is it just money that I save up over the years I work?
CPP is based on the contributions you make, in addition to what your employer contributes as well. Contractors pay both the employer and personal amount. The government keeps track of all this, but does not supplement it.
When am I eligible for CPP?
“You can apply for and receive a full CPP retirement pension at age 65 or receive it as early as age 60 with a reduction, or as late as age 70 with an increase.” – via the government.
Does it automatically kick in?
No, you actually have to apply for CPP, during the year that you want it to kick in. Deciding when to apply for CPP depends on many factors, a list of which you can find here (it’s too much to detail in this post, especially for people who are likely decades away from making this decision – add it to the retirement files).
How much of this pension will I get when I retire?
Sadly, not as much as you would think – or as I thought anyway. I would have liked to provide examples for you, but the amount that you get is based on your average working salary, depending on how much was contributed, and takes many factors into consideration such as the year you want to start taking CPP, how long you expect to live, whether you want to split the pension with a spouse as well as your TFSA and RRSP savings.
Okay, so back to the current news.
The government has proposed updating and expanding CPP, which means that our contributions could increase, as well as the amount we would receive upon retirement. All in all, I think it’s a positive change as it is far better to take a little pain now (paying more into CPP), to receive a better pension cheque when you’re no longer earning an income. Although the reality is you’d better have a lovely nest of savings, investments and some sort of passive income to retire comfortable in this city (Vancouver). But we are millennials after all, we’re extra resourceful and we’ve got some time to make all of this happen. That being said, I recently heard a wise saying; “The best time to plant a tree was 20 years ago. The second best time is today.” So the time to start is now.
Here is how CPP is proposed to change (via Global News):
- The proposed expanded CPP would roll out in 2019. Economic benefits pertaining to this expansion would not be expected to be felt until after all CPP changes would be fully implemented in 2025.
- Contributions would increase, from where they are now, gradually over seven years starting in 2019, to a total of $18 – $84 monthly (income dependent).
- Retirees would receive 1/3 of their average annual incomes, up from 1/4 of their average incomes. For example, if someone makes an average of $50k over their working life, they would receive $16k a year in CPP, up from $12k, (example via Financial Post).
- The amount of income subject to CPP would increase by 14% to $82,700.
- A tax deduction would be implemented “on the increased contributions by employees.”
Will it happen? (quoted from Global News):
- Initially, every province except Quebec backed the agreement in principle and agreed to ratify it by a July 15 deadline.
- B.C. later declined to finalize the deal by that date, saying it needed more time to explain it to the public and to seek feedback.
- A deal to reform the CPP needs the signatures of a minimum of seven provinces representing at least two-thirds of Canada’s population.
- The federal Liberals expect B.C. to back the plan and they intend to table CPP legislation this fall.
- The Canadian Chamber of Commerce has called on the federal government to introduce the expansion in a way that doesn’t have companies paying out more: offer additional employee contribution options and let employers match this on a voluntary basis.
- So, we’ll see.
And here’s how these changes could affect our economy:
- In the short term: economic contraction of 0.03 – 0.05 per cent and potentially lowering the employment growth rate 0.04 – 0.07 per cent between 2019 and 2025.
- In the long term: economic expansion of 0.05 – 0.09 per cent over the period of the new program. This could potentially create between 6,000 – 11,000 new jobs as an impact of more money flowing into the economy (I guess they’re expecting us to spend more if we get a little more pension?).
- Good to know: the conservative party has referred to an increase in CPP as a “tax hike.” I’m all for a healthy two-sided debate, but calling it a tax hike is inaccurate and positioned to make it a negative in the minds of Canadians. Personally, I think this is a positive – and my including this is not out of bias, I both dislike and like the Conservative and Liberal parties of Canada for various reasons. But, I digress.
Read the original articles that inspired this post from Gordon Isfeld, published in The Financial Post and from the Staff at Global News.
Feature image via Sartoria & Co.
