WHAT CPP EXPANSION WILL — AND WON’T — DO FOR YOU
There has been much talk around the federal government’s Canada Pension Plan enhancement recently, but the anticipation of higher income in retirement doesn’t mean you can cut back on saving strategies today. The reason? The expected returns of enhanced CPP are years away.
The government’s goal is to increase the CPP retirement benefit by approximately 50 per cent over time. Today, the maximum benefit at age 65 is $13,110 a year. In terms of today’s dollars, the enhancement — when it reaches maturity — will translate into an annual retirement income of about $20,000 for a person who has fully paid into the plan.
Getting to that income level is a long and slow process, however. The enhancement will need to be funded, which means a rise in annual CPP contributions. Those increases will be phased in over seven years starting in 2019. For example, a person earning a salary in the mid-$50,000 range will begin contributing an additional $6 a month in 2019. By the end of the seven years, the additional contribution will reach approximately $43 a month.
When it finally kick sin, the enhancement represents a“pretty significant improvement” for anyone earning under $65,000, says Allan Shapira, managing director, Aon Hewitt Canada in Toronto. “But it will be over 40 years before it’s fully baked in and you get the full impact on the benefit side .”
In the near term, that impact will be very modest, he adds. “For anyone 10 years from retirement, it won’t be a large factor in their savings strategies. If you’re in your mid-career, you might start to think about it, because you will get more than half of the extended benefits by the time you retire in 25 years.”
Investing in the CPP enhancement is no different than depositing at the bank and will simply become a part of your life, says Malcolm Hamilton, pension expert and senior fellow with the C. D. Howe Institute in Toronto .“It will not be as dramatic as you might think, because it’s a pretty drawn-out process. It will be a long time before the first group of Canadians will receive the fully enhanced benefit, so most people in the workplace today won’t pay for or get the whole thing.”
The real challenge for any Canadians who have not fully paid into the CPP and don’t have an employer pension is understanding what other options are available, Hamilton says. “Most Canadians have no clue what to expect to get in government pensions.”
When sitting down to work out your retirement income, there are several things to take into account.
Chief among them are other federal programs that provide benefits, including OAS (old age security) and GIS (guaranteed income supplement for low-income retirees). These are, however, subject to clawbacks based on retirement income, which also includes your CPP and investment income.
Additional benefits include the G ST tax credit, which offsets all or part of the GST or HST you pay and is automatically calculated annually by the government with your tax filing. There is also the working income tax benefit, which allows a tax deduction forlower-incomepeople.Low-income retirees may also be eligible for the spousal allowance and/ or spousal survivor allowance, which are part of the benefits included with OAS and GIS.
Also bear in mind that the CPP provides supplementary benefits including disability, survivor and death benefits.
Finally, a wide range of provincial tax credit programs are specifically designed to support lower-income retire es. In Ontario, for instance, these include programs such as GAINS (guaranteed annual income system), a monthly supplement for qualified pensioners, and the Ontario Trillium benefit (OTB). Many provincial programs, however, are also subject to clawbacks based on income earned.
People heading into retirement with a $40,000 income or higher will likely not need, or be eligible for, many of the additional federal and provincial benefits, Hamilton notes.
“They may not need to know about them, but lower-income people do. They should be taking a good hard look at what’s available, because government programs are their biggest asset in retirement.”
Shapira says that when you factor in all the various programs for lower-income individuals, “the combination does a very good job of replacing pre-retirement income”.
He adds, however, that it’s not easy to navigate the various programs and how they interact with each other. “Savings from one may only be clawed back from another bucket.”
The one key advantage with the CPP — whether enhanced or not — is that it provides a solid grounding that is not subject to clawbacks.
“Even if there are changes in other programs, the CPP is a certainty,” Shapira says. “That’s something that gets lost in people’s minds. They assume everything in place today will be there 30 years from now, but that’s not necessarily the case.”