PENSION PRIMER
Adam Mayers answers five common questions about Ottawa’s efforts to expand the CPP,
Canada’s finance ministers are meeting in Vancouver in a few weeks to continue their talks about expanding the Canada Pension Plan.
CPP expansion was a Liberal election promise, but at a pre-Christmas meeting with his provincial counterparts, Finance Minister Bill Morneau only found a chilly gust of wind blowing the other way.
Three ministers were opposed to an expansion and a fourth has likely joined them since then, as the energy and commodity price collapse has dented provincial economies.
Since changes to the CPP require the support of Ottawa plus seven of the 10 provinces representing twothirds of the population, the hurdle to change is significant. There are many different ways the plan could be expanded, but don’t get your hopes up; a deal is still in the distance, if it comes at all.
While we’re awaiting the outcome of the June 20 meeting, here are answers to common questions. If CPP is expanded, how much more will I get? It all depends on how the government goes about it. The simplest way would be to increase the average industrial wage, which is pegged for CPP purposes at $54,900 in 2016. You’ll find that number on the T4 slip you get from your employer at tax time. If that number is raised, it will mean higher premiums paid by you, but also a bigger payout. Another possibility is an optional add-on pension scheme. When would I get more money? Not for a while. If an agreement is reached this month, you’d have to wait for three more years before any changes came into effect. That’s the required cooling-off period between making CPP changes and implementing them.
Any increase would be phased in slowly, because the CPP won’t pay anything until it can be assured it will have money going forward to meet the commitment. Who would gain the most from an expansion? Young people and those in mid- career. Time is on their side. The extra money paid in can grow and produce a better return 25 or 30 years from now.
Older workers would get very little for same reason — time is working against them. Why is the CPP payment so small? The maximum monthly amount in 2016 for someone retiring at age 65 is $1,092.50.
That amount drops for every month you start receiving it before age 65, so someone starting at age 60 gets 36 per cent less as a maximum than a 65-year-old.
The CPP was not designed to replace all your employment income in retirement. It is supposed to be one of three pillars. The other two are personal pensions, including RRSPs, and other savings. Do many people get the maximum? No, fewer than 10 per cent of Canadians typically get it.
The average is about half of the maximum, according to Human Resources Development Canada, which administers the plan payments. Women tend to have a lower average than men. Why is the maximum so low? The maximum is based on contributing at the top rate for 391⁄ years
2 between the ages of 18 and 67. That’s a span of up to 49 working years, so you can drop up to seven low-earning years.
Most people don’t work for 40 years.
They may drop in and out of the workforce and, in their early years, they may not make enough to contribute the maximum. Do I need to worry that politicians will take the money to use on something else? Ottawa can’t touch your pension. The CPP Investment Board, which manages the money, operates at arm’s length from the government of the day. It reports to Parliament through its board of directors. Is an increase likely? It’s a distinct possibility. The investment board has $279 billion in assets and, for a decade, it has been consistently making more than it needs to meet its obligations.
Its average annual return after inflation over 10 years is 5.1 per cent. The chief actuary of Canada says it needed to make 4.1 per cent a year to meet its obligations.
That’s why the June meeting may produce progress. The choices are increasing your pension, reducing your premium or some combination of both.
The federal Liberals ran on a platform of better public pensions. Morneau comes from a pension benefits background.
Who knows. Maybe this time will be different. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Have a question? Reach him at amayers@thestar.ca.