ZOOMER Magazine - - FRONT PAGE - By Peter Mug­geridge

AL­THOUGH IT FORMS a big part of our re­tire­ment in­come, the Canada Pen­sion Plan is a com­plex pro­gram that’s not en­tirely un­der­stood by those who will even­tu­ally ben­e­fit by it. CARP helps clear up the mis­con­cep­tions with a CPP primer.

The Great So­ci­ety

A boom­ing econ­omy in the 1950s and 1960s her­alded the ad­vent of big govern­ment so­cial pro­grams aimed at end­ing poverty, es­pe­cially among se­niors. First, in 1952, the Lib­er­als led by Louis St. Lau­rent in­tro­duced Old Age Se­cu­rity (OAS), a ben­e­fit paid to all Cana­di­ans age 70 and over (now 65 and over). Lester B. Pear­son’s govern­ment in­tro­duced two more se­nior-friendly pro­grams: the Canada Pen­sion Plan in 1966, to help pro­vide an in­come for work­ing Cana­di­ans af­ter they re­tired, and the Guaranteed In­come Sup­ple­ment (GIS) in 1967, a ben­e­fit to help lift very-low-in­come se­niors out of poverty. A 2015 global sur­vey found that Canada spends 4.3 per cent of its GDP on pen­sions, well be­low the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment av­er­age of 7.9 per cent.

Thou shalt save

Since its in­tro­duc­tion, CPP has al­ways been a manda­tory pro­gram, with the pre­mi­ums shared 50-50 be­tween em­ployer and em­ployee. (Self-em­ployed pay the full pre­mium based on net profit.) It all op­er­ates on the prin­ci­ple that the temp­ta­tion not to save is too great. CARP’s Wanda Mor­ris agrees, say­ing, “Be­havioural ex­per­i­ments show that un­less we’re nudged – okay, in this case forced – into an au­to­matic sav­ings pro­gram like the CPP, we prob­a­bly won’t save on our own.” (Wit­ness the $500 bil­lion Cana­di­ans have in un­used con­tri­bu­tion room to their RRSPs.) Small busi­ness own­ers have al­ways grum­bled about the idea of shar­ing CPP pre­mi­ums, say­ing it’s no more than a pay­roll tax.

Pet food pays our pen­sions

In 1997, the govern­ment cre­ated the Canada Pen­sion Plan In­vest­ment Board (CPPIB) to man­age the fund’s as­sets. Be­cause it’s such a mas­sive re­source (with as­sets close to $300 bil­lion, it’s the ninth largest pen­sion fund in the world), Mor­ris claims that the CPPIB can use its “rel­a­tively low man­age­ment costs along with its mag­ni­tude of dol­lars and in­vest in lu­cra­tive com­pa­nies and in­fra­struc­ture projects around the world,” such as a lead­ing bank in China, a mas­sive re­tail chain in Korea and a pet food com­pany in the U.S. The pro­ceeds from th­ese are used to pay CPP ben­e­fits to re­tirees. In the last 10 years, CPP has av­er­aged a 6.8 per cent an­nual real rate of re­turn, adding $125 bil­lion to the pen­sion pool.

Last­ing power

Based on cur­rent pro­jec­tions, the CPPIB es­ti­mates the plan has at least 75 years of sus­tain­abil­ity. The longevity of the scheme re­ally de­pends on what econ­o­mist Mal­colm Hamilton calls “in­ter­gen­er­a­tional sol­i­dar­ity.” He means that, for pro­grams like CPP to en­dure, fu­ture vot­ers and politi­cians must

share the same political will to sup­port it as we do to­day. The two big un­knowns: how will the stock mar­ket per­form and will cash-strapped gov­ern­ments keep their hands out of the CPP cookie jar?

No, in fact, thanks to ef­forts by CARP, which lob­bied hard for CPP en­hance­ments, when mil­len­ni­als re­tire, they’ll ac­tu­ally re­ceive higher pay­outs than their par­ents or grand­par­ents did. Last year, the prov­inces and fed­eral govern­ment came to a sur­prise agree­ment to make im­prove­ments for work­ers down the road. So when mil­len­ni­als re­tire, pay­outs could be as much as 50 per cent higher than to­day’s re­tirees re­ceive. Ac­cord­ing to Mor­ris, “The fact that 79 per cent of CARP mem­bers backed CPP en­hance­ment showed that older Cana­di­ans don’t care just about them­selves but are also will­ing to fight for fu­ture gen­er­a­tions.”

So how much will I get?

The amount of CPP pay­outs you re­ceive will de­pend on how much you earn dur­ing your ca­reer and how much you paid into the pro­gram. And while you can drop your low­est eight years from the equa­tion (as well as some child-rear­ing years, for those who qual­ify), there are still a lot of school years and climb­ing years that will bring down your av­er­age. The cur­rent max­i­mum pay­out is $13,370 a year – but only those who have 39 years of con­sis­tently high earn­ings will hit that. The av­er­age Cana­dian re­tiree ac­tu­ally re­ceives far less – with $8,221 be­ing the yearly av­er­age.

SOC it to me

You can re­quest your State­ment of Con­tri­bu­tions (SOC) from Ser­vice Canada, an es­ti­mate of CPP ben­e­fits you’ll re­ceive based on your con­tri­bu­tions if you were 65. Re­mem­ber, says CPP spe­cial­ist Doug Runchey of DR Pen­sions Con­sult­ing, the SOC is an es­ti­mate, not a guar­an­tee. “The big­gest mis­take peo­ple make is mis­un­der­stand­ing what the num­bers mean on their SOC,” he says. Say you’re in your 50s, and your SOC sug­gests that you’ll be el­i­gi­ble for a pen­sion a $1,000 a month when you re­tire at 65. This as­sumes, how­ever, that you’ll con­tinue earn­ing at the same level from now un­til the end of your work­ing ca­reer. It doesn’t take into ac­count job loss, ex­tended leave, a drop in earn­ings or early re­tire­ment, all of which will lower your CPP ben­e­fits.

Should I col­lect CPP early?

You can be­gin col­lect­ing CPP as early as 60 or wait un­til 70 at the lat­est. How­ever, the govern­ment will pe­nal­ize you (sub­tract 0.6 per cent a month be­fore 65 if you be­gin col­lect­ing early) or in­cen­tivize you (add 0.7 per cent a month af­ter 65) if you de­fer it. To il­lus­trate the dif­fer­ence, sup­pose your an­nual CPP ben­e­fit is $10,000 a year, if you be­gin col­lect­ing at 60, you’ll be pe­nal­ized $3,600 over the five years. Con­versely, if you de­lay to 70, you’ll col­lect an ex­tra $4,200. Runchey says if you live to 80 (the nor­mal life ex­pectancy), it doesn’t mat­ter what age you start re­ceiv­ing ben­e­fits: “Based on the math, by 80 the to­tal pay­outs will be about equal.”

So de­fer, right?

If you can af­ford to, de­fer­ring seems the log­i­cal choice. How­ever, many Cana­di­ans (42 per cent) be­gin col­lect­ing at 60 sim­ply ei­ther be­cause they need the money or they want to start dip­ping into their nest egg. Plus there’s the health wild card to think about. Con­sider the case of Sarah, a sin­gle woman who, in or­der to get higher pay­outs, opts to de­fer her CPP un­til age 70. Un­for­tu­nately, she passes away at age 69, and all those years of pay­ing into the plan go for naught – her money goes right back into the CPP pool.

It’s all in the num­bers

In or­der to de­cide whether to de­fer or not, Runchey says that those on the verge of re­tir­ing should “know what their [CPP] pay­outs will be and con­sider all their other re­tire­ment in­come streams.” Be­sides be­ing a pen­sion con­sul­tant, he has a side­line busi­ness where, for a small fee, he’ll run the num­bers to give peo­ple a bet­ter idea of when it makes most sense to be­gin claim­ing CPP.

Do I pay while I’m work­ing?

If you’re be­tween the ages of 60 and 65 and work­ing, you must con­trib­ute to CPP whereas work­ers be­tween the ages of 65 and 70 can de­cide for them­selves. Th­ese pre­mi­ums go to­ward your Post-Re­tire­ment Ben­e­fit (PRB), which will bump the amount you re­ceive af­ter you re­tire.

Un­even play­ing field

One of the re­al­i­ties with CPP, CARP’s Mor­ris notes, is that older sin­gles (like Sarah) are un­able to avail them­selves of sev­eral ben­e­fits that mar­ried or com­mon-law part­ners can. The most ob­vi­ous ex­am­ple is the sur­vivor’s ben­e­fit, which is paid out to the sur­viv­ing mem­ber of a mar­ried or com­mon­law union. Sin­gle peo­ple, how­ever, can­not des­ig­nate a fam­ily mem­ber or friend who could re­ceive the sur­vivor’s ben­e­fits. Mor­ris points to an­other is­sue whereby peo­ple who don’t have chil­dren must, in ef­fect, sub­si­dize those who do, through the child-rear­ing dropout pro­vi­sion.

When should I ap­ply?

Fill out a CPP ap­pli­ca­tion at your lo­cal Ser­vice Canada of­fice (or on­line at www.ser­vice­ six months be­fore you wish to start col­lect­ing ben­e­fits.

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