We sometimes think of retirement as an individual weight that we all must bear alone. But sometimes, using a collective approach can make that heavy load a little easier for us.
So says Alex Mazer, Founding Partner of Common Wealth. “Preparing for retirement is pretty hard to do individually,” he notes, adding that many people have trouble saving at all, he says, and few start while young. Then, they “can make poor investment decisions” when left to their own counsel, and thus don’t benefit from “the pooling of longevity and investment risk” that comes with a collective savings approach.
Without investment advice, which Mazer says can be difficult to get, many of us invest in high-fee, inefficient savings vehicles. Research shows that this individualized retirement reality results in low savings at retirement for all but the wealthiest among us, Mazer says.
Turning savings into retirement is also a complex process, he says. You have to keep investing while you are taking money out of your savings plan, he explains. If your money doesn’t continue to grow there is the danger “of overspending your savings, which can translate into reduced income later in retirement,” Mazer warns.
A collective approach is better than an individual one, Mazer says. With collective savings, investments can be pooled, reducing investment and longevity risk and reducing management fees. Finally, there can be simple, cost-effective ways to turn the savings into retirement income in a collective plan, he explains.
Working with different partners, Common Wealth is developing new collective retirement plans that are aligned with these principles, Mazer explains.
The company developed a plan for lower-income healthcare workers that combines a group TFSA with some of the key characteristics of a pension, including fiduciary governance, pooled investment management, and the potential for mandatory contributions through payroll. By using a TFSA structure, Mazer says, income at retirement is tax free, which means eligibility for the Guaranteed Income Supplement is not impacted.
The firm’s latest project is developing a nationally portable retirement plan for the non-profit sector, where about 850,000 workers who don’t have any sort of retirement vehicle at work. That number represents about half the non-profit workers in Canada. Again, the plans call for a pooled, collective system with professional investment management, low fees, and a plan for turning savings into income.
Mazer says that if he could personally influence one policy change, it would be to create “high quality collective plans with auto-enrolment” for workers lacking a pension plan at work. Auto-enrolment has worked well in the UK’s NEST program – very few people opt out. Mandatory plans are also popular in Australia. The result in both countries is a much higher level of retirement saving, he concludes.
We thank Alex Mazer for taking the time to talk to us. The Saskatchewan Pension Plan is an open defined contribution plan where contributions are invested collectively with professional management. Annuities are available to help you convert savings into an income stream. Perhaps SPP is the missing piece of your own retirement puzzle.
Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. After a 35-year career as a reporter, editor and pension communicator, Martin is enjoying life as a freelance writer. He’s a mediocre golfer, hopeful darts player and beginner line dancer who enjoys classic rock and sports, especially football. He and his wife Laura live with their Sheltie, Duncan, and their cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22
Factor high healthcare costs into your retirement savings strategy: HOOPP
One of the biggest problems retirees can face is unexpected, major healthcare costs in retirement – and that possibility should be factored into retirement savings.
So says Darryl Mabini, Senior Director, Growth & Stakeholder Relations for the Healthcare of Ontario Pension Plan (HOOPP). HOOPP is a $77.8-billion public sector defined benefit pension plan serving healthcare workers in Ontario.
HOOPP recently produced a four-paper series called Retirement Security – Is it Attainable? One of the four papers, called Seniors and Poverty – Canada’s Next Crisis found that 12.5 per cent of Canadian seniors – and a startling 28 per cent of senior women – live in poverty.
A factor behind this, the series suggests, is the lack of good workplace pension plans (the defined benefit type, which provides pensions based on a percentage of your earnings, is rare outside the public sector) and inadequate personal retirement savings.
“People saving for retirement don’t factor in the healthcare costs when they get older,” explains Mabini. While Canadians are proud of their universal healthcare system, he notes, they “are not aware of what it doesn’t cover.” Some long-term care costs are not covered by provincial plans and can cost thousands a month, he notes. Treating chronic diseases and illnesses can also be expensive in retirement, particularly if you don’t have health benefits, says Mabini.
So retirement income – having enough of it – is critical. “We found that about 40 per cent of Canadians are covered by a workplace pension plan. For the other 60 per cent, it is do-it-yourself; they are saving on their own,” Mabini says. But doing it on your own is hard – the savings are voluntary, not mandatory, and no one tells you how much you actually need to save to be able to afford retirement, he explains.
“Our research found that the amount people have saved is heavily impacted around age 85, once long-term care costs are factored in,” he says. Those who are age 85 and older are at risk for having insufficient income, and because of their longevity; it is usually women who come up short on retirement income, Mabini notes.
“The problem is that those without a good workplace pension plan tend not to save on their own,” he says. They think CPP and OAS will be sufficient, he adds. “The most you can get from CPP, and few get it, is about $12,000 a year at age 65. With OAS, it is about $8,000.” While $20,000 a year may sound OK for a retiree, it isn’t enough when facing long-term care costs of thousands a month, Mabini says.
If you don’t have money to cover healthcare costs, you have to depend on government income supplements and other programs which are not always readily available, he notes.
“There needs to be more education about the importance of retirement savings, and the risks of not having a workplace pension,” he says. “Saving on your own can work, but putting away two per cent of what you make is not adequate for some people. People need to realize the risk of senior poverty.” If you are saving on your own, Mabini recommends setting an income replacement target, making savings automatic and ideally mandatory, pooling, and having a way to turn those savings into a lifetime income string.
The full findings from HOOPP’s Retirement Security series can be found here.
We thank Darryl Mabini for speaking to Save with SPP. The Saskatchewan Pension Plan provides an excellent way to save for retirement if you don’t have a workplace plan, and it offers annuities to turn your savings into a lifetime pension. Find out more at www.saskpension.com.
Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. After a 35-year career as a reporter, editor and pension communicator, Martin is enjoying life as a freelance writer. He’s a mediocre golfer, hopeful darts player and beginner line dancer who enjoys classic rock and sports, especially football. He and his wife Laura live with their Sheltie, Duncan, and their cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22
Canadians are struggling with record levels of personal debt. Figures from early 2018 show household debt has topped 170.4 per cent. This means the typical Canadian owes $1.70 for every dollar they earn.
Save With SPP recently asked noted personal finance expert Jamie Golombek, Managing Director, Tax and Estate Planning for CIBC Financial Planning & Advice, for his views on how to avoid the pitfall of debt, how to dig out from under it, and how to make saving part of your overall plan.
“The first thing people need to do is have a written budget,” says Golombek. “The budget needs to show the cash that is coming in, and the monthly expenses that are going out.” This simple step will give people a better handle on their cash flow, he says.
His second tip was to “plan ahead for major expenses.” Setting money aside for big ticket items, as well as emergencies, such as layoffs or major home repairs, helps you avoid being “caught by surprise later,” Golombek explains.
His third suggestion is to try and “distinguish between your wants and needs, especially when it comes to major expenditures,” he says. That’s a big issue, because we live in a society where people expect instant gratification, rather than saving up and then buying the things they really want later, he explains.
Golombek speculates that we are in this high-debt situation because of two main factors – housing prices in various Canadian cities and towns have skyrocketed, while interest rates have “plummeted to a near 60-year low.” That’s creating the temptation of buying when debt is relatively cheap, he explains. But credit card interest can still be in the 20 per cent range, he adds.
As well, he says, “there are so many easy ways to spend money these days.” There are apps that hook your phone up to your credit card, so you can pay by tapping the phone, or using a thumbprint. Spending, he says, has never been easier.
How to dig out from under it?
“The best way to go is to have a financial plan, one that looks out to the long term. Take a look at the big picture for the next five, 10 or 20 years,” he explains. Things like time off, education, retirement and also debt reduction should be part of your plan. “This plan will tell you how much you can afford to spend, and how much you need to save,” he says.
We thank Jamie Golombek for talking to us – and remember that if you are planning to save for retirement, a good place to invest is the Saskatchewan Pension Plan.
Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. After a 35-year career as a reporter, editor and pension communicator, Martin is enjoying life as a freelance writer. He’s a mediocre golfer, hopeful darts player and beginner line dancer who enjoys classic rock and sports, especially football. He and his wife Laura live with their Sheltie, Duncan, and their cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22
Hi. My name is Sheryl Smolkin, and today I’m interviewing Randy Bauslaugh for a savewithspp.com podcast. Randy is a partner at the McCarthy Tétrault law firm, where he leads the national pensions, benefits, and executive compensation practice. He has been involved with many of the leading pensions and benefits cases over the last 30 years, and he is also a member of the Saskatchewan Pension Plan.
Welcome, Randy. I’m so glad you could make time for us in your busy schedule.
Thanks. I’m happy to give back to the SPP.
That’s terrific. Randy has recently written an article titled Dumb and Dumber: Individual Investment Choice in DC Plans. That’s what we’re going to talk about today.
Q: Randy, that’s a very provocative title for an article. Tell me about the independent research supporting your thesis that giving investment choice to plan members in defined contribution RPPs is riskier from a legal perspective and a bad idea from a financial performance perspective.
A: Sure. The research comes from various sources – research institutions, academics, news articles and a lot of that relates to the financial performance side. Also, on the legal side, I had a student a few years ago take a look, and there were 3,500 class actions relating to defined contribution plans particularly in the US and those were just relating to DC plan fees.
I think you can pick up any standard textbook on pensions and it will tell you that defined benefit plans have a low legal risk but potentially fatal financial risk. That’s because they guarantee the retirement payments. However, they always say DC plans have low financial risk, because the employer just contributes a fixed amount, but very high legal risk, because there are so many different ways of getting sued.
Q: Then why do DC plan sponsors typically provide a broad range of investment options for plan members?
A: Well, I don’t really know. I have some theories. Before the mid-1980s, most plans did not provide choice, and then it sort of became trendy. I think a lot of employers just believe that choice empowers their employees, or maybe it’s just because after all, who wants just one TV channel.
I also know for a fact that aside from individual empowerment or incentives for the financial industry, there are a lot of plan sponsors out there who think either they have a legal obligation to provide choice or they are somehow reducing their legal exposure if they do provide choice when exactly the opposite is true.
Q: What legal risks does offering multiple investment options raise for DC plan sponsors?
A: Well, one thing a client once said to me is, “Well, what about the (Capital Accumulation Plan) CAP guidelines? I need to provide choice to comply with the CAP guidelines.” Financial market regulators put out something called Guidelines for Capital Accumulation Plans. Take a look at the table of contents and you’ll find a whole lot of ways of being sued under a DC plan that offers choice. I’ve got a slide presentation that just identifies 48 different ways in which plan members have sued their employers only over fees.
The other thing people should do is read the second paragraph of those guidelines. It says it applies where you’re giving two or more choices, so it doesn’t apply if you’re not giving any choice.
Q: Is providing only one investment option, such as a balanced fund, a set-and-forget strategy for plan sponsors, or do they still have active management and monitoring responsibilities?
A: They still have the active management and monitoring responsibilities. It’s definitely not just “let’s turn it on and forget about it.” Ideally, a DC plan should be managed like a defined-benefit fund. You may do a profile of what your current particular employee group looks like and then the investments can be shaped to that group’s profile, but you still need to manage it on a regular basis.
One of the advantages of a single fund is that you get professional management of the whole fund, not members making their own investment choices for their own little pots. Once you set it up, you should still review it every month or at least every quarter just to make sure that that fund has got an appropriate mix for your group.
Q: Why is a one-fund approach less expensive from a fees perspective for both plan sponsors and plan members?
A: Well, usually you can get economies of scale that will keep the fees down, because you’ve just got one big pot and not multiple little pots. I know that recently a lot of DC fund providers have dramatically reduced their fees for, say, balanced funds and other investment vehicles but some of the other esoteric funds are still pretty expensive. When you’ve got all these little individual accounts, you still have lots of transaction and other fees that are tied to those accounts. That tends to make them a bit more expensive than a pooled arrangement.
Q: Doesn’t having one or more investments managed by several investment managers better diversify a DC plan member’s portfolio and promote better overall returns?
A: Well, you can get that in a no-choice plan, as well, because you could have many managers that are managing different parts of the bigger pool. But the difference is you now have scale, and you’ve got professional management of the money.
Most plan members are not good at investing. In fact, only 7% or so of DC members can actually beat the rate of return of the average DB plan. One of the more interesting statistics that came up in the research was that only 3% of their professional advisors can beat the average rate of return of the average DB plan.
Q: What is a default fund, and what percentage of DC plan members typically invest in the default fund?
A: About 85% of the members in DC plans don’t make any choice at all. If they don’t make a choice, they end up in the “so-called” default fund. It’s a fund that you get into in default of making an election. Employers have to keep track of who is in the default fund because it’s not really clear whether it is just as a result of a decision or simply putting off investment of their money. It may actually be the plan member’s choice to go into the default fund.
In some surveys many members have said that they thought the default fund must be the best fund because that’s the one the sponsor set up for people who don’t make decisions. Increasingly, what we’re seeing out there today, though, is people defaulting into what’s called a target date fund.
A target date fund is based on your age when you go into it, and as you start getting close to your retirement age, it will move your portfolio from largely stocks to largely bonds. That’s not a bad idea, because once you retire, the theory is you don’t have the capacity to make more income, so a loss just before retirement is undesirable.
One of my clients actually allows employees to choose their target date funds, and they found that a number of people were choosing three of these target date funds because they weren’t sure if they were going to retire at age 55, 60 or 65. So they put a third of their money in each in case they retire early or later, which is probably the absolute worst thing they could do.
Q: How long have you been a member of Saskatchewan Pension Plan, Randy?
A: Probably about 10 years. I was at another firm some years ago, and they had a pension arrangement, and then when I came to this firm and they don’t. I just think SPP is a great idea.
I know a lot of people … Even my own professional financial advisor questioned how I got into the SPP and asked whether I was born in the province. No, I wasn’t. It’s open to anybody, and it works just like an RRSP. Anyway, every year I just keep moving the maximum amount from my RRSP to the SPP, and I make the maximum contribution every year. I’m glad to see it’s gone up.
*This is the edited transcript of a podcast recorded in April 2018.
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Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.
Today I’m interviewing Evelyn Jacks for SavewithSPP.com. Evelyn is the founder and president of Knowledge Bureau, a virtual campus focused on professional development of tax and financial advisors. She was recently named one of Canada’s Top 25 Women of Influence. She is also one of Canada’s most prolific and best-selling authors of 51 personal tax and wealth management books, and a highly respected financial commentator and speaker.
Every year there are income tax changes and they impact individuals filing personal tax returns. First of all, I’d like to highlight some of 2017 changes that listeners should keep an eye on when they’re getting ready to complete their tax return.
Q: Evelyn, taxpayers with children are going to see a major change in tax credits for 2017. Can you bring us up to date on what these changes are?
A: Yes, absolutely. The most notable changes found in the past are that the children’s arts amount which was the non-refundable tax credit on the Federal tax return has been eliminated and in addition, the refundable tax credit for the children’s fitness amount is gone.
On the employer’s side, the government has also discontinued a 25% investment tax credit for child care spaces of March 22, 2017. These are quite significant changes, especially because on the federal return, there are no other places, with the exception of disabled children, to claim minor children.
Q: What has happened to tax credits for tuition, education, and textbook amounts?
A: Again here, we’re seeing some significant changes. As of January 1, 2017, only the tuition credit can be claimed on the Federal tax return and then only if the total exceeds $100 in the year. What’s happened is that the finance department has removed the monthly education amount of $400 for full time students and $120 for part-time students, as well as the monthly text book amount, which was $65 for full-time students and $20 for part-time students.
However, when you look at the tax return you are still going to see references to the tuition education and textbook amount found in Schedule 11. That’s important because, students can still carry forward any unused amount from all three components of this credit from prior years.
The other thing I should mention is that the provinces all have education credits but that’s changing too, so, in Saskatchewan, for example, there has been an elimination of both the tuition and education credits as of July 1, 2017. Therefore, on the Saskatchewan provincial return you can only claim those credits for half of the year.
Q: Now, the public transit credit is also gone. What’s the effective date on that?
A: On the Federal side, we saw that credit eliminated as of July 1, 2017. So again, it’s a situation where you’re going to have to keep your receipts and make the claim, just for half the year in 2017.
Q: In your view, what was the Liberal government’s rationale for eliminating these credits, and what did taxpayers get in return?
A: Well, the government is really undergoing quite a significant tax reform at the moment. When they came in with their first tax changes after the election, one of the first things they did was reduce the middle-income tax rate, for income between about $46,000 and about $92,000, from 22% to 20.5%. In addition, they created an upper income tax bracket increasing the tax rate from 29%-33% on income over $202,800. The third thing they did was they introduced the more generous child benefits.
In fact, that benefit has recently been indexed for the beneficiaries starting in July 2018. If your family net income is under $35,450 then you’ll be able to receive over $500 a month for each child under the age of 6, and around $450 a month for each child age 6-17. These are quite lucrative amounts but they require the filing of a tax return and the combining of net family income.
Q: The eligibility for medical tax credits for fertility treatments has been expanded retroactively. Please explain those changes and what actions taxpayers who are impacted should take to realize the full benefit of these changes.
A: Yes, starting in 2017 and subsequent years, the expenses for medical treatments to conceive a child will be deductible even if the treatments are not required because of a medical condition, which was the criteria in the past. If the expenses ocurred in a year from 2008 forward they can still be adjusted, because we have a 10 year adjustment period that we can take advantage of.
Q: What, if any, other surprises might tax payers have when they start filling out their 2017 tax return?
A: Well, there are a lot of things that change every year including indexing of various tax credits, tax rates and claw back zones. But I think the one big change that I’d really like to point out is the caregiver credit. It’s new for 2017, and it replaces three credits from the past: the family caregiver tax credit, the caregiver tax credit, and the tax credit for infirm dependents. So now one caregiver can get credit.
The second thing is that there are two different amounts: one that I call a mini-credit of $2,150, and one that I’m going to call the maxi-credit of $6,883. So on the mini-credit side you must claim this. It’s the only credit you can claim for an infirm or disabled minor child. But not necessarily one who receives a disability tax credit, but someone who is infirm as it relates to normal development of other children on both a physical or a mental basis.
A person that can claim this mini-credit is someone for whom you are a claiming a spousal amount or an equivalent to spouse amount. Now, the maxi-credit generally is claimed for an eligible dependent who is over the age of 18. But in some cases, if you have a spouse with a low income, you can claim a top-up credit of up to $1,683.
So you’re going to have to take a close look at Schedule 5 on the tax return and at net income allowance, particularly for low income earning spouses, to make a complicated tax calculation. What you need to remember is that your dependents no longer need to live with you. You cannot claim this amount for someone age 65, who is healthy, which is what you could do before under the caregiver amount.
Q: It sounds very complicated. Can taxpayers typically rely on their tax software to guide them and ensure they get all the credits and deductions they are entitled to? In what circumstances do you think that they should seek professional advice?
A: Well, you know, I’m a big fan of tax software because these programs, first of all, take the worry out of the math for you, and some of the math calculations, particularly as you are calculating federal and provincial taxes is very complicated. But the tax program is not necessarily going to prepare the tax return to your best advantage. There are lots of ways to do the math correctly. What you are aiming for is to calculate to your family’s overall benefit, and to do some tax planning as well.
For example, there are a number of carry-forward provisions that people may not be aware of, or they don’t enter properly. You can carry forward charitable donations to up to five years. You can carry forward capital losses in stock market investments indefinitely to offset capital gains in your future.
The other thing is that starting in 2017, you absolutely have to file the refund titled T2091, a designation of principle residence form, even if you sell a tax-exempt principle residence. Anyone who sells property starting in 2017 has to fill in this complicated form. The tax software may or may not tell you about that, and if you miss it you could be issued a penalty of up to $8000. That could really hurt.
Q: What are the most frequent errors or omissions tax payers typically make when completing or filing their income tax return?
A: Any expense that is discretionary, so, I’m thinking of child care expenses and other kinds of expenses where people have out-of-pocket costs. Moving expense are really lucrative, for example. Also, missed medical expenses are very common.
Q: If you had three pieces of advice to offer tax payers to help ensure they file a correct tax return, and get all the credits and deductions they are entitled to, what would they be?
A: The first thing is to catch up on any delinquent filed returns. The option to benefit from the long available disclosure program is actually changing and it will close for some people, effective March 1, 2018. So if you chronically ignore your filing obligations, not only will you be unable to avoid tax-evasion policies, you may not be able to avoid interest relief in some harsher cases. That’s really important. Catch up if you’re behind.
The second thing is to make a RRSP contribution by March 1st this year because that RRSP contribution will reduce your family net income, which will increase things like your child’s health benefits, your GST credit or other refundable or non-refundable tax credits. The RRSP contribution is your ticket to bigger benefits or bigger tax refunds.
The last thing I would say, the average income tax refund in Canada is $1,735, which is a lot of money. That’s just your overpayment of taxes. Most people don’t realize that’s an interest-free loan that you give to the government. Turn that around, and put that money to work for you. Invest it in a TFSA because that’s going to allow you to earn tax- free investment savings for your future, or if you have children in the family, why not take advantage of the lucrative Canada Education Savings Grants and the Canada Learning Bonds by investing in an RESP. There’s lots of ways for people to leverage the money that they pre-paid to the tax department.
That’s really helpful Evelyn. Thank you very, very much. It was a pleasure to chat with you today.
Thank you so much for giving me the opportunity.
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This is an edited transcript of an interview recorded 2/07/2018.
Canadians can receive easy-to-understand interpretations of breaking tax and investment news by subscribing to Knowledge Bureau Report at www.knowledgebureau.com. Look for the Newsroom Tab. You can also follow Evelyn Jacks on twitter @evelynjacks.
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Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.
Today I’m interviewing Shannon Lee Simmons for savewithspp.com. She is a Certified Financial Planner, Chartered Investment Manager, media personality, personal finance expert and founder of the online New School of Finance. Shannon has also won a whole slew of awards including being named one of Canada’s Top 30 under 30. She has a monthly column for the Globe and Mail as well as being a personal finance columnist for CBCs On The Money and Metro Morning.
So Shannon is a very busy lady!
I heard her speak at the 2017 Canadian Personal Finance Conference last November, where she debunked many financial myths that inhibit people from saving, investing and ultimately retiring successfully. And that’s what we’re going to talk about today.
Welcome Shannon.
Hi, thanks for having me Sheryl.
Q: First of all tell me what you mean by precarious work and why you think we need to revise dated financial assumptions in light of the rise of precarious work? A: Precarious work basically means working in the gig economy, freelancing or being self-employed. You’re not entirely sure where your money’s going to come from maybe even a month from now or two months from now. And to me that’s what it means to be precariously employed from a financial planning point of view, and I think that can create stress and anxiety for a lot of people.
So if we have a whole bunch of people who don’t necessarily know where their next paycheck is going to come from, they need to have really big emergency accounts, and that may mean stepping back from investing and putting money into RRSPs until they can make sure that they’re safe and secure. That’s why the rise of precarious work has really changed the way that I give financial advice.
Q: Under normal circumstances what would the three main elements of financial advice be?
A: I think that the three things we hear a lot are:
Don’t leave money waiting on the sidelines. Make it work for you by investing it.
Own a property versus renting.
You need a million dollars to retire on.
Q: Let’s start with rent versus buy. Home ownership is the Holy Grail in Canada and many people view home equity as their retirement nest egg. What percentage of income should people plan to spend on a mortgage and other housing costs? A: I still think that buying is a wonderful way to build equity. The problem arises when you buy a home that you can’t afford. I think that the thing that you want to make sure of is that you don’t have a mortgage that’s more than five times your family’s household income. That means if you make $100,000 a year you shouldn’t be carrying a mortgage that’s more than $500,000, and you might even want to be more conservative (i.e. four times your household income) because that’s going to allow you to still make payments and have a little bit of extra money left over for life and other types of savings.
Q: Many of my readers or most of my readers are Saskatchewan residents, and the median price of a two-story home in Saskatoon is approximately $412,800 dollars. What would the qualifying income typically be for a person to buy a house of that value? A: Oh that’s a really hard question to answer because I’m not a mortgage broker. From an affordability standpoint, I would say an income of anywhere from $70,000 to $100,000 couul support a home in that price range. However, some people have debt or they have massive car payments. It comes down getting a customized answer for yourself that will allow you to handle the other bills in your life.
Q: If an individual or family cannot qualify for a mortgage or they choose to rent how can they accumulate a comparable nest egg for their retirement? A: What’s really exciting about the shift happening in financial planning is we’re seeing renting as sometimes the smarter financial decision. What you need to do as a renter, is just make sure that you are taking advantage of the fact that you don’t have to fix the furnace if it breaks, or if the roof is leaking it’s not your problem. And so if you don’t have to spend $25,000 over five years on home maintenance you can save the money instead.
I say to people who are renting, be proud that you’re renting, but just make sure that you’re also renting affordably because where renting becomes a silly throwaway piece of advice is if the rent is higher than 30% to 40% of your after tax income. So I would say you want to keep your rent in and around 30% to 40% of your after-tax income. Then you want to be making sure that you’re saving for your retirement portfolio at least 10% of your gross income if not more, because you’re not building that equity every single month paying off a mortgage.
Q: In view of the more precarious employment environment, how much should people keep in an emergency fund? A: Usually we hear like three months, but if you’re precariously employed I would blow that out to five or six months. If you have a large emergency account then you have less fear on a daily basis because you know that even it’s a slow season or if your contract doesn’t get renewed that there’s money in the bank that will help you survive and pay your bills and eat for at least five to six months.
When I say five to six months I mean basics like bills and groceries and toiletries, because if you don’t have any money coming in the chances are you’re probably going to pull in your spending on discretionary items like entertainment until money comes back into the household.
Q: That’s a challenge though I guess because if you do have casual or precarious employment then the problem becomes to find the cash even to grow that emergency account. A: One of the things that I talk about is just staying lean. If more and more of our wages are stagnating and many of us are precariously employed, we need to make sure that we don’t leverage ourselves too much or really spend outside of our comfort zone, outside of our means so to speak. That might mean kind of adjusting expectations a little bit to become more realistic.
Q: If an individual has to spend the emergency funds in a period of unemployment or other crisis, how important is it to replenish it as soon as possible? A: Let’s say you just had an emergency or you’ve had a period of unemployment and you just about emptied everything out. The first thing you want to do when money starts coming back into the house, is to pay off any debts that you might have racked up during that period of time. That obviously means credit card debt first, followed by any unsecured lines of credit. Replenishing the emergency account is the next priority. Then and only then will you step into investing land, which is like RRSPs and TFSAs and building that bigger nest egg.
Q: The standard mantra is to invest cash and make it work for you. In your view does this also apply to emergency funds? A: No you should never invest your emergency fund. It should be liquid, safe and accessible at all times. The money that should get invested is your longer-term dollars that have time to go up and down a little bit with market volatility.
Q: How crucial is it for Canadians looking for financial stability to stay out of debt or pay down debt? A: Paying off debt is important not only so your net worth rises and because obviously you’re spending money on interest that could be going back into your pocket. But also, I think it gives you confidence and motivation to move forward with your finances. The fact is, when we carry debt for so long, we start giving up. And that attitude and that mindset when it comes to money is detrimental because it will continue and bleed into other areas, and then you’re never going to get back on your feet and you’re never going to move forward. Imagine making that last payment on your debt. How exciting is that to finally have the use of your money to spend or to save instead of servicing your debt?
Q: TFSA or RRSP for savings? And why? A: TFSA all the way. Both are tax shelters you can invest in for the long term. The TFSA doesn’t have that deduction that everyone gets very excited about during RRSP season. But my view is if you can only save enough to max out your TFSA, I would say TFSA first then RRSP. And if you can only save enough to max out your TFSA every year (say $5,500), then chances are your income is probably not 80 or 90 or $100,000 a year where you’re really getting a big bang for your buck with your RRSP tax refund. If you are earning that much, then you can likely save the first $5,500 in a TFSA and then even still save an additional amount to the RRSP afterwards, and take advantage of some of the tax savings.
Money in a TFSA is also more accessible, so if your mortgage is up for renewal four years from now and interest rates have skyrocketed, you could take money from your TFSA and put it on the mortgage, but you can’t do that with an RRSP without tax consequences. And last but not least, in retirement when you take money out of the TFSA it’s tax free. Your marginal tax rate in retirement is much lower and entitlement to government benefits like OAS will not be reduced or eliminated.
It’s never been more important for all of us in Canada to qualify for as many inflation- protected guaranteed pensions as we can at the end of our working career because hardly anyone has workplace pensions anymore.
Q: If you could give us three quick pieces of financial advice what would they be? A: Okay the first thing would be, do not overextend yourself financially. Don’t buy a house you can’t afford. If you are going to rent, rent affordably because if you have those fixed costs under control then you have a lot more flexibility over what you can do with the rest of your money. So that’s the number one thing I would do.
The second thing would be to pay off debt and build an emergency account before you do any other kind of savings. Doing those two things will put you back in control of your cash flow and it will motivate you to make changes going forward. It will also make you less afraid all the time.
And the third thing I would say and we just kind of went over this, would be once you get to that point where you want to start saving, max out your TFSA first then save the balance in your RRSP.
That’s great thank you so much for joining me today Shannon Thanks so much for having me, Sheryl.
*This is an edited transcript of a podcast recorded in January 2018.
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Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.
Today, I’m very pleased to be talking to Katherine Strutt, general manager of the Saskatchewan Pension Plan. She has some exciting news to share with us about enhancements to the program, including an increase to the SPP maximum annual contribution level effective immediately for the 2017 tax year.
SPP is the only plan of its kind in Canada — a retirement savings plan, which does not require an employee/employer relationship. As a result, it can be of particular benefit to individuals with little or no access to a pension plan.
Welcome, Katherine.
Thank you, Sheryl.
Q: For the last seven years the maximum annual contribution SPP members with RRSP contribution room could make was $2,500. How has that changed?
A: As you indicated, the maximum annual contribution limit was increased to $6,000 effective January 29, 2018, and it can be used for the 2017 tax year. However, members must still have available RRSP room in order to contribute the full $6,000 but the limit is now indexed as well, starting in 2019.
Q: If a member contributes $6,000 until age 65 how much will his or her pension be?
A: We estimated that someone contributing for 25 years and retiring at age 65 can end up with a pension of about $2,446 a monthbased on an 8% return over the period. However, we encourage people to use the wealth calculator on our website because they can insert their own assumptions. And if they want a more detailed estimate they can call our office.
Q: Can a spouse contribute for his or her partner if that person doesn’t have earned income and how much can the contribution be?
A: The SPP is a unique pension plan in that spousal contributions are acceptable. So, for instance, my spouse has to be a member. But I can contribute to his account and my account up to $6,000 each if I have the available RRSP room. If I’m making a spousal contribution, the money goes into his account, but I get the tax receipt. Other pension plans don’t offer that option. You could have a spousal RRSP, but with SPP you can actually have a spousal pension plan.
Q: Oh, that’s really fantastic. So actually, in effect, in a one-income family, the wage earner would get $12,000 contribution room for the year.
A: Yes, as long as they have available RRSP room, that’s for sure.
Q: That’s a really neat feature. And to confirm, members can contribute the full $6,000 for the 2017 tax year?
A: Yes, they can. Because we’re in the stub period right now, any contribution made between now and March 1st can qualify for the 2017 tax year.
Q: Have you had any feedback on the increased contribution level? If members are just finding out about the increase now, how much of an uptake do you expect given that, you know, maybe they haven’t saved the money or they haven’t allowed for it?
A: We’ve already had some members that have done it. I can’t tell you how many, but I was checking some deposits yesterday, and I saw that some people have already topped up their contributions. We anticipate that people who contribute on a monthly basis will start increasing their monthly contributions because they have an opportunity to do so. But it will be really hard to know until after March 1st how many people actually topped up their 2017 contributions.
The response has been very, very positive from members. They have wanted this for a long time. The new indexing feature is also very attractive as the $6,000 contribution will increase along with changes to the YMPE (yearly maximum pensionable earnings) every year.
Q: How much can a member transfer into the plan from another RRSP? Has that amount changed?
A: No, that amount has not changed. That remains at $10,000. But the board is continuing to lobby to get that limit raised.
Q: Another change announced at the same time is that work is beginning immediately on a variable pension option at retirement. Can you explain to me what that means and why it will be attractive to many members?
A: We have a lot of members who want to stay with us when they retire, but they’re not particularly interested in an annuity because annuity rates are low, and they do not want to lock their money in. They prefer a variable benefit type of option, but until now their only way of getting one has been to transfer their balance out of the SPP to another financial institution.
The new variable benefit payable directly out of our fund will be similar to prescribed registered retirement income funds, to which people currently can transfer their account balances.
It will provide members with flexibility and control over when and how much retirement income to withdraw, and investment earnings will continue to grow on a tax-sheltered basis. Those members who want to stay and get the benefit of the low MER and the good, solid returns I think will be attracted to this new option.
Some members may wish to annuitize a portion of their account and retain the balance as a variable benefit. This will ensure they have some fixed income, but also the flexibility to withdraw additional amounts for a major expense like a trip, for instance.
Q: Now, what’s the difference between contributing to an RRSP and SPP?
A: In some respects, they’re very similar in that contributions to the SPP are part of your total RRSP contribution limit. One of the biggest advantages I think that SPP has is it is a pure pension plan. It’s not a temporary savings account. It’s meant to provide you income in your retirement.
All of the funds of the members, are pooled for investment purposes, and you get access to top money managers no matter what your account balance is or how much you contribute. Typically those services are only available to higher net worth individuals, but members of SPP get that opportunity regardless of their income level.
And the low MER (management expense ratio) that in 2017 was 83 basis points, or 0.83 is a significant feature of SPP. Solid returns, and the pure pension plan, I think those are things that make us different from an RRSP. We are like a company pension plan, if you are lucky enough to have access to a company pension plan. That’s what we provide to people regardless of whether or not their employer is involved.
Q: If a member still has RRSP contribution room after maxing out SPP contributions, can he or she make additional RRSP contributions in the same year?
A: You bet. Your limit is what CRA gives you, and how you invest that is up to you. So for instance, people that are part of a pension plan might have some additional available RRSP room left over. They can also then contribute to the SPP and get a benefit from their own personal account, in addition to what they are getting from their workplace pension.
Q: MySPP also went live in late January. Can you tell me some of the features of MySPP, and what member reaction has been to gaining online access to SPP data?
A: The reaction from members has been very positive. They’ve been asking for this for a while, and we did a bit of a soft roll out the end of January with a great response. Then members are going to be getting information with their statements, and we expect an even bigger uptake.
Once they’ve set up an account, they can go in and see the personal information we have on file for them, who they’ve named as their beneficiary, when the last time was that they made a contribution and what their account balance is. Furthermore, if they’ve misplaced a tax receipt or can’t find their statement, they can see those things online.
Retired members can get T4A information and see when their pension payments went into their accounts. So it’s a first step, and we think it’s a really positive one, and we’re getting some really good feedback from our members.
Q: Finally, to summarize in your own words, why do you think the annual increase in the SPP contribution level, introduction of a variable benefit and MySPP makes Saskatchewan Pension Plan a better pension plan than ever for Canadians aged 18 to 71?
A: Well, I think that by having an increased contribution limit that is indexed, the program might be more relevant to people. It certainly will be a bonus I think to employers who wanted to match their employee contributions but were running up against the old limit. This will give them more opportunity to do so.
It will also improve the sustainability of SPP over the long term as people are investing more. The variable benefit we’ve introduced will give retiring members more options, and it will allow them to keep going with this tried and true organization well into their retirement.
MySPP allows members access to their account information whenever they wish, 24/7 on all their devices. That will be attractive to younger prospective members.
Exciting times. Thank you, Katherine. It’s been a pleasure to chat with you again.
Thanks so much, Sheryl.
*This is an edited transcript of an interview recorded 1/31/2018.
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Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.
Today I’m interviewing Lisa Chamzuk, a partner in the pension and employee benefits group at the Vancouver law firm of Lawson Lundell LLP for savewithspp.com. With an increasing number of employees opting to work beyond age 65, or coming back to work after retirement, many questions arise as to what, if any, pension accrual and healthcare benefits older workers can expect to receive from their employers.
So that’s Lisa and I are going to talk about today. Thank you for joining me, Lisa.
Thank you for having me.
Q: If an employee retires and starts receiving a pension from the company pension plan and decides to come back to the same employer, can this individual accrue additional pension? A: Generally speaking, no. It depends a little bit on the type of pension plan where the pension accrued and from which the member is collecting the pension. There is a rule in the Income Tax regulations that prohibits someone who is drawing a pension at the same time as accruing further benefits in that same pension plan. It is something that not all employees know when they decide to retire.
Q: I presume that this rule applies to a defined benefit pension plan. What about a defined contribution plan? A: That’s a good question. So, the rule applies only to a defined benefit pension plan. What that means is, if you draw your pension from your employer’s DB plan you can’t then re-accrue in that same DB plan when you return to work. That doesn’t mean that if you had an accrual in a defined contribution plan that you can’t re-accrue in the same way.
Q: And I presume a Group RRSP would be the same thing.
A: Yes, that’s not covered by the rule either. You could come back and accrue under a Group RRSP subject to any age restrictions in the plan document.
Q: So let’s say a retiree is collecting a DB pension and returns to work. Can that person ask to stop receiving pension benefits so that accruals can start again? A: The ITA doesn’t weight in on that particular issue, but pension standards legislation across the country does. So, if you are working in British Columbia, the pension benefit standards act in our province specifically requires that the plan text say what happens if a retiree returns to work. If the sponsor of the plan chooses, it can give two options to the retiree who is coming back to work. The first is to continue with the pension and not return as an active member in the pension plan. The second option is to suspend receipt of the pension and return as an active member in that pension plan.
Q: What happens if the employee works beyond the age of 71? A: Well at age 71 we run into the ITA rules again. So, at the age of 71, you must start receiving a pension if you have been accruing in a pension plan. That’s sort of the end of the line in terms of pension accruals. There has been talk about that number increasing. But as of right now, the rule is, when you reach the age of 71 your pension must start. So even if you’ve come back and you begin to re-accrue you have to be aware of the fact that at some point you’re going to be forced to start receiving that pension and you won’t be able to draw your pension at the same time you are accruing.
Q: What if a retiree takes a job with another employer while collecting a pension from his or her former work place? Can that person start accruing in the new pension plan? A: Yes, generally speaking, the rule only applies to accruing in and drawing a pension from the same pension plan.
Q: What, if any, alternative arrangements can employers put in place for older employees collecting a pension who are coming back to work? A: If the employer wants this particular segment of people to return to work and so is motivated to respond to this particular issue, there are options available. The employer could set up a define contribution plan, for example. An RRSP is another way the employer could go, and it’s possible that employer already has that type of arrangement set up for other reasons. However the age 71 restriction applies to RRSPs as well.
Q: How common is it for returning, or older employees to be offered a salary position? Wouldn’t it be more typical for employers to bring on an individual as an independent contractor for a specific period? A: I think that’s probably true, right now. I wouldn’t be surprised if we see a shift over the next 10 years, given what’s happening demographically in the country, if more companies, are looking to retain or draw back older workers into the work force. It is also less likely in a unionized environment. I think someone who was in a union before retirement will probably go back through the union dispatch program to get work. There are generally fewer options in terms of post-retirement pension accrual after that happens because it’s a union-sponsored plan as opposed to an employer-sponsored plan.
Q: What about age-based restrictions in group benefits plans, like life insurance and health benefits? Are they permissible? A: They are and that’s certainly something that we see fairly regularly. Sometimes you have to pull the policy document to see exactly what those restrictions are. It’s absolutely common for a health benefit policy to create either a cut-off at a certain age
(usually 65) or a scaled benefit once the covered individual reaches a certain age. For example, it’s very typical to see life insurance coverage drop down even if an individual does work past age 65. And, in health benefits, we see that as well. We often see a cut-off at age 65.
Q: There are several cases alleging that allowing employers to have different benefits for employees over 65 is age discrimination. How have the plaintiffs in these cases fared before the courts? And if they’re not successful, why do you think they’re not? A: This is certainly the litigation of the day. We’re seeing lots of these types of claims. Just by way of background, there used to be provisions in human rights codes across the country that allowed for mandatory retirement. Employers could force individuals to retire and it wasn’t viewed as being discrimination on the basis of age.
When mandatory retirement was eliminated, what did remain in provincial human rights codes was the provision that says that even though you generally can’t discriminate on the basis of age, that doesn’t apply in the context of a bona fide plan text of a group insurance plan or pension plan. Therefore, unless a former employee can demonstrate to the Human Rights Tribunal, and then on review by the courts that the plan itself is not bona fide, they’re not going to be able to make out an age discrimination claim.
To date, that language has been interpreted to mean that it is essentially a legitimate plan. Tribunals have not gone a step further to say employers must be able to show on an actuarial basis why that age cut-off or that reduction at a certain age is required in order for the plan to be sustainable.
Q: Interesting. With the increasing number of older employees in the workplace, do you anticipate a possible legislative response to better protect the rights of returning retirees to accrue benefits comparable to younger employees? A: It’s a very strong group, politically. They certainly have leverage. What I do expect to see if tinkering with the age restrictions to recognize that people at age 65 are much more capable than, maybe, they were 50 years ago, and may age 71 is too low an age. But what the drafters/legislators are wrestling with is also the need to transition older workers to make room for younger cohorts.
Q: What, if any, other regulatory issues impacting their compensation package should retirees be aware of if they are considering going back to work? A: Well, don’t assume that anything that you might have been entitled to when you were in the workforce is a given. Ask specific questions. One thing that could come up depending on the type of employment that the retiree is returning to is, if they’re receiving old age security benefits, there is a the claw back if they earn too high an income. They might have an obligation to re-pay OAS benefits and have those benefits cut-off.
And again, you’d want to get some financial advice to make sure you know exactly what impact the return to work will have on your particular circumstances.
This is all very interesting. Thank you very much for talking to me, Lisa.
Thanks again for having me.
Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.
Today I’m interviewing Ed Rempel for savewithspp.com. Ed has been a Certified Financial Planner for over twenty years, and an accountant for thirty-three years. After building one of the largest financial planning practices in Canada, he partially retired in his fifties to focus on his passion for writing.
On his blog Unconventional Wisdom, Ed recently discussed his very interesting research* which reveals that if you want to withdraw 4% a year from your retirement portfolio without running out of money in 30 years of retirement, you need to hold significantly more equities than bonds in your portfolio. And that’s what we’re going to talk about today. Welcome, Ed.
Thanks a lot Sheryl.
Q: So how do you define a successful retirement for the purposes of your study? A: For the purpose of the study, I defined a successful retirement as providing a reliable income rising with inflation for 30 years. That means you retire at 65 and your money lasts to age 95.
Q: Many financial planners use the 4% rule, which essentially says that you can withdraw $40,000 a year plus inflation for life from a $1 million portfolio. What do you think? A: I have 146 years of data on stocks, bonds, cash, and inflation. I looked back at all those years to see what would have happened in the past if people retired that year, with each type of portfolio – e.g 100% bonds, 100% stocks plus various other permutations and combinations.
I also tested these scenarios with inflation, to see what actually happened in the past. And the surprising result was that the more equities you actually have the safer your portfolio is. My whole blog is about “unconventional wisdom.” I love challenging ideas that most people believe aren’t really true and that’s one of them.
Q: So, to what extent does retirement success link to whether or not retirees follow the common of rule of thumb which suggests that they shouldn’t invest more than 100 minus their age in equities? For example, the portfolio of a 70-year old should include 70% bonds and 30% stocks. A: We call that the age rule and its one of the things I tested in the study. I found that it actually gives you a significantly lower success rate. If you have 70% bonds at age 70, and the bond allocation is growing as you get older, that’s a very low component of stocks. In these circumstances you will have a much lower retirement success unless you withdraw a lower amount of income each year.
Q: And what would the lower amount of income be in your view? A: If you are more comfortable with a conservative 70% bond/30% stock portfolio, I would suggest you use a 3% not a 4% annual withdrawal rate.
Q: Then what is the stock/bond allocation with the highest success rate, which we defined earlier as having enough money to withdraw 4% annually plus inflation, for thirty years? A: The highest success rate will result if you are invested 70% or more in stocks. This is a very heavy allocation. And if you plan to withdraw more than 4% (i.e. 5% or 6% annually) the highest success rate will occur if you have 90% or 100% stocks.
Q: What about bond or GIC investors? What percentage of their accounts can be safely withdrawn so their money will last thirty years? A: I would suggest bond and GIC investors stick with 2.5%. That’s a little bit more than the interest that they’ll get, so they would be encroaching on their principal.
Q: Many financial advisors tell investors to keep cash equal to two years income, to draw on when their investments are down. Will that improve the possibility that these people won’t run out of money?
A: That is another example of “conventional wisdom” that people subscribe to. And I agree it kind of sounds logical, but my study found that holding two years’ worth of cash will not enhance your chances of making your money last for 30 years. In fact, there were a number of cases where keeping cash actually meant investors ran out of money, when without cash they didn’t.
The only possible benefit would be entirely behavioral. For example, if investments go down some people might get scared and cash them in. However, if they have cash they might leave their investments alone and just spend the cash for a little bit. But in general I don’t recommend this because I like to follow what actually works and I found no actual benefit in holding cash to cover expenses for several years after a market downturn.
Q: Based on their risk tolerance then, how would you advise clients or readers who are nervous about holding a high percentage of equities in their portfolio? A: They still need to stay within their risk tolerance. Therefore, even though the study showed a higher amount of equities is safer, and would give them a better retirement, that’s not what I’m recommending that everyone should necessarily do.
Q: So more conservative investors are just going to have to understand they will either need more money to meet their retirement goals or they will have to spend less?
A: Right. Adding bonds gives you a fixed income that reduces volatility that can make you less nervous. But then you have to lower income expectations.
Q: Say that somebody does go with a higher stock allocation, what about the risk if there’s a stock market crash early in their retirement? How much will it throw out the calculations? A: In the study I went back to 146 years, and there were a lot of big market crashes in the last 146 years, to see what actually happened. In actual fact that I found that historically this almost never a factor except in one very clear case for people who retired in 1929. It was actually inflation that eroded buying power over the years.
Q: What’s the biggest mistake people can make if there is a market decline? A: The biggest mistake, in fact, I call it “the big mistake,” is to sell your investments, like sell your equities or switch to more conservative investments, after a market decline. The bottom line is you must be able to stay within your risk tolerance and stay invested in the market, through the inevitable crashes. That’s the only way you’re going to get the retirement income that you want.
Q: My last question, what is your best advice to retired investors, or investors close to retirement, regarding how to structure their portfolios. A: Well the bottom line is to have a proper retirement income plan. You have to think through what the lifestyle is you want to have and how much money you need to support it. And then look at how you are comfortable investing and come up with a plan that gives you what you need. There will be trade-offs, but once you make a proper retirement income plan, then you can have a sustainable income throughout the rest of your life.
Thank you Ed! It was a pleasure to chat with you today.
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.
For the second part of our series about CPP disability benefits, I interviewed David Brannen, a former occupational therapist turned disability claim lawyer from Moncton, New Brunswick. Brannen is the author of A Beginner’s Guide to Disability Insurance Claims in Canada. He started the national disability claim law firm Resolute Legal to help deserving people win long-term disability payments from insurance companies and the CPP Disability Program, even after a denial or unsuccessful appeal. Thanks for joining me today David.
I’m delighted to be here, Sheryl
Q: How does the definition of eligibility for CPP disability benefits differ from the definition in an individual or a group disability insurance plan?
A: The easiest way to look at it is that the CPP definition is much harder to meet than most disability insurance policies. CPP disability is focused on the inability to do basically any job in the economy, whereas disability insurance policies look at the ability to do your own job. Then there usually is a second part in an insurance policy that will continue to pay benefits if you’re disabled from doing any job as defined by the insurance policy but that is usually a much less restrictive definition of any job as would be defined for CPP.
Q: So how hard is it to meet the eligibility criteria and get CPP disability benefits? Of the people who apply, how many are successful at the first level?
A: The last data that we had released was an auditor-general’s report back in 2016. The results were pretty shocking and showed that of the 70,000 people who applied in the audit year, about 60% were denied.
Q: Why is the denial rate so high?
A: It’s hard to say. I would assume a number of those people of the 60% simply don’t meet the eligibility from a contribution standpoint so many people have either not made recent contributions or they’ve never paid into CPP at all. But the bulk of people who have met the contribution requirements get denied because they simply don’t have enough information for the case to be approved.
Q: Why should a person receiving LTD benefits — that’s long-term disability benefits — from a private or a group plan apply for CPP disability benefits although if they are successful the LTD benefits will typically be reduced?
A: That is a very good question. The first reason I tell people is look, you really don’t have a choice because after a certain point the insurance company will estimate and start deducting your CPP disability amount even if you’re not receiving it.
The other big one is that receiving a CPP disability benefit will actually result in you eventually getting a higher CPP retirement. The general idea is that it shows that you’ve been out of the workforce for a legitimate reason and it actually does factor into the ultimate CPP retirement pension at the end. Finally, getting the CPP disability benefit is really a safety net. If you suddenly lost your disability benefits you would have still the income coming in from the CPP disability program.
Q: That’s interesting. Now, tell me about the appeal process available to people who are turned down.
A: Okay. It’s a two-step paper appeal process. So once you apply and get a denial, you have 90 days to submit a written appeal requesting a re-consideration. You will send it directly to Service Canada, the same people who declined the original application. The best scenario is that you will supply more information to support your arguments.
If your internal reconsideration is denied, the next level of appeal is to the Social Security Tribunal which is an independent body that is the final decision-maker as to whether or not you are entitlted to a CPP disability benefit.
Q: You just told me in an offline discussion that typically those hearings are held by video conference or telephone.
A: You have the option to do them in person and certainly sometimes the tribunal judges will request an in-person hearing but more and more they are scheduled by video conference and telephone. It enables the Tribunal to actually process the claims more quickly and at less expense to the claimant.
Q: So of the 60% of applicants who are turned down initially, what percentage go on from there to submit a reconsideration appeal and then an appeal to the Social Security Tribunal if they are turned down a second time?
A: One of the big things that really shocked me when I saw the auditor general’s report is that of the 40,000 people denied, about 66% just give up altogether. That means only 33% or about 13,000 people actually file appeal. Then of these 13,000 people, about 35% get approved and about 65% are denied. That leaves you with a pool of like about 8,500 people who get denied after the second appeal.
So you’re already down from 70,000 to 8,500 who are denied at that second level. Again, of those people who get denied on the first appeal, more than half give up. As a result, the number of people that go on to the tribunal hearing is about just over 3,000 people as documented in the most recent report.
Q: How do they do?
A: Actually they do fairly well. Of the 3,000 that go to the final hearing, about just over 60% actually get approved. That shows if you’re one of those people that does persevere to the end, you do have a better than 50% change of winning at the tribunal hearing, all things being equal. It’s the one point where the percentage of approvals kind of flips if you look at it. By the time you make it to the tribunal here is about a 60% approval rate.
Q: So you’ve published a number of online publications to help people and one of them is The CPP Disability Claims Approval Blueprint. What are some of the tips for success on appeal that you offer in blueprint?
A: Number one is meet the claim deadlines. Many people lose and are denied because they just don’t meet the deadlines for appeals. It’s a very unforgiving system. The other thing we tell people is that most claims are denied because there’s just a lack of information. Therefore, we encourage people to just get as much information into the claim file as possible. That means getting your complete doctor’s records going back as far as possible. Any physiotherapy records or medical records you send in are helpful. Most people just send in their most recent family doctor’s records but I can’t emphasize how important it is to have historical records on file.
Finally, the real secret to winning these cases is building a persuasive narrative and story of your case. To build that narrative you need the historical medical records. One of the most powerful stories you can tell is a struggle over time — that you just didn’t decide to stop working one day. You can show you struggled for years at work. You struggled with disability and pain for years and it’s all recorded in the medical records. Once you can show that powerful story all of a sudden the hearing can flip from, “Why aren’t you still trying to work?” to, “Wow, look at what this person’s been through over the last five years.”
Q: How can a disability lawyer help people who are turned down the first time around?
A: Frequently disability lawyers can help not by necessarily jumping in to represent people but by giving them better information to do a better job representing themselves. The main value a lawyer brings in a case like this is the ability to pinpoint where the information gaps are. The fact that you’re disabled does not win your case. What wins the case is showing that the medical records or the materials you put in demonstrate you’re disabled.
I guess lawyers help most by being able to pinpoint the specific information that’s needed and sometimes they are better able to get the information. Doctors are often not as receptive to having the patient tell them, “Can you please expand on this? We need to know more about that.” But if a lawyer writes to them, they’re more likely to respond to those types of inquiries.
Q: How much does it typically cost for legal services to appeal a CPP disability claim? After all, disabled people appealing CPP benefit typically haven’t worked for a long time and may be really broke. How much are they putting out and how long is it going to take them to pay this off before they even have a pension in their pocket?
A: I can’t speak for all lawyers or people who practice in this area. We take cases on a no win, no fee basis so that there’s no money is required upfront. You would just pay if an appeal is successful. Anticipating this call, I calculated that our average fee for the last year was about $4,500. That’s based on all cases, including ones where we get a zero because the case is lost.
Typically if we are successful, there is a back payment and the fee would be paid as a percentage of that back-payment (say about $15,000). Like I said, our average for 2016 was around $4,500 of that back-payment. We’d get our fee and our client would keep the remainder and all future payments.
Q: Okay, that’s great. So is there any other comments or questions that I didn’t ask that you’d like to comment on?
A: Many people, legitimate people I see are denied are for two main reasons. One, they haven’t tried to go do other types of work or they haven’t demonstrated that they really tried to stay in the workforce. The other one is, for whatever reason not really following through all of the medical recommendations. So if you quit going to physio, if you refused to take a drug, those are kind of things that can also cause a legitimate claim to be denied
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That’s great! Thank you very much, David. It was a pleasure to chat with you today.
It was my pleasure. Thank you.
David Brannen
Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.
