Because you were not employed in 2016 or you earned less than the basic personal deduction ($15,843 in Saskatchewan) you may not be worried about meeting the May 1st income tax deadline. But there are many good reasons to file a tax return even if you don’t have any income to report. For example:
Get a refund: If you worked for some period of time and your employer deducted income taxes you actually didn’t have to pay it is the only way to get a refund.
TFSA contribution room: It is the easiest way to establish contribution room for a Tax-Free Savings Account although contribution room is not affected by taxable income.
Earned income for RRSP purposes. Even if you do not wish to contribute to an RRSP currently, “earned income” amounts can be carried forward indefinitely. For RRSP purposes, earned income includes net employment income, net rental income from real property, CPP/QPP disability benefits and taxable alimony received.
Refundable tax credits: There are some federal and provincial refundable tax credits that may be payable to you even if you have no earnings and paid no tax. For example, see the federal Working Income Tax Benefit.
GST/HST credit: Generally, Canadian residents age 19 or older are eligible to receive the federal GST/HST credit, which is paid quarterly to eligible recipients. Those under 19 may be eligible, if they have (or previously had) a spouse or common-law partner, or if they are a parent and they reside with their child.
Non-capital loss: You have incurred a non-capital loss (see line 236) in 2016 that you want to be able to apply in other years.
Education credits: You want to carry forward or transfer the unused part of your tuition, education, and textbook amounts. See line 323.
GIS: You receive the guaranteed income supplement or allowance benefits under the old age security program. You can usually renew your benefit by filing your return by April 30. However, if you choose not to file a return, you will have to complete a renewal form. This form is available from Service Canada,
Also consider having your children file a tax return reporting income from various types of part-time work (paper route, baby-sitting, lawn mowing, etc.), even if they do not have to pay income tax, so they can create their own RRSP contribution room.
Low earners stand to gain little from an expanded Canada Pension Plan (CPP), according to a new C.D. Howe Institute report. In “The Pressing Question: Does CPP Expansion Help Low Earners?”, authors Kevin Milligan and Tammy Schirle show the large differences in the net payoff from the expanded CPP for lower and higher earners.
Federal and provincial finance ministers agreed in June to expand the Canada Pension Plan. Under the status quo, CPP offers a 25% replacement rate on earnings up to a cap of $54,900. The expanded CPP will add a new layer that raises the replacement rate to 33.3% up to a new earnings cap of about $82,900 when the program is fully phased in by 2025.
To pay for this, both employer and employee contributions will be raised by one percentage point up to the existing earnings cap, and by four percentage points between the old and new earning caps. This expansion will be phased in during the period 2019 to 2025 for contributions, with benefits being phased in over the next 50 years commensurate to contributions paid.
This reform will substantially raise expected CPP benefits for most young workers now entering the workforce. For lower- and middle-earning workers, the higher replacement rate will lead to an eventual benefit increase of about 33% over existing CPP benefits.
For a high-earning worker, the maximum CPP benefits will increase more than 50% over the status quo. These expansions are large enough to make a noticeable difference for the younger generation of workers as the expanded CPP matures over the coming decades.
However, the C.D. Howe study authors note two important shortcomings of the new package hamper its effectiveness, both related to low earners.
First, low earners are already well covered by the existing suite of public pension benefits – many now receive more income when retired than when working. Why expand coverage where it is not needed? As a contributory pension, the CPP risks worsening the balance of income between working and retirement years for low earners.
Second, the income-tested withdrawal of some government-program benefits wipes out much of the impact of extra CPP benefits for many low-earners. Around one-third of Canadian seniors currently receive the income-tested Guaranteed Income Supplement (GIS), so concerns about interactions with income-tested benefits have a broad base.
In order to be eligible for the GIS in 2016, a single, widowed or divorced pensioner receiving a full OAS pension cannot have over $17,376 individual income. Where a couple each receives a full OAS pension they will not be eligible for the GIS if their combined income exceeds $22,944.
To summarize these issues: expanding CPP for low earners risks making some Canadians pay for pension coverage they don’t need. To make matters worse, extra contributions may reduce the living standards of low earners today for modest net rewards in retirement tomorrow.
The CPP agreement-in-principle reached by the finance ministers may address some of these concerns by offering an improvement to the Working Income Tax Benefit alongside the CPP expansion. It is possible that an expanded WITB could effectively counteract increased CPP contributions by some low earners, but no details of the WITB expansion have been provided to date. Nevertheless, low earners would still face the problem of CPP-GIS interactions that undercut the impact of expanded CPP benefits.
In a Globe and Mail article, authors Janet McFarland and Ian McGugan also note that expanded CPP does not do much to help people who do not collect CPP in the first place. That describes many senior women who spent most of their lives as homemakers and so earned little or nothing in CPP benefits. About 28% of single senior women over 65 live in poverty, according to a study this spring for the Broadbent Institute by statistician Richard Shillington of Tristat Resources.
In addition they say the planned CPP changes will also do only a limited amount to help affluent savers because the maximum amount of income covered by the plan will increase to only about $82,800 by 2025. Therefore, those with six-figure incomes will still have to save on their own if they want a retirement income that will replace a considerable portion of their incomes above the expanded limit.
A recently retired actuary I once met at a conference told me that retirees worry primarily about their health and their money. Even retirement savings that seemed perfectly adequate when you hand in your office keycard for the last time seem to be eroded by the unrelenting drip, drip of inflation.
That’s why the lucky few who have indexed or partially indexed defined benefit pensions (most common in the public sector) are the subject of “pension envy” by the 80%-85% Canadians who do not have access to any form of workplace pension.
But according to a new C.D. Howe research paper by actuary Fred Vettese, retirees actually spend less on personal consumption as they age. He says, “This decline in real spending, which typically starts at about age 70 and accelerates at later ages, cannot be attributed to insufficient financial resources because older retirees save a high percentage of their income and, in fact, save more than people who are still working.”
Vettese cites evidence showing that compared to a household where the head is age 54, the average Canadian household headed by a 77-year-old spends 40% less. None of this drop in spending is attributable to the elimination of mortgage payments because they are not considered consumption. Much of the fall in spending at older ages was traced to reduced spending on non-essential items such as eating out, recreation and holidays.
The author focuses on public sector pension plans, which are fully indexed to inflation. His findings show that these plans could move to partial indexation, generating significant savings. “Given that more than 3.1 million active members are contributing to public-sector pension plans, the total annual savings could add up to billions of dollars, he says.” At the individual level, he suggests these savings would allow public-sector employees to increase current consumption or to reduce debt.
Given this phenomenon, cost-of-living indexation of workplace pension benefits could be reduced without sacrificing consumption later in life, Vettese concludes. He also notes that, “Reduced pension contributions would free up money to be spent today when families struggle to raise children and pay down mortgages on houses, thereby raising plan members’ collective economic welfare over their lifetimes.”
The average resulting reduction in required total employer/employee contributions to public-sector plans is of the order of $2,000 a year per active member. There are over three million active members in Canada’s public-sector DB pension plans, most of which provide full inflation protection or strive to do so to the extent that funding is available.
Nevertheless, Vettese says Pillar 1 (OAS/GIS) and 2 (CPP) pensions should not be subject to any reduction in benefits or contributions because these plans are generally designed to cover basic necessities, such as food and shelter. In the absence of evidence to the contrary, he believes it is reasonable to assume that spending on such necessities does not decline very much, if at all.
I have heard the three phases of retirement described as “go-go”, “slow-go” and “no-go.” My mother at 88 no longer drives a car and can’t to get out to shop very often anymore, so I am prepared to concede that many of her expenses have been reduced. However, her memory isn’t what it used to be and she has had several bad falls, so paying for 24-hour care in her own condo is a huge drain on her assets. Also taxis to multiple doctor’s appointments and medical supplies are expensive.
While Vettese suggests partially eliminated or reducing inflation-protection for indexed pension plans could allow public-sector employees to enhance current consumption and reduce debt, I’m not sure that’s necessarily a laudable or desirable objective. Mom saved and scrimped all her life and because my Dad was a disabled WW2 veteran she gets a tax-free, indexed pension for life. She also collects CPP and OAS.
I’m glad she has the additional disposable income so she can stay in her own apartment with the necessary support system as long as possible. Even though older retirees may no longer go on extended vacations or eat in fancy restaurants, they still have other equally compelling expenses in order to live out their remaining days in dignity and comfort.
Now if we could only figure out a way to help raise the bar for all seniors to be able to afford the same well-earned privilege.
Well, the earth moved and in late June at a meeting of provincial/federal finance ministers, Bill Morneau got the consensus he needed from eight provinces including Saskatchewan for the phase in of modest enhancements to the Canada Pension Plan. As a result Ontario has agreed to shelve its plans for a home-grown Ontario Registered Pension Plan.
The feds plan to start collecting higher premiums beginning January 1, 2019. Many details still have to be ironed out, but here are 10 things you need to know about how enhanced CPP benefits will impact both employers and employees.
The Canada Pension Plan Act says that once a sufficient number of provincial governments have indicated support, the federal government can move forward and lock in the reform with an Order in Council—no new Parliamentary debate or legislation is required. From that point forward, the expansion will be fixed in place unless amended through a subsequent agreement of two-thirds of provinces to reverse the expansion—which is very unlikely.
If you are already retired or close to retirement you will not benefit from the changes. Someone retiring in 2020 who made one year of the increased contribution would get a tiny amount. Someone retiring in 2030 would have 10 years of extra contributions.
Canadians who work a full 40 years will see their benefits increase (in 2016 dollars) to a maximum of $17,478 instead of $13,000. Therefore the replacement rate will inch up from 25% of the Year’s Maximum Pensionable Earnings (YMPE) to one-third.
The maximum amount of income subject to CPP will increase 14% from $54,900 this year to $82,700.
Increased premiums of one percent will be phased in over seven years beginning in 2019. That means depending on the income levels of individual Canadians, up to $408 will come off their pay cheques.
The refundable tax credit known as the federal working income tax credit will be expanded to help low-income Canadians offset the increase in premiums.
Changes will not impact RRSP (and SPP) contribution room.
To avoid increasing the after-tax cost of the added premiums, Ottawa will provide a tax deduction for the additional contributions rather than a tax credit.
Company pension plans are not always offered – particularly Defined Benefit plans. Therefore it makes sense that young people and mid-career employees will benefit.
Participation is mandatory and from the limited information released to date, it appears that even companies that do have a pension plan will have to make additional contributions and their employees will not be exempt.
After several weeks of “theme” issues it’s time to check in with some of our favourite bloggers to find out what’s on their mind.
On Boomer and Echo, Marie Engen asks the perennial question RRIF Or Annuity? Which One Is Right For You? She suggests combining both so an annuity covers your basic retirement expenses together with with your CPP, OAS, and any other pension income you may be receiving to give you a guaranteed income stream for life. This allows your RRIF to provide you with investment growth opportunities and easier access to your money for your more enjoyable lifestyle expenses.
Tax Freedom Day 2016 happened June 7th this year. Retire Happy’s Jim Yih says it’s another reason to celebrate summer. He explains where all of your taxes go because once you realize the severity of tax on your lifestyle, it is your job to investigate legitimate ways to reduce your tax bill. “I’ve often said that good tax planning is the foundation to any financial, investment or estate decision,” Yih concludes.
Bridget Eastgaard lives in Calgary where due to the drop in oil prices the rental market is very soft. On her blog Money After Graduation she shares One Simple Shortcut To Put More Money In Your Budget. Her research revealed a similar unit renting for $250 less in her building plus a half-dozen comparable apartments renting nearby for less. She succeeded in lowering her rent by 20%, saving hundreds of dollar a month that will be redirected to accumulating a down payment on a house.
And the Big Cajun Man Alan Whitten reminds readers to keep an eye on their bank account to make sure automatic withdrawals are being processed properly on an ongoing basis. When he checked on his son’s RESP recently, he found that TD Bank mysteriously stopped depositing in November of 2015. There has been a problem ticket opened on this issue, and someone will be getting back to him.
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.
Next week Federal Finance Minister Bill Morneau will again be meeting with provincial and territorial finance ministers to talk about options for improving Canada Pension Plan benefits. This protracted discussion has been going on for as long as I can remember, but the hurdles remain the same.
CPP changes require the support of Ottawa plus seven of the 10 provinces representing two-thirds of the population. When the finance ministers last met in December 2015, Ontario which is currently going at it alone, PEI, Manitoba, Nova Scotia and New Brunswick gave CPP improvements a “thumbs up.” Quebec, B.C. Saskatchewan and Alberta vetoed the idea.
Here are some links to recent articles in the mainstream media that will bring you up-to-date on the various arguments made by stakeholders in the debate.
Larry Hubich, president of the Saskatchewan Federation of Labour says the proportion of their incomes that Canadians put into CPP, and will someday get back as pension payments, “is not enough.” Nevertheless he is optimistic since many Canadian politicians — including Prime Minister Justin Trudeau — agree there’s a pension problem because many Canadians can’t retire on what they’ll get from the CPP under current rates.
After the finance ministers met in December 2015, Dan Kelly, president and CEO of the Canadian Federation of Independent Business (CFIB), and Marilyn Braun-Pollon, Saskatchewan vice-president of CFIB told the Regina Leader-Post that small business owners are relieved that Canada’s finance ministers have put plans to expand the Canada Pension Plan (CPP) on hold. “They are relieved but they’ve expressed a desire to see a shift in the conversation,” Braun-Pollon said.
The Globe and Mail reports that a coalition of business groups and youth advocates is calling for an expanded Canada Pension Plan, but only if it is targeted at middle-income levels. The coalition argues that higher premiums to pay for more generous retirement benefits should kick in at annual earnings of about $27,500. They argue helping Canadians who earn less than that is better accomplished through Old Age Security and the related Guaranteed Income Supplement.
The Ontario government recently announced it is delaying the introduction of its Ontario Retirement Pension Plan until 2018 while it negotiates with the federal government and other provinces on an enhanced CPP. However, at this point, the government says it still intends to proceed with the ORPP as it’s unlikely that all provinces can agree on a CPP enhancement large enough to take the place of the ORPP. Here’s what you need to know about the ORPP:
And Fred Vettese, the Chief Actuary of Morneau Shepell writes in the Financial Post that he is actually in favour of CPP expansion if it is done right. He says one thing it will certainly do is to raise the under-savers (and there are many of them) closer to the standard of living they enjoyed while working. The unanswered question is how much closer should they be without having to save on their own?
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card and
This is the last Best from the Blogosphere for 2015 and I’m taking a break, so the next one will be published on January 25, 2016. We wish all savewithspp.com readers a healthy, prosperous New Year.
As we look back on 2015 and ahead to 2016, there is much to think about. We have a new Federal government, the loonie is at an all-time low and Canadians have extended extraordinary hospitality to Syrians and other refugees from war-torn lands.
Here are some interesting stories we are following:
In TFSA vs. RRSP: How are Canadians saving? I interviewed Krystal Yee (Gen X), Tom Drake (Gen Y) and Bonnie Flatt (Boomer) to find out how Canadians are taking advantage of the tax-sheltered savings vehicles available to them.
In What Sean Cooper Really Achieved By Paying Off His Mortgage In 3 Years Robb Engen from Boomer and Echo tells us that Sean Cooper didn’t just pay off his $255,000 mortgage in three years; he taught us all a lesson in personal branding. Mr. Cooper, a pension analyst by day, mild-mannered blogger by night, took an almost Machiavellian-like approach by achieving fame through mortgage freedom at age 30.
Jim Yee offers some Year End Finance Strategies that will take advantage of ongoing changes to our tax rules. For example, in 2016, the new Liberal government will be lowering the tax rate on the middle income bracket from 22% to 20.5% so those individuals making more than $45,283/year but less than $90,563/year, deferring income to next year might save some tax dollars.
On the Financial Independence Hub, Doug Dahmer writes about the timing of CPP benefits. He says the CPP benefit for a couple can be in excess of $700,000 over their lifetime and the study demonstrates that the difference between starting your benefit at the least beneficial date and starting at the best date can be more than $300,000.
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.
Canadians have spoken. Canada has a new Prime Minister and a new first family. While the moving trucks have not been booked yet, Justin, Sophie, Ella-Grace, Xavier and Hadrien will be the second generation of Trudeaus to live at 24 Sussex Drive.
Since the election, the financial press has gone into overdrive analyzing what the new government will mean for your bottom line and urging the new government to either act quickly or step back from key election promises.
Here are some of the post-election stories I found interesting:
The MoneySense staff posted What a Liberal majority means for you on election day shortly after a Liberal majority was announced. One of Trudeau’s well-publicized campaign promises was to cut the annual Tax Free Savings Account (TFSA) contribution limit from $10,000 back to $5,500. A recent MoneySense analysis found high-income individuals stand to lose an estimated $53,000 over 30 years, assuming 5% equity returns and a combined federal and provincial tax rate of 50% under the Liberal plan.
In the Globe and Mail, Rob Carrick considered some potential TFSA avenues the Liberals could take. He quoted Mark Goodfield, a partner at BDO Canada LLP, who believes the Liberals may announce before year’s end that the cumulative TFSA limit starting next year will be $42,000. That would factor in the $5,000 limit from 2009 through 2012, the $5,500 limit for 2013 and 2014 and $5,500 limits for 2015 and 2016. According to Carrick, Goodfield believes the government will make the current $10,000 limit for this year a moot point, by limiting people who contributed $10,000 this year to just $1,000 in 2016, which would effectively be $5,500 a year for 2015 and 2016.
How the election affects your savings by Adam Mayers at the Toronto Star reports on both the Liberal commitment to expand the Canada Pension Plan and the proposed TFSA rollback. He says, “We can be hopeful about CPP expansion, but don’t expect it for a while. In the meantime, the Ontario plan will go ahead, with the best outcome being that it’s folded into an improved CPP at a later date.” Mayers also believes TFSA rules are unlikely to change before the new year, so if you have the money to use the $10,000 limit, he says do it now.
The non-profit Working Canadians group headed by Catherine Swift (formerly chair of the Canadian Federation for Independent Business) says cutting the TFSA limit is unfair when our tax dollars pay for gold-plated public pensions, Jonathan Chevreau reports in the Financial Post. Chevreau points out affluent baby boomers and seniors have hundreds of thousands of dollars ready to convert to TFSAs and he agrees with Swift that leaving the TFSA limit where it currently stands at $10,000 is the least the feds can do to enable 80% of Canadians to put away some funds for their own proper retirement.
The Universal Child Care Benefit will be replaced by the Canada Child Benefit. The biggest difference? The new benefit is tied to income and is tax-free.
The Liberals have quietly announced they would eliminate textbook tax credits for students ($520/year). But it’s not all bad news for students. Students won’t have to start paying back their loans until they begin earning $25,000 per year (or more).
One of the bigger changes announced is that it will be easier to access the Home Buyers Plan which allows a first time home buyer to borrow up to $25,000 (tax free) from his/her RRSP. Borrowers have 15 years to pay it back and it can be used more than once in a lifetime. Under the new rules, those going through life changes (such as divorce) will be able to access the home buyers plan to buy a second home.
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.
Today, I’m pleased to be interviewing Greg Hurst for savewithspp.com. Greg is a pension consultant and pension innovator based in Vancouver. He’s held many roles in the pension industry with large international and small regional consulting firms and a major Canadian insurer.
He’s a member of both the editorial advisory board of Benefits and Pensions Monitor and Benefits Canada’s online expert panel. In fact, two of his articles were among the five most widely-read Benefits Canada pension articles of 2013.
Today, Greg is going to share his thoughts with us on the federal government’s surprising pre-election proposal to study allowing Canadians to voluntarily contribute to the Canada Pension Plan (CPP) to supplement their retirement savings.
Thank you for joining me today, Greg.
Glad to be here Sheryl.
Q: Were you surprised to hear of the federal government’s announcement in May that they are going to reconsider a voluntary top-up to the Canada Pension Plan?
A: It was totally unexpected. Since 2011, the federal government has consistently said it’s not the right time for changes to the CPP, and even more recently – in fact, just before the announcement – they characterized CPP contribution rate changes as a “pension tax hike.”
Q: Interesting. So, why do you think that the Minister of Finance, Joe Oliver, announced these consultations after the government and the provinces previously rejected similar proposals?
A: Well, an election is coming up. The federal Conservatives recognize that CPP expansion will be a significant election issue. In the 2014 Ontario election pensions were front and center, and Kathleen Wynne’s Liberals won with her promise of the Ontario Registered Pension Plan (ORPP), which grew out of the federal government’s refusal to consider CPP expansion in spite of a consensus amongst the provinces. Canadians have come to love the CPP. It delivers on its benefit promises and the CPP Investment Board consistently delivers good news on its investment returns.
Q: Now, in an article you wrote that was published May 27th on the Benefits Canada website, you suggest that “the devil is in the details.” The closing date for the consultations on a voluntary CPP top-up is September 10th and the election will be held on October 19th. Do you think a detailed blueprint for adding a voluntary tier to CPP will be available for public scrutiny prior to the election?
A: It is unlikely. October 19th is the next fixed election date, and that would leave less than six weeks to build and publish the blueprint. It would also require input from the provinces. It would be very irresponsible for the federal government to publish proposals for CPP changes without first consulting the provinces.
Q: Ontario has gone ahead and passed legislation to establish the ORPP. What do you think of those proposals?
A: Well, I really favor mandatory employer and employee contributions for pension benefits. It’s taken a lot of political courage and leadership from Ontario, which has been absent elsewhere in Canada for many, many years to implement the ORPP. But there again, the devil is in the details. I might have different ideas on how to build the ORPP, but I really don’t have any interest in criticizing those who exhibit this leadership in pensions.
Q: In your view, is it likely that other provinces will jump on the bandwagon once the Ontario plan is up and running?
A: I think there’s a good chance of that, particularly if the Conservatives win the upcoming federal election, because they’ve been consistently intransigent in their opposition to workplace pensions with mandatory employer contributions. But if the Liberals or NDP wins, they’re more likely to build on the leadership of Ontario and proceed with CPP expansion, which I think would make the ORPP unnecessary.
Q: Were you surprised by the federal announcement that the Harper government would not help Ontario administer the ORPP?
A: I was quite surprised. To me, it amounted to a juvenile temper tantrum. It seems to be extremely bad policy for the federal government to torpedo any provincial pension initiative, particularly in this way. Administration of contributions could easily be accommodated in the same way as provincial income tax collection. And in terms of tax deductibility, the feds could readily accommodate ORPP contributions in the current tax-assisted framework like they already do for the Quebec Pension Plan and the Saskatchewan Pension Plan.
Q: Do you believe a voluntary supplement to the CPP should be an option for Canadians to save for retirement? Is this something you would use to increase your retirement savings?
A: Well, to answer questions about the concept of a voluntary CPP supplement, I first have to suspend my disbelief that the federal government – and particularly a Conservative government – would actually choose to compete with the financial services industry, which already has a wide spectrum of products and services designed for retirement savings.
I think that the expectations amongst the public with this announcement are that it would be a savings and investment vehicle, in which case my answer would be, no, I wouldn’t use it to increase my retirement savings and, no, I don’t think they should bother.
Q: Why do you say that?
A: Well, although many Canadians might be excited by the possible opportunity to share in the investment results that the CPP Investment Board has achieved — particularly if the cost of investing is similar to the Board’s current cost — that’s not what they would get from a voluntary supplement under the CPP. It would require a different investment mandate from the CPP Investment Board, with the degree of difference dependent upon how much administrative flexibility the plan has. It would be far more expensive at the end of the day and would likely not have much to differentiate it from retirement investment options already available in the marketplace.
Q: And what about the design of a potential voluntary top-up? What do you think? Should the money be locked in? And should there be basic required contributions, or some variability? I mean what should this thing look like?
A: Well, you know, it depends on how they actually design it. They could do it as a standard savings and investment vehicle, or they could do it as a prepaid annuity vehicle, which might be more interesting. So, I think, first off, Canadians would generally choose good, old-fashioned RRSPs over CPP supplements as a savings and investment vehicle, unless the CPP had the same flexibility with no locking-in, in which case the cost would be almost the same as traditional RRSPs. But if a voluntary CPP supplement were designed around the prepaid annuity concept, contributions could be flexible so you could buy as many prepaid annuities as you want, perhaps within some limits; and full locking-in would perhaps be appropriate under that kind of a design.
Q: Now, in a previous question, you referred to the integration of a voluntary CPP into the current income tax rules. Do you think that that’s problematic, or it would be fairly easy to do?
A: I think it could be fairly easy to do within the current income tax rules. If you really wanted to make it work as a prepaid annuity concept, you could put it on top of the existing RRSP limits. It would just be another added-value pension saving that wouldn’t impact your RRSP limits.
Q: That might make it more attractive to particularly people who have topped up their RSP limits already.
Q: So, who do you think should be responsible for investing the contributions made to a voluntary CPP supplement?
A: If it was designed around a prepaid annuity concept, it would be the CPP Investment Board.
Q: How important is keeping costs low to the success of this proposal?
A: Well, it’s fundamentally important if it’s a savings and investment vehicle, which means that it would be very difficult to do without having some sort of subsidy from the government. MERs aren’t really applicable to paid up annuities. But certainly the cost would then likely be comparable to the current costs of the CPP Investment Board services.
Q: When you discuss a “prepaid annuity,” what do you mean? Do you mean that it would operate like a defined-benefit pension as far as the consumers are concerned?
A: Yes. Once you purchase it – so, you come in with “this is the amount of contribution I have. This is my age.” And then that would purchase a certain amount of fixed pension payable at your retirement date of age 65, or maybe 67, assuming that becomes the new normal retirement date. So, when you buy the annuity, you would know how much you’re getting when you reach that retirement date — like a defined-benefit plan.
Q: Do you think that this voluntary top-up to CPP is ever going to see the light of day? Will that depend on who forms the next government?
A: No. Even if it’s a prepaid annuity, I don’t think there will be enough of a market appetite for the concept to proceed. If it were a saving and investment type of program, it would have costs that are too high to really compete with the current, private-sector marketplace. But if the Liberals or the NDP form the government, I believe then we’d see a mandatory form of CPP expansion.
Q: Thank you very much, Greg. I really appreciated talking to you today.
A: My pleasure, Sheryl.
This is the edited transcript of an interview conducted by telephone in July 2015.
Are Canadians saving enough for retirement? It depends who you ask.
A BMO survey conducted in early 2014 revealed that only 43% of Canadians planned to make RRSP contributions by the March 1st deadline, down from 50% the previous year. An October 2014 study from the Conference Board of Canada reports that almost four in 10 Canadians are not saving and nearly 20% of respondents said they will never retire.
Yet a 2015 study of 12,000 Canadian households conducted by consulting firm McKinsey & Co. says that four out of every five of the nation’s households are on track to maintain their standard of living in retirement. The research reveals that most of the unprepared households belong to one of two groups of middle to high-income households:
Those who do not contribute enough to their defined contribution (DC) pension plans or group, and
Those who do not have access to an employer-sponsored plan and have below average personal savings.
The McKinsey study suggests that since the retirement savings challenge is quite narrow, the best way to address it should be an approach targeted to these groups that is balanced and maintains the fairness of the system for all Canadian households.
And now, Malcolm Hamilton, a Senior Fellow at the C.D. Howe Institute and a former Partner with Mercer has weighed in on the issue with his commentary Do Canadians Save Too Little?
Hamilton agrees with the McKinsey research that Canadians are reasonably well-prepared for retirement. Most save more than the five percent household savings rate. Most can retire comfortably on less than the traditional 70% retirement target. Furthermore, the size of the group that appears to be “at risk” cannot be accurately determined nor can the attributes of its members be usefully described.
He notes that a couple can live comfortably after retirement despite a reduction in income of more than 30% for several reasons:
They no longer need to save for retirement.
They no longer contribute to CPP and EI.
One of their largest pre-retirement expenses – supporting children – ends.
During their working lives the couple acquires non-financial assets like the family home, cars, furniture, art and jewelry. Some can be turned into a stream of income. Some cannot. But they do not need to budget to re-acquire these items during retirement.
Finally, any tolerable reduction in post-retirement income is amplified by a disproportionate reduction in income tax due to the progressive nature of our tax system and special tax breaks reserved for seniors.
As studies of our retirement system become more sophisticated, Hamilton thinks we should focus more on solutions for individuals who are not saving enough as opposed to a blanket approach that will impact everyone
So how can we fill the “gaps” identified by these studies?
Hamilton is not a big fan of an enhanced Canada or Quebec Pension plan. He agrees that CPP/QPP are effective ways to increase the post-retirement incomes, and to reduce the pre-retirement incomes, of all working Canadians.
However, he says they are ineffective ways to increase the post-retirement incomes of hard-to-identify minorities who are thought to be saving too little. “Their strength is their reach – they can efficiently move everyone to a common goal,” Hamilton says. “But what if there is no common goal? What if there are only individual goals dictated by personal circumstances and priorities?”
The report concludes that because gross replacement targets are unreliable measures of retirement income adequacy due to the diversity of our population, programs like the CPP/QPP can go only so far in addressing our retirement needs. They can establish a lowest common denominator – a replacement target that all Canadians should strive to equal or exceed.
“Beyond that, we need better-targeted programs – programs that are better able to recognize and address our individual needs,” Hamilton says.