Proposed increases to CPP

[Slava]

I thought that we should have a thread about this chatter to voluntarily increase both contributions and withdrawals from CPP. ( http://www.theglobeandmail.com/report-on-business/conservatives-propose-voluntary-canada-pension-plan-expansion/article24621263/ ) While there are really no details at this point, making it difficult to say whether its a good/bad idea here are few potential considerations:

- CPP for many Canadians represents some forced savings. It comes off your cheque directly and is a mandatory contribution. Most people sort of forget about it to be truthful.

- While a new amount would be great because it would allow for that increase there aren't really details at this point about how it would be structured or what the rates would be. It would be likely that this would mirror the current plan and function as a defined benefit plan (where you put in a certain amount and they in turn pay you a set pension on your retirement).

- With defined benefit plans being more scarce these days (because of the guaranteed element) there definitely is a need here. CPP comes with an additional consideration at this point though. You can pay for decades (your whole working life potentially) and then die. If that happens the CPP death benefit is $2500. Clearly that would be an issue for someone who opted to double their contributions over say 35 years.

As I say, this is all up for discussion at this point and I haven't seen specifics at all. Its a very interesting idea though, and will be interesting to see the debate unfold over the coming weeks.

[GGG]

What kind of return does CPP get? Or maybe how long do you have to live for CPP to get better returns than the market.

[Slava]

What kind of return does CPP get? Or maybe how long do you have to live for CPP to get better returns than the market.

In the media they're fond of reporting that last year they returned 18.7%, but over the past decade the return was about 6.2% per year. That's not a bad rate of return. Not amazing, but not terrible either.

[stampsx2]

Absolutely not. No increase to cpp whatsoever. If you die before 65 the government get's to keep everything you put in your whole life. It's a very high risk investment with a possible return of almost zero. If i take my monthly contributions and invest them in rrsp's i have a guarenteed amount going to a spouse, sibling, child or i could even donate it to a charity of my choice.

As a matter of fact i would rather have the option of backing out of cpp alltogether. As you mentioned earlier, if you die before you had a chance to collect you or your spouse see almost none of what you've contributed your whole life.

My guess is a canadian would have to live to at least 75 to benefit from cpp above and beyond what they put in.

The government can implement a mandatory retirement saving policy where a percentage of your paycheque goes into a savings of your choice.

[Slava]

I definitely see what you're saying here. There are two things that would make this proposal palatable to me. One is that it operates more like a defined contribution plan where you get your money back if you die (well your beneficiaries, obviously) and second would be that it's voluntary.

I would note another advantage here though; not only is this not taxable, but it doesn't impact your RRSP limit.

[stampsx2]

Exactly, leaving more room for additional contributions such as a tfsa. That $200 cpp contribution would go much further if each canadian had to invest it themselves.

If i'm not mistaken you can also put away for retirement through life insurance policies which i think were a better option than cpp.

The problem with voluntary some will argue that too many canadians would not put anything away leaving them stranded at retirement.

[Slava]

Exactly, leaving more room for additional contributions such as a tfsa. That $200 cpp contribution would go much further if each canadian had to invest it themselves.

If i'm not mistaken you can also put away for retirement through life insurance policies which i think were a better option than cpp.

The problem with voluntary some will argue that too many canadians would not put anything away leaving them stranded at retirement.

Well the proposal would see the current amounts stay mandatory, but give people the option to add more (up to double from what I've seen). So people wouldn't really be stranded for retirement, at least no more than they are now.

I do think that people could do as well on their own if not better (more flexibility and more options, more command about when and how much withdrawals will be and that sort of thing). There is a segment though where if they made the decision once to have this come off their cheques and forgot about it, where they would be much better off than trying to do it on their own. People get paralysed by the sheer amount of options available, and then have issues with procrastination in general. I'm obviously not saying this is everyone, but I have this conversation regularly where people say "I've been meaning to do this for a long time!" The option to increase easily here might serve to reduce some of that issue...or at least hopefully it would!

[stampsx2]

But once they take a bit of time to do they're securing their future.

If cpp was made optional and employers would equally contribute to their employee's retirement that would give each person maybe $400/month to make smart investments. With all the investment options available you could even see much more early retirements at 55.

To me cpp is just an expensive but poor life insurance policy that may or may not pay you (not your family) when you get older. It's to the governments benefit for people to die early so they can pocket the cash. It costs them nothing to run the program.

[Slava]

But once they take a bit of time to do they're securing their future.

If cpp was made optional and employers would equally contribute to their employee's retirement that would give each person maybe $400/month to make smart investments. With all the investment options available you could even see much more early retirements at 55.

To me cpp is just an expensive but poor life insurance policy that may or may not pay you (not your family) when you get older. It's to the governments benefit for people to die early so they can pocket the cash. It costs them nothing to run the program.

Well you're preaching to the choir here. I'm an independent advisor, so naturally I think that people can do better on their own than they can relying on these programs. I have just seen the procrastination and enough people not doing it on their own though, so I also see the value in making this easier for people who otherwise save nothing.

[pseudoreality]

There's a huge amount of people that don't take advantage of employer matching RRSP contributions because they say they can't afford it. Really? You can't afford free money? Although I feel I could do better on my own, removing CPP would result in a lot of people with no money in retirement.

[Slava]

There's a huge amount of people that don't take advantage of employer matching RRSP contributions because they say they can't afford it. Really? You can't afford free money? Although I feel I could do better on my own, removing CPP would result in a lot of people with no money in retirement.

I'm always astounded that people don't take advantage of the matching plans. It's the kind of thing that you notice the first month or two when it comes off your cheque and then you basically forget about, or don't notice. The other thing is that some companies do it as a percentage of your income (most) so it keeps pace with your raises. It's really a great way to save.

[GGG]

And if you really want to you can just cash out your rrsp a few months in and pocket that free employer money.

I've never heard of people not taking advantage of it.

[pseudoreality]

And if you really want to you can just cash out your rrsp a few months in and pocket that free employer money.

I've never heard of people not taking advantage of it.
You and I know that, but its crazy how some people are so short sighted. I know first of senior people who do not take the free money. This why we need programs like CPP.

[stampsx2]

You and I know that, but its crazy how some people are so short sighted. I know first of senior people who do not take the free money. This why we need programs like CPP.

And what would be wrong with a mandatory percentage of your paycheque going into an investment of your choice such as rrsp for example.

[Slava]

And if you really want to you can just cash out your rrsp a few months in and pocket that free employer money.

I've never heard of people not taking advantage of it.

I do. I work in the industry, obviously, and you might be surprised. You can't always cash out and get the employer portion though as some places do have vesting periods.

[DownhillGoat]

And what would be wrong with a mandatory percentage of your paycheque going into an investment of your choice such as rrsp
The fact that it's mandatory.

I'm good with a voluntary increase, but the mandatory CPP premiums drive me up the wall.

[Sylvanfan]

Do they really need a voluntary increase? I mean with the TFSA limit moving up? I personally feel that there are enough options in place for Canadians to fund their retirement sufficiently. Guaranteed pensions carry risk and the government should be trying to shed this risk not take it on. We have what I feel is a sufficient banking and financial system developed in our own borders. Why have the government start playing more in that sand box than they already do.

[Slava]

Here is a pretty good review and some interesting points about the CPP and potential changes: http://findependencehub.com/voluntary-cpp-is-an-old-idea-has-its-time-finally-come/

[edslunch]

There's a huge amount of people that don't take advantage of employer matching RRSP contributions because they say they can't afford it. Really? You can't afford free money? Although I feel I could do better on my own, removing CPP would result in a lot of people with no money in retirement.


There's also a huge amount of people that live paycheck to paycheck. Setting aside a chunk of every pay isn't always an option, no matter how good the future returns. Of course there are also people who could but don't - totally agree they are missing out

[Locke]

Heres a question to you regarding the self-employed:

Many self-employed individuals pay themselves via dividends for tax purposes, however one of the drawbacks to that is that people who strictly earn dividends dont contribute to CPP or generate new RRSP room and thus wouldnt be eligible to collect, or would collect less, CPP upon retirement.

There are tax-planning alternatives to counter this but what would your advice be? Is it better to maintain strict dividends and effectively opt out of CPP because individuals can invest and plan for their own retirements better than the Government can? What value would you place on the certainty or guarantee of CPP?

[Slava]

Heres a question to you regarding the self-employed:

Many self-employed individuals pay themselves via dividends for tax purposes, however one of the drawbacks to that is that people who strictly earn dividends dont contribute to CPP or generate new RRSP room and thus wouldnt be eligible to collect, or would collect less, CPP upon retirement.

There are tax-planning alternatives to counter this but what would your advice be? Is it better to maintain strict dividends and effectively opt out of CPP because individuals can invest and plan for their own retirements better than the Government can? What value would you place on the certainty or guarantee of CPP?

Sorry for the delay here because I know that you posted last week and I wanted to answer but give a reasonable response. Its a tough question in some ways, but here are a couple considerations. First of all, CPP is indexed and while not fully guaranteed I'm of the opinion that it would be political suicide for a government to just stop the payments. At this point it looks sustainable and lets go on that assumption.

If a guy was retiring today and collected the average CPP payment he would get about $640/month. Over 30 years (lets say that puts him at 95 years of age) that means he collects about $230k, which is a decent chunk of money. While its indexed though, you still have to discount it back and I used the figure of 5%....you can disagree with that figure and there are some reasons it might not be the right figure to use, but this is fairly rudimentary! I come to a value today then of about $118k. So essentially what that means is that that if you were making a decision on whether to take that income stream of $639.44 per month for 30 years, or take a lump sum you would want $118k to keep things even.

So to equivocate that a person on their own would have to save about $1250/year based on a 7% average rate of return for 30 years; its definitely doable. So when you look just at that figure you might think its not really an advantage; save $100/month on your own for 30 years and you're all set. To me there are a couple issues. First being that some people (a lot) won't actually save that money. Second, what people need to do is save more than the $100 because $640 indexed isn't enough to live on...so they should be saving 3-4x that figure in a lot of cases and particularly if they aren't going to use CPP.

I have to point out though that I'm using averages and making a lot of assumptions here. People shouldn't really base their life savings or life savings plans off this post! I think its relatively accurate, but if you choose to take this as gospel and wind-up eating cat-food in your retirement don't blame me.