Canadians aren’t saving enough for retirement, say advocates of a larger CPP.
By Peter Mazereeuw
OTTAWA — A war of words is being fought over the financial future of Canada’s largest generation as it edges towards retirement.
Some of Canada’s most influential unions, think tanks and politicians are among the chief combatants, each armed with their own facts and figures. At issue is whether Canadian workers are saving enough money for a comfortable retirement.
Nearly six out of 10 Canadians between the ages of 55 and 64 feel they have not saved enough money to retire comfortably, according to a survey conducted this summer by the Conference Board of Canada, an Ottawa-based public policy think tank.
The survey included more than 1,600 Canadians polled online, and was weighted to reflect demographic norms in Canada.
Retirees struggling to make ends meet is nothing new, The rate of poverty among seniors in Canada was one of the ten lowest among member states in the Organization of Economic Cooperation and Development in 2010, according to an OECD report released last year.
However, while the rate of poverty among seniors was declining among most member states between 2007 and 2010, Canada’s rose two percentage points, from 5.2 to 7.2 per cent, the report says. says Susan Eng, vice-president of advocacy for CARP, a lobby group for Canadian retirees. It will, however, be a new experience for the group of baby-boomers nearing retirement.
“They’re used to getting their way,” she says, “and they vote.”
Middle class hasn’t saved enough to maintain status in retirement, says labour group
Voices on both sides of the debate agree that workers should plan for a retirement income of about 70 per cent of what they live on during their working years, if they want to maintain their standard of living.
There is widespread agreement that Canada’s wealthiest workers will be just fine in retirement, and Canada’s poorest will get just enough help from government retirement supplements to keep food on their tables. But the fate of the middle class is where the consensus ends.
Canada is heading for a “retirement income crisis,” says Chris Roberts, the social and economic policy director for the Canadian Labour Congress (CLC), an umbrella group representing more than three million Canadian workers in dozens of unions.
The CLC foresees such a crisis because much of the working middle class hasn’t been able to save anywhere near enough to achieve that 70 per cent retirement income, Roberts says. A decline in the quality and availability of workplace pensions, high fees on private mutual fund investments levied by banks, and short-term thinking by wage earners has prevented many from doing so, he says.
The CLC is calling for a doubling of the contributions to—and benefits from—the Canada Pension Plan (CPP) as a long-term solution, which wouldn’t cost the federal government a penny in direct costs. The CPP currently deducts just under five per cent from every paycheque issued in Canada, and an equal amount from employers.
The CPP is an ideal tool for helping Canadians maintain their pre-retirement lifestyle, since the amount it pays out to seniors is tied to how much they contributed while working, says Roberts. The trouble is, it simply doesn’t take in or pay out enough, he says.
The average CPP benefit paid out in July 2014 was $607 per month, or $7,284 per year in taxable income, according to the Service Canada website.
“I get calls all the time from seniors who are desperate to stay in their own house,” she says.
The CLC isn’t the only proponent of a larger CPP. The federal NDP, Liberal Party and CARP—the advocacy group for Canadian seniors—are also advocating for higher mandatory contributions and payouts.
Many provincial governments also favour expanding the CPP, at least for now, says Eng. That’s important, because changing the CPP is complicated. The federal government and at least seven provincial governments representing two-thirds of Canada’s population must agree before it can be changed, says Eng.
Kathleen Wynne’s government in Ontario is eager for action, and is in the process creating another mandatory pension that would deduct a set percentage from employers and employees with each paycheque in addition to the CPP.
This would require the creation of a whole new bureaucracy to manage the pension, and the Wynne government would likely abandon the plan if the CPP were expanded, according to Eng.
The federal government isn’t interested in doing so, according to Minister of State for Finance Kevin Sorenson.
Expanding the CPP would cost employers money and slow the growth of Canada’s economy, Sorenson said in an emailed statement.
The government has made a handful of moves to help Canadians in retirement and those saving for retirement already, including creating Pooled Registered Pension Plans, which employers and employees can join in order to benefit from the economies of scale enjoyed by large investment funds, by creating Tax Free Savings Accounts, and by introducing a “top up” for the Guaranteed Income Supplement for low-income seniors, he said.
The Guaranteed Income Supplement provides a non-taxable monthly payment of between $507 and $764 to seniors who have an annual income below a certain level, which varies with their marital status and other factors.
The federal government also provides an old age security payment to all seniors, and benefit payments for some Canadians between the ages of 60 and 65 who are dependent on a low-income spouse or were dependent on a spouse who died. However, old age benefits are subject to a “recovery tax,” wherein Canadian seniors earning more than $69,562 will begin to have their payments reduced as their incomes increase.
All retirement payment amounts and thresholds are indexed to inflation.
For example, if a single, senior is retired with no savings or workplace pension and an annual income (including CPP benefits) less than $432, he or she would receive just more than $1,300 per month in old age security and guaranteed income supplement payments, for an annual income of just less than $16,000.
If a married couple retires with a combined income from savings, CPP payments and workplace pensions of $60,000, that couple would receive $1,127 per month ($13,524 per year) in combined old age security payments, but no guaranteed income supplement payments. However, that extra income would put them above the recovery tax threshold, and they would be required to payback 15 per cent of their total income above that threshold—in this case, just less than $600 per year.
A retired senior with an annual income of more than about $114,000 will not receive any old age security payments.
The federal government has pledged to raise the age at which seniors qualify for old-age benefits from 65 to 67 for some benefits and from 60 to 62 for others. That change is scheduled to be phased in between 2023 and 2029.
The federal NDP would cancel that change in age eligibility if brought into power, says Irene Mathyssen, the official opposition party’s critic for seniors.
While the New Democrats support expanding the CPP, Mathyssen called it a “long-term solution” to the problem of inadequate retirement savings.
If CPP pay deductions were increased, the workers nearest to retirement—who represent a large chunk of Canada’s population right now—would only contribute at that higher level for a few more working years. As such, their CPP payments in retirement would only increase slightly.
In the meantime, Mathyssen, Eng, and the CLC are pushing for an increase to the Guaranteed Income Supplement to help low-income seniors.
Any “quick fix” to do more for the large generation on the edge of retirement would likely require significant government intervention, says Roberts.
Expanded CPP not the best way to help struggling retirees, say opponents
Ian Lee, a business professor at Carleton University, agreed that an increase to the Guaranteed Income Supplement and other low-income retirement benefits could help Canada eliminate poverty among seniors.
However, he joined some of Canada’s most well known right-leaning think tanks, including the C.D. Howe Institute and Macdonald-Laurier Institute, in dismissing the idea of a larger CPP.
The CPP is financially soundAssets in the Canada Pension Plan fund are “expected to increase significantly over the next decade and then will continue increasing at a slower pace” if the current rate of contribution, 9.9 per cent of worker pay, is sustained, according to Ménard’s report. as it currently stands, despite the projected increase in those who draw from the fund versus those who contribute as the population ages, according to the most recent report on the sustainability of the CPP by Jean-Claude Ménard, the chief actuary in Canada’s Office of the Superintendent of Financial Institutions.
Increasing the CPP is an inefficient way of helping workers who were unable to save enough during their working years, since it would also boost deductions and payments to the highest earning workers and retirees, he says.
Lee says those who are raising alarms about savings-poor workers near retirement aren’t accounting for all the possible sources of income for retirees, including a combination of CPP and government retirement benefits, workplace pension payments, private investments and savings, and real estate value.
Lee dismisses the Conference Board of Canada survey, arguing people generally never feel that they have enough money to pay for their desired lifestyle, even if they are relatively high earners and savers.
Lee and Mathyssen agree that many seniors willingly “downsize” from the homes in which they raised their family, and buy or rent a less expensive home. Doing so can provide low-income seniors with an instant nest-egg from which to draw upon in retirement, Lee says.
But seniors shouldn’t be pushed out of their homes as their incomes dwindle and property taxes rise, says Mathyssen.
“I get calls all the time from seniors who are desperate to stay in their own house,” she says. For many retirees, the homes in which they raised their families have an irreplaceable sentimental value, she says.
The existing blend of CPP, government supplements, workplace pensions and private savings is working for Canadians, says Alexandre Laurin, an associate director of research at the C.D. Howe Institute, a right-leaning think tank based in Toronto.
However, Eng says that while the average assets of retired Canadians may look healthy on paper, the reality is about one-quarter of Canadians see a significant drop in their standard of living upon retirement. That doesn’t even include the poorest seniors who will continue to live on a low income in their senior years.
For many workers who have earned just enough to reach middle-class status, “the CPP is pretty much it,” says Mathyssen.
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