Royce Shook

4 years ago · 2 min. reading time · visibility 0 ·

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Liveable Wage in retirement

Richard Thaler, who won the Nobel Prize suggests that employers should use the opt-out option rather than the current opt-in option to help employees invest for retirement. This is a good idea and one that the Canadian government follows with its pension plan, the Canadian Pension Plan (CPP). Everyone in Canada who works for another person has to pay into the Pension Plan, there is no opt-out clause. The Canada Pension Plan started in 1965.

The CPP was a response to growing poverty among retired Canadians. The aim of the CPP was to cover 25 percent of a worker’s average lifetime earnings, up to a stated ceiling on earnings covered. The CPP was originally financed entirely by payroll taxes (or contributions) levied on employers, employees and the self-employed. Benefits depended on current contributions.

The CPP now earns investment income, along with payroll contributions, which are split equally between employers and employees, with the self-employed paying the full rate. The average annual CPP pension received by a retiring 65-year-old person at the end of 2016 was $7,728 – versus a possible maximum of $13,368. 

Plan participants can opt to start receiving their pension anytime between the ages of 60 and 70, with the annual pension amount adjusted up or down on an actuarially fair basis. The Plan also features an array of ancillary benefits for survivors, for disability and for death. The employer and the employee investment in the Plan at the end of 2016 was 9.9 percent of pay (split 50-50) on annual earnings between $3,500 and the maximum eligible earnings cap of $54,900.

In an earlier post, I suggested that the Financial Planning Industry would like us to invest about 15% of our income toward saving for retirement. Saving this amount is very difficult for young workers or even workers in their 40’s. However, if we recognize that we are already saving about 10% of our income through the Canada Pension Plan, then saving another 5% may not be difficult for some. For others, the idea of saving more is still something they cannot do on their income.

In Canada, there has been a movement to increase the amount of money Canadians save in their Canada Pension Plan, by raising the amount paid by the employer and the employee. If the rate was raised by 2.5% for each this would bring the Canadian worker to the 15% mark and would provide more income at retirement. The government could also raise the eligible earning cap from $54,900 to $75, 000. 

In Canada, every person no matter how rich or poor is entitled to receive an Old Age Security (OAS) check every month, at age 65. The amount of this check is $ 570.52, However, if you earn over $ $73,757 a year, the government starts to clawback (reduce) the amount you receive every month. Once you earn $118,000 a year you receive no OAS.  If the workers of Canada had more money from their CPP when they retired, the government could reduce the clawback ceiling for the OAS, from about $118,00 to a more equitable amount and most seniors would be better off than they are with the current system.

By adding more to CPP and reducing OAS clawback, this the government would have more money to give to those who did not work and should receive a pension. Some of the provinces in Canada are starting to look at the idea of a livable wage instead of paying welfare. This idea is normally seen as one that would affect young and middle-aged individuals and families, who are now on some sort of welfare. Moving toward the idea of a livable wage is a good idea, but it should also be carried into retirement for those who did not work, could not work or chose not to work, so we do not go back to high levels of poverty for seniors.


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Royce Shook

4 years ago #2

Hi Brian, no opt-out unless you are self-employed and then you can opt-in but if you do, you pay both your share and the employers share. I don't trust the government in most things, but the CPP is controlled by an independent board and they seem to be doing a good job. I agree with you that there will be another big financial fiasco and we should all take steps to protect ourselves.

Royce Shook

4 years ago #1

No, Brian, I reject your assessment of what happens in Canada, the government does not steal any of your salary, we put a portion of our income into a retirement savings plan, which is matched by your employer (some may see that has unfair for the employer, I don't) after you turn 60 you can start to collect a retirement income. The longer you wait to collect the more income you collect. Since most people, do not save for retirement if left to their own resources, the CPP works as a forced savings plan for Canadian workers. Some would argue that they could do better investing their own money, but the history of the CPP plan shows that it has outperformed most private retirement plans, so it is a very unusual and competent investor that could do better than the professionals who run this plan. The other issue that comes up is that some people might argue that if you don't save for your own retirement, you deserve to be broke and end up on the street. Luckily most Canadians reject that view, and that is why we have the CPP for those who work, and for those that could not or did not work we have the Old Age Security which is about $500 a month, and if this is your only income when you retire, a person qualifies for a Guaranteed Income Supplement of about another $800 a month. We pay taxes to support this program, which most Canadians support. Taxes well spent and forced savings through the Canada Pension Plan to have a reasonable living in retirement. If you want more income in retirement then you can add to your retirement savings by using a Registered Retirement Savings Program or use a not-registered plan.

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