By Sandra Mann, MBA Financial Services, CPA, CGA, FPSC Level 1™
I’m sure you’ve heard by now that the Canada Pension Plan (CPP) is set for expansion beginning in 2019, but you may be wondering how the changes will impact how you manage your money today as well as how it will affect your retirement.
The changing face of work in Canada
When CPP was introduced in 1965, it was meant to be supplemental retirement income to bolster workplace pensions and personal retirement savings and investments. That intention hasn’t changed. What has changed is the Canadian “workscape.”
Working 30 years for the same company is not likely (or even desirable) for many people at the start of their careers. Climbing one corporate ladder is less common than seeking new opportunities at different companies. (I myself left a traditional financial services position for the fresh challenge offered by Money Coaches Canada). Many Canadians change careers completely, some go back to school or start their own businesses. There is no defined path. Even those who decide to build a dedicated career with one employer are not immune to lay-offs and decreasing pensions.
With less retirement income likely to come from a generous company pension, even more onus is back on Canadians to ensure they are putting enough away for their future; a future that will also likely be 5 to 10 years longer than their grandparents’ golden years.
Saving for retirement an increasing weight on Canadians’ income
Financial strategists and economy watchers have been saying for many years that the increased burden of retirement savings on the middle class was getting too heavy and I agree.
The clients I work with are high-earning Canadians that have demands on their money at every turn: childcare and children’s activities, dependent elderly parents, children with special needs, alimony, mortgages, insurance, high income and property taxes, soaring food costs and fluctuating gas prices. On top of all that they are often trying to save for their children’s education and their own retirement.
So when it all seems like too much, and they need to find places to cut, retirement saving is often the first area to be reduced. In our thirties and early forties, while in the throes of building a career and raising kids, 65 seems incredibly far off. The plan is usually to put their resources on something more immediate, just for a short time, and when “things” settle down, they will double down and catch up. It’s an idea that rarely works, because “things” never settle down, “things” just change from one pressing priority to another.
An idea whose time has come
The idea of expanding CPP to lessen the burden on Canadians has been in and out of the financial news since around 2009. The idea became an actual plan on June 20th, with the support of Ottawa and eight of the 10 provinces.
So here are the changes as reported by The Canadian Press:
- Increasing the income replacement rate to one-third from one-quarter, meaning the maximum CPP benefit will be about $17,478, instead of about $13,000
- Increasing premiums on employers and employees by 1%, meaning you could see up to $408 more coming off your paycheque each year
- Increased premiums will be phased in over seven years, starting in 2019
- The maximum amount of income subject to CPP will be $82,700 (14% increase)
- Expanding the refundable tax credit known as the federal working income tax benefit, to help low-income Canadians offset the increase in premiums
- New portion of employee contributions to CPP will be tax deductible (not a tax credit)
If you are fairly close to retirement, these changes won’t actually have much impact on your contributions or benefits. The people who will benefit the most are young Canadians at the start of their careers. They will contribute the longest at the higher rate and reap the most benefit at retirement.
Those in their 30’s and 40’s will probably feel the biggest pinch from the higher contributions, as they tend to have the most demands on their funds already. But if that’s where you are, don’t despair, being forced to save in the years when it would be easy to put it off is a good thing.
An opportunity to reevaluate on your goals
What I like about this plan is that it will have a positive impact on Canadians and their future; so often financial news around retirement is filled with gloom and dire warnings. That said, even this good news doesn’t excuse you from planning and saving on your own. CPP is still only a supplemental retirement income source. I’m hoping people will be encouraged by the expansion to take a fresh look at their own plan.
If you’re wondering what the CPP expansion means to you and how it will affect your cash flow now and in the future, seize the moment to create a financial plan that balances your immediate needs with your future needs and dreams.
The support and accountability that comes with working with a professional Money Coach makes goal setting and planning faster and less stressful than doing it on your own. Money Coaching informs your decisions and gives you peace-of-mind about your future.