On the Road to Pension Poverty?

Russell Wangersky of The Chronicle Herald reports, On the road to pension poverty:

So the New Year ticked in and, in the process, your paycheque changed. OK, it probably changed in a couple of ways, but I’m most interested in one change: a small increase in premiums for the Canada Pension Plan (CPP).

If no one said anything about it, probably only a handful of people would have said, “Hey, wait a minute” and gotten on the phone to whoever in payroll probably spent a good hunk of their Christmas rejigging the numbers for the first payroll of the year.

It’s not very much.

If you’re making $53,900, it means you’ll see an increase of about $81 a year in what you pay into the CPP — or roughly $3 on every biweekly paycheque.

But it’s a good move, because it’s a reaction to help those without company or government pensions, but it’s also going to be too little, too late for a cohort of pension impoverished Canadians. You’ll pay $3 more, and your employer will pay $3 more — and that will increase through the next passel of years to make the CPP better for all.

But if it were up to me, it would be more money from employees, and even more from employers.

I’ll get to why in a minute.

The increased payments don’t really show up as increased benefits for pensioners until 2065.

And I know, I sound like a broken record on this.

But to me, what’s going to happen in the very near future — the next 15 to 20 years — is a slow-moving catastrophe of elder poverty.

Right now, the newest Statistics Canada numbers — and they’re from 2016 — show that just 37.5 per cent of Canadian workers have a pension plan. That’s not a good plan, a reasonable plan, or a gold-plated plan — it’s any plan whatsoever. And that’s all employees, including the subset of provincial and federal governments, the post office, police departments, soldiers, sailors and military pilots who not only have pension plans, but have decidedly jammy ones.

Public sector employees make up about 20 per cent of the country’s workers, so ugly rough math would suggest that, out of the remaining 80 per cent, around one in five employees has a pension plan.

That’s because one of the great steps forward for the world’s admirals of industry has been to get rid of messy things like pensions.

I know that there are plenty of people who have seized the bull market by the horns and have strategically made the sorts of pension savings they should have as corporate Canada bailed out of pensions. (And made a laughing stock of that briefly trendy concept that companies were a big happy family that cared about their employees. Big happy families don’t generally let the Old-Os freeze quietly in the dark with no dinner.)

As corporate Canada skipped out — of defined benefit plans first, and often all pension plans as they moved to more part-time, gig-based and contract employees — big companies made big money.

That was the time for the federal government to step in and collect considerably larger CPP premiums from both employers and employees — but also more from employers who were stepping away from pension plans to bolster corporate financial results.

As it is, the new premiums — other, larger ones that are already scheduled to follow in future years — will help workers, especially young workers starting out.

But there’s going to be a black hole of people who will have to find ways to make a living, even if it means trying to stay on the job long after they might otherwise retire.

But relax, people. At least pensions are still de rigueur at the top executive level.

I sent this article to Malcolm Hamilton, a Senior Fellow with the CD Howe Institute and a retired pension actuary who spent 33 years at Mercer where he advised large pension plans in both the public and private sectors.

Malcolm is very sharp and he really knows his stuff. Along with Philip Cross, the former chief economist at Statistics Canada, he recently exposed the dirty secret behind Canada's large pensions.

Anyway, Malcolm's thoughts on the article were straightforward:

"We were told that government pensions must be increased because two thirds of the workforce had no workplace pension. So we increased the CPP. However, since we don't consider the CPP a workplace pension, increasing it doesn't alter the fact that two thirds of Canadians don't have workplace pensions. So people demand an additional increase in the CPP even though this can't possibly solve their imaginary coverage problem. And so it goes."

Malcolm and I also exchanged some thoughts on this Tangerine article written by Caroline Cakebread on why the Canada Pension Plan shouldn't be your only plan:

You might think that the Canada Pension Plan (CPP) is an actual "pension plan" – after all, that's what it's called. But if you're relying on government benefits like the CPP to fund your retirement, then you probably need to rethink that plan.

Can You Live on Your CPP Payments? Probably Not

The maximum CPP benefit you can earn is just $1,134.14 a month. Could you live on that? Probably not. And the truth is that most people don't contribute enough to earn the maximum, especially if they've spent time in school, taken time off to raise kids, or if they're self-employed. In that case, the average payment is more like $666.56 a month – not even close to what most people need to live in retirement.

You'll also probably be eligible for Old Age Security (OAS) payments of up to a maximum of $596 a month – add that to CPP, and you're doing better. But it still won't likely be everything you need. 

CPP is One Piece of the Retirement Puzzle

This isn't to say that government benefits like CPP and OAS shouldn't be part of your retirement plan – they should definitely factor in. But they're only meant to be one part of a bigger plan – one that balances government benefits, personal savings, and if you're lucky enough to have one, a workplace pension plan.

Given that only 38% of Canadian workers are covered by a pension at work, the pressure is on to make sure you're independently saving as much as you can for retirement. The good news is that the government has a few great tools to help you figure out how much you need and to help you save. 

Three Tools to Help You Plan for Retirement:

The Canadian Retirement Income Calculator: This tool from the Canadian Government helps you figure out how much CPP/OAS you have coming to you in retirement, and how it fits with your other savings. Gather your CPP statement of contributions and other financial information and allot some time to go through the whole thing.

Retirement Savings Plan: RSPs are key retirement savings tools for Canadians. Contributions are tax deductible, which helps you reduce the amount of tax you pay. And you don't pay tax on earnings in your RSP until you withdraw from the plan.

Tax-Free Savings Account: As long as you stay within your contribution limits, funds contributed to your TFSA grow and can be withdrawn tax-free. It's a great way to save and make sure that capital gains, investment income, and interest all go back into your pocket when you retire.

Take Advantage of Every Tool You Have

So even though the Canadian Government won't pay your bills when you retire, they do make it easier for you to save on your own. Take advantage of everything available and make sure you're fully prepared for retirement.

What exactly does the Canadian government pay out? The Tangerine article covers it well.

John Archer, a Portfolio Manager and Wealth Advisor with RBC Dominion Securities in Montreal, also wrote a special to the Montreal Gazette, Government pensions: What Montrealers can expect and when:

With 2018 having come to a rather chaotic end and 2019 looking like it may be filled with lots of political drama as well, there is one thing many Canadians can depend on — their government pensions. Here are the details of what amounts pensioners might expect during the coming year as well as the payment dates.

Recipients of the Quebec Pension Plan (QPP) (retirement, disability, orphan’s, surviving spouse’s pensions) who have signed up for direct deposits can generally expect to receive their payments on the last working day of each month. In 2019, these dates will be Jan. 31, Feb. 28, March 29, April 30, May 31, June 28, July 31, Aug. 30, Sept. 30, Oct. 31, Nov. 29 and Dec. 30.

The maximum monthly amounts for those applying for QPP benefits beginning in 2019 will be $1,154.58 for those 65 years of age, $738.93 for those 60 years of age (64 per cent of the maximum QPP pension at age 65) or $1,639.50 for those 70 years of age (142% of the maximum QPP pension at age 65). Please note that for those who began receiving QPP before 2019, they may not be entitled to the maximum 2019 amounts because of how QPP is indexed. Also, not everyone is entitled to the maximum QPP benefit.

Retraite Québec has a calculator on their website for those who wish to estimate what their maximum QPP benefits might be if they were to apply now.

The maximum monthly surviving spouse’s pension for those between ages 45 and 64 will be $931.43. For those ages 65 or over, they can receive up to $696.15 per month. If you are already receiving a retirement pension, you will be paid a combined pension subject to a maximum amount that might not be equal to the sum of both the survivor’s pension and the retirement pension. As a result, the amount of your surviving spouse’s pension could be reduced.

It should be noted that QPP benefits are taxable. Quebec residents who would like more information about these benefits can call Retraite Québec at 514-873-2433 or can apply for the benefits online.

For those who receive pension benefits under the federal Old Age Security (OAS) program, those payments can be automatically deposited into bank accounts, typically on the third-from-last banking day of the month. In 2019, these dates will be Jan. 29, Feb. 26, March 27, April 26, May 29, June 26, July 29, Aug. 28, Sept. 26, Oct. 29, Nov. 27 and Dec. 20.

The OAS pension is a monthly benefit available, if applied for, to most Canadians 65 years of age or older who meet certain legal status and residence requirements. Individuals are allowed to postpone receiving their OAS payments for up to five years. Those who take their OAS at a later time will receive a higher OAS payment.

To qualify for an Old Age Security pension, in addition to being age 65 or older, you must also be a Canadian citizen or legal resident of Canada on the day preceding the application’s approval or, if no longer living in Canada, must have been a Canadian or legal resident of Canada on the day preceding the day you stopped living in Canada. Furthermore, if you are a resident of Canada at the time of application, you must have lived in Canada for at least 10 years after turning age 18. OAS applicants living outside of Canada must have lived in Canada for at least 20 years after turning age 18.

If one is not covered by either of these scenarios, that person might still qualify for some type of pension, since Canada has social security agreements with many countries. For more information on OAS, you can call Service Canada at 1-800-277-9914 or consult the Government of Canada website.

Malcolm Hamilton and I discussed these figures so that I can understand what all the fuss about pension poverty really is. Malcolm shared this with me:

It's a little more complicated than that.

A retired person with no savings, no employment income and no CPP pension will receive about $1500 per month from OAS and GIS. A couple will receive about $2300. They will pay no income tax. The $1500 income is similar to the take home pay for a full time minimum wage worker. To me, this is more than fair.

Someone who works their whole life and retires with the maximum CPP benefit - $1130 per month - will receive more. Because they collect $1130 from the CPP they will lose about $710 of their GIS benefit, leaving them with a pension equal to $1500 + $1130 - $710 = $1920 per month. For a married couple both of whom collect maximum CPP benefits, the monthly pension will be $2300 + 2 x $1130 - $1100 = $3460.

Once the CPP expansion matures (40 years from now), the CPP maximum benefits will increase from $1130 to $1650. The combined CPP, OAS and GIS benefits will then be $1500 + $1650 - $900 = $2250 for a single person and $2300 + 2 x 1650 - $1100 = $4500 for a married couple. The income required to qualify for maximum CPP benefits under the new CPP will be $64,000, not $56,000. At this income level, I believe that government pensions will provide about 80% of what someone needs to maintain their standard of living after retirement.

All of these numbers are approximate.

This is why I feel that pension poverty is an exaggerated concern.

I appreciate Malcolm's insights because I remember a few years ago, I attended a conference in Ottawa where I saw former Quebec Premier Jean Charest and Henri-Paul Rousseau, the former President and CEO of the Caisse.

At that conference, there was an economist from the University of Calgary who said that with OAS and GIS, enhancing the CPP might be detrimental to low income Canadians. I wish I had more details but I can't remember when I went, it's been a while now.

Anyway, the point that Malcolm is trying to make is don't believe everything you read on pension poverty.

Now, to be fair, Caroline Cakebread's article mentions something important, namely, the truth is that most people don't contribute enough to earn the maximum CPP benefit, especially if they've spent time in school, taken time off to raise kids, or if they're self-employed.

Pension poverty does exist and it discriminates based on gender and employment status. There are many single elderly women and men with no workplace pension who are going to experience a very rough patch during their retirement years because they didn't contribute enough to earn maximum CPP benefits.

They won't be destitute but they definitely won't be living the standard of living they were accustomed to during their working years.

All this to say that more needs to be done. In my last comment on my Outlook 2019, I stated the following:

[...] one valuable lesson of 2018 which HOOPP understands well is the value of a good pension. There are healthy debates on the dirty secret behind Canada's pensions but I truly believe that we are entering a new era where more and more people all over the world are going to want the government to step in to bolster retirement policy so everyone has access to a well-governed defined-benefit plan they can count on.

In fact, I recently had a phone call with James Pierlot and Catherine Marsh of Blue Pier, Canada's first and only fully outsourced, customizable and scalable pension solution, and stated flat out: "It's time we treat retirement policy and pensions the same way we treat healthcare."

They both agreed and also agreed with me that while enhancing the CPP is a great idea, it's simply not enough, more needs to be done so all Canadians can retire in dignity and security (I'm sure some will disagree with us).

I do believe in well-governed defined-benefit plans which adopt a shared-risk model and I'd like to see more people in the private sector have access to them.

This way, the road to pension poverty can become a thing of the past. In the meantime, take the time to read about how CPPIB will be managing your additional CPP contributions here.

Below, South Korea has more elderly citizens living in poverty than any other developed nation. Kathy Novak reports on the reasons for this growing problem.

Also, inside South Korea's elderly crime wave. Poverty, social isolation and an aging population are to blame for a dramatic increase in the number of crimes committed by older South Koreans. CNN's Paula Hancocks visits one facility that houses elderly inmates.

I mention this because I saw something on LinkedIn that horrified me and wondered how long before the rest of the world goes down South Korea's path? This is exactly what we want to avoid and we should treat all our citizens, especially the most vulnerable, with the respect and dignity they deserve.