Tag: CPP

My Service Canada Account – Estimating your CPP retirement pension

Do you ever wonder how much you will receive from Canada Pension Plan and Old Age Security?  It’s a question that likely has entered more conversations in the last few years as public pensions have come under greater scrutiny.  

Knowing your public pension allows you to more effectively set your private savings goals and retirement spending expectations.  Of course CPP and OAS will always be subject to occasional modification, but such changes are almost always incremental in nature.  Accordingly, the best estimate of future entitlement is the current system, with the proviso to revisit periodically.

There are two linked government resources that enable you to use your own historic data and future intentions for this purpose.  This month’s article features CPP management with your My Service Canada Account. [Footnote]  Next month, we’ll see how that information is combined with OAS and private savings in the Canadian Retirement Income Calculator.

Accessing My Service Canada Account

For starters, sign-up.  

While the service is free, one must obtain password access by registering on the Service Canada website.  For security, an initial password is sent by Canada Post to your address on record with the government.  You will have a chance to confirm the address, so if it is incorrect then you can call and speak to someone, but otherwise it can be done online.

CPP earnings and contributions

In my case, I’m a decade or two away from starting CPP and OAS, so my personal interest is to take a peek at my CPP contribution history.

A table shows all calendar years in which you made contributions (ie., paid CPP premiums) and the amount of pensionable earnings upon which those were based.  There are notations in respective years where you were [B] below the basic exemption, contributing at the [M] maximum, [S] self-employed, and where a [CS] credit split with a spouse may have applied.  There is even a new notation for [P] post-retirement benefits, being the credit that applies beginning in 2012 for premium contributions made when receiving a retirement pension while continuing to work. 

If you want to obtain a printed official statement, you can order it online. On the other hand, if you disagree with the record then there are instructions as to necessary documentation and procedure you can take to correct any errors. 

Estimating monthly CPP benefits

Now here’s the fun part.  

With a couple clicks, you can get a quick estimate of your CPP retirement pension in current dollars if you were 65 and began your pension today.  Though this may be a simplistic way to express it, in fairness it is easier to understand than to show an indexed amount years or decades into the future.  Alternatives are also offered for retirement commencing early at 60 or late at 70, based on the respective 0.6% and 0.7% monthly adjustments that will be fully implemented by 2016. 

Of further practical reference are the figures for the CPP disability pension and related amounts for dependent children.  Finally (literally), there is a summary of the type and amounts available on death for lump sum payment, survivor spouse and dependent children.

If you want to go further to integrate the pension figure with other retirement savings and income sources, the site provides a hyperlink to the Canadian Retirement Income Calculator.  That’s next month’s column.

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[Footnote]: The service is also a central communications hub for applications, claims, monitoring and general information on Employment Insurance.  For this article however, the focus is on Canada Pension Plan.

Would increased CPP actually increase savings? – Some sobering thoughts

I vividly recall one summer session when my economics professor stopped mid-sentence, turned from the blackboard and locked a distant gaze out the window. “Ah, there it is,” he uttered in a longing fashion, then slowly turned back toward the handful of us in attendance.

You see, he and an old college mate had agreed anytime either was back at their alma mater, he would raise a cold one — or a warm one, being British — at the local pub. It was at that moment with chalk in hand that my prof had sensed he was being toasted. And with that, at his behest we adjourned to the patio of our own campus watering hole for the remainder of the day’s lesson so he could reciprocate.

True story. But apropos of what, you might ask?

Well, in the midst of reading yet another article on the condition of our retirement system, and specifically on the state of the Canada Pension Plan, I had my own ‘Ah’ moment. 

If and how to improve CPP

For some time now, and certainly since the 2009 release of the Retirement Income Adequacy Research papers, our pension and retirement system has been under the microscope. Whether this scrutiny arises out of a true crisis, or is merely coming to the fore due to the demographic truth about boomers breaking 65, this public dialogue will be with us for years and decades to come. 

In due course the CPP has garnered attention, both in terms of what it currently offers and what it may offer prospectively in response to any determined shortcomings. Chief among the issues under consideration are whether we’re saving adequately, investing effectively and living within our means, both before and during retirement. 

To show my colours, I’m firmly a fan of the CPP. It delivers forced savings, eliminates the necessity for investment decisions, and provides a guaranteed base level retirement income. To some this may smack of paternalism. And if our entire retirement system were so prescribed, I would agree wholeheartedly. In its current form, however, I believe it provides both individual and community benefits, and does so well within the borders of trampling on personal prerogative. 

But what about an expanded CPP? In the article I was reading, the author referred to CPP premium cost being shared equally between employers and employees. And that’s when it hit me: ‘Ah’ and I was back on that patio.

Incidence and payroll tax

Now I can’t say for certain what topic we drank to on that sunny afternoon, but the event was sufficiently memorable to remind me of tax incidence — the concept that a party who pays a tax may not be the one who bears its full cost. The true burden depends on elasticity of demand and supply, such that there may be a shift between parties based on relative economic power.

Carry this over to the employment context. It’s a longstanding debate whether payroll taxes imposed on employers may actually be borne partially or entirely by employees over the long term — the notion being that there may be a corresponding suppression of long-term wage increases. I leave it to economists whether, and to what degree, this may apply in our system generally, and in a given workplace specifically.

On the face of it, an expansion of the broad-based CPP intuitively appeals to a sense of fairness. It is not so clear, though, how the ultimate cost will be borne. Even if the net effect across the economy is neutral, the dynamics of each workplace will be varied. 

Indeed, it is conceivable for some employees that it will serve to invisibly siphon future pay raises over to CPP. That’s not necessarily a bad thing, just something to be understood. 

Me, I continue to root for CPP improvements as part of the solution, but remain open to sober reflection as the dialogue lingers.

Is the CPP a good deal? – A napkin-alysis

Over lunch with a colleague on a recent road trip he posed to me a simple, but ultimately very complex question, “Is the Canada Pension Plan a good deal?”

He wasn’t trying to debate social policy, public finance or macro-economic principles – we’d already chewed that fat during our advisor meetings while canvassing potential future OAS changes and actual current CPP retirement provision changes.  No, his focus was now squarely on the baseline CPP retirement pension itself, and whether it is a good financial proposition for a retiree. 

Putting on my lawyer’s cap I prefaced my comments with the standard ‘it depends on circumstances’, before reaching across the table for a napkin to scribble down my own 2 cents.

Quantum of the pension

To begin, what dollar amount of pension might one expect to receive?  

The 2012 maximum CPP retirement pension is about $11,840 annually, though the actual average pension as at October 2011 was about $6,512.  Using the maximum figure for argument’s sake, I asked, “To produce that income, how much do you think it would cost to purchase a single premium immediate annuity on a 65 year old?”  

As I look into this from time to time (verified once more in drafting this article), I offered that presently $100,000 would buy about $7,000 of annual income with zero years guaranteed.  Men would get a few hundred more, women a couple hundred less.  Grossing that up, it might cost our androgynous retiree about $170,000 to acquire the max CPP pension.  

Put another way, $170,000 is a rough proxy for the present value of the anticipated future pension payments, actuarially speaking.  Of course that’s understating the matter as it is based on a non-indexed annuity, but it will serve for the time being.

The quid pro quo: Past paid premiums

Continuing the case, we turn to an estimate of the present value of all past CPP premiums paid.  

To be entitled to the maximum pension, our increasingly theoretical retiree will need to have contributed maximum premiums for the maximum entitled years.  For simplicity, that would be the period from 18 to 65, less the low earnings dropout years, which just increased from 7 to 7.5 this year, and will settle at 8 in 2014.  So, that’s 47 minus 7.5, or 39.5 years.

The 2012 maximum employee-side premium is about $2,301, with the employer responsible for an equivalent figure.  While the premium rate is presently fixed at 4.95% (I will come back to this shortly), the annual cost is effectively indexed, so for these purposes we will use current premium as a stand-in for the present value of each previous year’s premium paid. 

Applying further rough math, the product of multiplying max years times current premium is about $90,000. 

Deal or no deal?

Thus in this simplistic sketch, a maximum pension retiree’s fortunes would appear to have almost doubled.  Proportionately that should apply at lesser pension levels, perhaps even more favourably at the lowest income levels as premiums are not due on the first $3,500 of income.

Returning to that premium cost, the actual rate was 1.8% from 1966-1986, rose 0.1% per year until 1997 when it was 3.0%, then stepped up from then until 2003 when it reached the current 4.95%.  So for a current retiree with premium cost having often been less than the current rate and future pension payments being indexed, further credence is lent to the CPP value proposition.

Add to that the availability of other features like the death benefit (modest though it may be), disability pension, children’s benefit and survivor benefits (both before and after retirement).  Beyond the inherent worth of each of these features, in combination they suggest that the zero guarantee assumption used in my annuity example is more than fair in most situations.

Still, conceding on the downside, people are not statistics and those of us with known lower life expectancies will have correspondingly lower pension receipt expectations.  And for those self-employed who paid both employer and employee premiums, the net result is unclear at best. 

As for my colleague I don’t know if he left the restaurant heartened or heartburned, but at least it gave him something to digest, other than lunch that is.