The Increasing Reliance on Public Pensions: Things Have Changed

Things have changed for Canadians in their pre-retirement planning period.  High interest, inflation and consumer debt are eroding away “savings room” for private savings, and longevity risk is increasing.  As a result, preserving access to indexed public pensions – the CPP and the OAS - is now more important than ever in retirement income planning.  Doing so is complex. That’s why, well informed tax and financial advisors can add significant value.       

The Backdrop.  While Statistics Canada reports that over 6.7 million Canadians are active members of a registered pension plan (RPP) at work, a startling statistic was recently released by the Healthcare of Ontario Pension Plan: three-quarters of Canadian adults aged 55 to 64 have $100,000 or less in savings and 44 per cent have less than $5,000.

Canadians are worried about this, and that’s exactly why pre-retirement planning must be a centre focus this tax season, especially for taxpayers who don’t have a workplace pension.  Consider this survey by the Canada Pension Plan Investment Board and Innovative Research Group (November 2023);   more than half of survey respondents (52%) are counting on the CPP to be their main source of income in retirement. 

The same survey notes:  “ . . .the CPP is financially sustainable for at least the next 75 years based on current projections. . .(meaning) more than 21 million working and retired Canadians (can count on it).

But in a country with over 30 million tax filers, that is not everyone.  The survey also found:

• 62% fear running out of money after retiring
• 53% feel anxiety about making the wrong financial decisions
• 25% are very stressed about retirement planning
• 53% don’t know how much money they’ll need to retire
• 45% have a financial plan in place
• 25% set money aside from every pay cheque for retirement

The issue is less stressful for low-income households.  That’s because low-income households do not change spending patterns much in retirement; most of their income is spent on non-discretionary items. Here, the OAS & CPP are critical supports which help to achieve a larger proportion of pre-retirement income than for middle or upper-income earners.

Retirement income readiness, including full access to OAS and CPP, is a more important issue for middle and upper income families. Preserving the OAS is becoming more critical as a supplementary retirement income source and a hedge against inflation. From a planning perspective, managing income levels and the income mix itself, to avoid the OAS clawback, is increasingly important.

Maximum monthly benefits and income tested-thresholds. At the time of writing, the monthly OAS benefit ranged from just over $700 for those age 65 to 74 to just under $800 for those 75.  Those who postpone their OAS to age 70 will receive 36% more. 

Maximum payments and income thresholds

The Ideal Client.  Narrowing the opportunity down further, managing the income-mix in retirement planning is critical for those who have no workplace pensions, which is the majority, according to a report by the Benefits and Pension Monitor:

“While approximately 86 per cent of public sector workers have a workplace pension, only roughly 24 per cent of private sector workers do. In total, about two-thirds of Canadian workers have no workplace pension at all.”

Anticipating the amount of the OAS and CPP benefits ultimately receivable, and taking advantage of all opportunities to maximize and preserve them, can help you better understand the proportional role these benefits play against five primary determinants for retirement readiness: 

• Target longevity period;
• Earnings, unemployment periods and pension contribution history;
• Combination of income sources available;
• Final after-tax, inflation-adjusted target income projected to be available in retirement; and
• What actual retirement expenditures will be.

Make A Difference.  The most impactful way to add value in an advisor-client relationship, is the degree to anticipate and proactively plan with private sector workers and those self-employed who do not have access to a  workplace pension.  It can help them achieve financial peace of mind more quickly and as a result, live a more worry-free retirement.

Excerpted from the Knowledge Bureau’s Tax Efficient Retirement Income Planning Course, part of the DMA™ Program Curriculum. Take a risk-free trial and Program Orientation!