CPP Benefit Enhancements: An Alternative to Private Plans and Pensions

Will the CPP be enough to provide security in retirement? That’s a big question for many who face higher premiums for the mandatory plan starting in January of 2019. But to get the most out of your CPP, it pays to get some professional advice.

For those with the greatest needs to supplement income in retirement, understand when to receive the CPP and how much it will be can be a mystery. Tax and financial advisors can help to get through the government to find the information and then project forward the expenses this money may be expected to cover: needs like food, clothing, drugs, transportation, utilities or wants, like vacation enhancements, all after taxes.

Should you work longer to contribute more? It’s also an important question, especially for those who don’t have the means to contribute to private plans and do not have employer pensions. Access to the enhanced CPP benefit provides them with a greater source of independence within a government-driven program. But when will the enhancements kick in?

In reviewing the data comparisons outlined by the C.D. Howe Institute, following are some key items to note based on the chart showing an income replacement objective of 60 percent if CPP is taken at 60/65/70:

• The CPP/QPP raises the percentage of income replacement considerably if delayed until age 70 based on the chart data. However, this is a general estimate, as each individual has different cash flow/income needs, and those needs can vary from year to year. Percentages often don’t present accurate information.

• The data comparison does show a reduced amount of total private savings required to meet the replacement rate objective if CPP is deferred, but that amount can be subjective for everyone based on how that money is invested (depending, for example, on asset allocation, rate of return). There should be further clarification on the structure of the private savings (for example, whether the funds are held in RRSP, TFSA, etc.) and the calculation of the after-tax amount.

The CPP Enhancements/Reform data referenced Year’s Maximum Pensionable Earnings (YMPE) for the calculations and the percentage of income replacement is based on that amount. There is an advantage to deferring CPP when YMPE has been reached for several years, as illustrated in the graphs; however, for many individuals (particularly the self-employed), the CPP has become more expensive to fund during the contributing years. A more in-depth analysis over the contributory phase should be done and a comparison made with the alternative of self-funding private plans to give us a more accurate perspective of the true value of the enhancements and the option for deferral. The forward-looking exercise of retirement planning for Canadians requires several supports. Most important is the support of financial professionals who are truly working for Canadians’ best interests and preparing them properly for their retirement years. Providing clients with the resources to make informed decisions customized to their circumstances is just as important as the payout enhancements and increased flexibility of the government benefit plans themselves.

This article is part two in a series regarding CPP Benefit Enhancements from Stefanie. Read part one, “Deferring Receipt of CPP: Is it the Right Call for Retirees?”
 

Stefanie Keller is the CEO of Stellar Wealth & Tax Solutions, an independent financial planning practice offering comprehensive financial and business planning and cross-border advisory services to individuals, professionals, entrepreneurs and snowbirds. ​​

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