While most Canadians will receive benefits from the Canada Pension Plan, a broader approach to investment is needed to ensure a comfortable retirement, especially for those who fall outside the umbrella of defined benefit plans.
The Canada Pension Plan is a government-backed pension program that provides an income to retirees, but because it can only pay up to a specific limit, it should really be seen as just one piece of your overall retirement planning strategy.
If you are working for the public sector, or for a very large employer in the private sector, you could have enough savings when you combine your CPP benefits with Old Age Security – especially if they supplement your company’s defined benefit plan and personal RRSPs.
It’s the people who are working in the private sector and don’t have a company pension plan who need to take more urgent action.
“Those people have to have a strategy in place, whether it’s through the Personal Pension Plan or through other techniques like using an insured retirement plan or a retirement compensation arrangement, or even a traditional RRSP,” said Jean-Pierre Laporte, a pension expert and the chief executive of Integris Pension Management Corp.
“There are many different products out there … that can be used to plan for retirement, but simply relying on CPP I think is extremely foolish, because while the CPP is actuarially on a sound footing … it’s just not enough money.”
The Canada Pension Plan pays a pension out to its members once they hit retirement age, usually at age 65, based on how much money they put into it over the years.
The maximum payout for the CPP (at retirement) was $1,065 per month in 2015, while Old Age Security pays about $565 per month. Anyone who’s 18 and older contributes a part of his or her income to the CPP by law.
“It’s funded mainly as a pay-as-you go system, so contributions made by you and I to a pension are then used the same day to pay pensions to pensioners, to roughly 80 per cent,” Laporte said.
“Twenty per cent is administered by the Canada Pension Plan Investment Board and invested in the Canadian economy and abroad, so there is a reserve that’s been building up since 1997 when the CPPIB was introduced.”
The Canada Pension Plan also includes a disability benefit few people know about. It allows you to start collecting a pension well before retirement if you become disabled and unable to work, as long as you’ve contributed enough over the years to qualify.
Some observers have been asking for changes to the contribution limits for years, including Laporte who eventually set up his own pension plan to help incorporated professionals save for retirement.
“The problem with the CPP, first of all, is that (the) maximum pensionable salary is not really realistic for a lot of higher earners, so they have to look elsewhere to create a pension,” Laporte said.
“The other problem is that if you die while in receipt of the CPP, it’s not like a traditional pension plan where the commuted value of all your contributions can then roll over to your spouse. You get a survivor pension, but there’s an overall cap. You don’t get the full value of those contributions.”
The Canadian government is currently in discussions to try to amend the CPP to address some of these shortcomings, including increasing the amount of money an individual can contribute to the CPP if he or she wishes to try to build up a bigger nest egg.
In Ontario, the provincial government has proposed its own provincial plan, the Ontario Retirement Pension Plan, which would supplement the CPP.
Quebec already has its own system in place, called the Quebec Pension Plan.
So what can a person do to ensure they have enough to retire on?
Laporte says the best bet is to find ways to save and invest for the type of retirement lifestyle you want, while the various levels of government and political parties work out what they want the government pensions themselves to look like.