CANADA PENSION PLAN JUST ANOTHER GOVERNMENT PROGRAM PROMOTING FINANCIAL DISCRIMINATION OF SINGLES AND THE POOR
(These thoughts are purely the blunt, no nonsense personal opinions of the author about financial fairness and discrimination and are not intended to provide personal or financial advice).
Our last post discussed the financial discrimination of Old Age Security (OAS). This post discusses the financial discrimination of the Canada Pension Plan (CPP).
CPP is part of the Pillar 2 plan of Canada’s retirement income system for seniors. Some of the attributes of the plan are:
- Federal government and Provinces are joint stewards of the CPP
- Provides retirement, survivor, and disability benefits
- Universal coverage of all workers in all industries
- Employees and employers make equal contributions (4.95% each – 9.9% combined in 2015?) on earnings up to annual maximum of $54,900 (2016)
- Defined Benefit – up to 25% of the average wage
- Fully portable
- Inflation-indexed to CPI
- Actuarially sound for the next 75 years
- The maximum CPP benefit for 2016 is $1,092.50 per month.
Unfortunately, most Canadians do not realize that the average Canadian will not receive the maximum CPP on retirement. In fact, most will only receive about $643 per month of CPP maximum. Why is this so?
Jim Yiu from ‘Retire Happy’ in his article “How much will you get from Canada Pension Plan in Retirement?” states (words in italics are my words):
‘When planning for retirement, the first piece of advice given is not to plan on getting the maximum. When you look at the average payout of CPP, it’s just a little over $643 per month in 2016, which is a long way from the maximum. In other words, not everyone gets the maximum. At the most basic level, the amount you get from CPP depends on how much you put into CPP.
Why is it that so many people do not qualify for the maximum amount of CPP? The best way to answer that is to look at how you get the maximum retirement benefit. Eligibility to receive the maximum CPP benefit is based on meeting two criteria:
- Contributions – The first criteria is you must contribute into CPP for at least 83% of the time that you are eligible to contribute. Essentially, you are eligible to contribute to CPP from the age of 18 to 65, which is 47 years. 83% of 47 years is 39 years. Thus, the way to look at CPP is on a 39-point system. If you did not contribute into CPP for at least 39 years between the ages of 18 to 65, then you won’t get the maximum. If so, then you might get the maximum but there is another consideration.
- Amount of contributions – Every year you work and contribute to CPP between the age of 18 and 65, you add to your benefit. To qualify for the maximum, you must not only contribute to CPP for 39 years but you must also contribute ‘enough’ in each of those years. CPP uses something called the Yearly Maximum Pensionable Earnings (YMPE) to determine whether you contributed enough. (For 2016 the YMPE is $54,900 – EQUIVALENT TO ABOUT $25 PER HOUR).
Basically if you make less than $53,600 of income in 2015 ($54,900 in 2016), you will not contribute enough to CPP to qualify for a point on the 39-point system…..As you can see, it’s not easy to qualify for full CPP especially with the trend of people entering into the workplace later because of education and people retiring earlier. If you have 39 maximum years of contribution you’ll get the maximum CPP amount. If you have 20 maximum years of contributions you will get approximately half the maximum (you might get some partial credits for part years).
Planning your retirement needs and income requires some understanding of how much you will get from CPP. Many people either assume they will get the maximum or assume they will get nothing at all because they fear the benefit may not be there in the future. Both these assumptions have significant flaws. Take the time to personalize the planning by understanding how the CPP benefit is calculated and how much you will receive.’
Reasons why CPP is financially discriminatory to singles with low/moderate incomes and the poor:
- The YMPE 2016 salary to get maximum CPP benefits is $54,900 (up $1,300 from last year). If average annual hours of work equals 2,200 hours then YMPE salary will be approximately $25 per hour. Many singles and the poor do not have $25/hr. jobs. In addition politicians, government, and businesses generally refuse to increase the minimum wage or ensure a living wage for all Canadians. If the YMPE is increased by $1,300, why aren’t the wages increased by the same amount for the poor so they can also contribute more to CPP? Even those persons who work faithfully at full time jobs for forty years, but don’t have $25 per hour jobs will not receive full CPP benefits. (Is this really what they deserve after working faithfully for their country for forty years)? So who benefits most from CPP? It is the middle class and wealthy who have at least $25/hr. jobs and, therefore, are able to get full CPP benefits.
- Early retirement – who gets to retire early? It is generally the upper middle class and wealthy married or coupled family units because of the marital manna benefits they receive, high incomes and the net worth they have. In reality many of these families really do not need full CPP benefits. From personal experience of this blog author, some married or coupled spouses will say both spouses do not need to work when really both spouses should be working or because of their high income only need one spouse working. (To get full CPP benefits each Canadian born citizen needs to contribute into CPP for at least 39 years between the ages of 18 to 65. And, Canadians must not only contribute to CPP for 39 years but they must also contribute ‘enough’ to maximum of YMPE in each of these years).
- Marital manna benefits – Married or coupled family units have received many marital manna benefits that allows them to achieve more wealth than many singles and the poor. One such example is the Child Rearing Drop-out Benefit. CPP benefits may be increased for years that spouse did not generate income because of staying home to rear child from ages 1 to 6. This is not necessarily a bad thing in and of itself, but those who are more likely to be able to stay home for child rearing are those with healthy incomes.
- Perception of financial need – Many politicians, governments, and financial planners have misconceived perceptions that financial goals should be for Canadians to have equal or higher pension income than while working. In other words, if poor, it is okay to always be poor even in retirement. For middle class or wealthy they say the goal should be equal or more pension income than working income even with high net worth and assets. In reality, institutions like the OECD states less wealthy need 100% retirement income of working income, while wealthy need retirement incomes that are much less of working income. What is left out of these perceptions is quality of life. Equal or higher pension income than income while working for singles with low/moderate incomes and the poor especially if paying rent or mortgage in retirement often does not equal a good quality of life.
- Proposed enhancements to CPP contributions and benefits – Proposed enhancements where CPP retirement pensions will be higher if taken after age 65 and./or will be higher if person works past age 65 are very good things. However, it is likely that singles and the poor are not the ones who will be able to postpone receiving their CPP benefits, and it is also more likely that singles and the poor are the ones who will need to work longer. As for increasing CPP contributions now so that CPP benefits can be increased in the future, this generally is a good thing; however, the stress of having to contribute more will be more financially distressing for singles with low and moderate incomes and the poor rather than the middle class and the wealthy.
It seems to be more important for politicians and governments to ensure that upper-middle class and wealthy maintain their standard of living than it is to treat ever singles, early divorced singles, single parents and the poor fairly in benefits they receive (cpp).
Upside-down financial systems (upside-down) and marital manna benefits have created a nanny state where married/coupled persons want it all and once these benefits are in place, it is very difficult to eliminate them because of voter entitlement. Upper middle class and wealthy married/coupled persons have been made irresponsible by their own politicians and government. Many are not living an equal life style in their retirement, but a much better lifestyle. A further question is whether these programs will be financially sustainable because upper class and wealthy married or coupled family units have not contributed enough to pay for these benefits.
Much is required of all family units regardless of marital status to educate themselves on what their actual retirement income will be. If you don’t work, you won’t get CPP. You won’t get CPP if you don’t work. You won’t get CPP if you don’t make CPP contributions, for example, working ‘under the table’. (And, wouldn’t it be nice for parents to pass this financial information onto their children so that their children will also make wise financial decisions)! Much is required of financial planners to educate themselves on quality of life issues, not just equal or higher pension incomes. Much is required of politicians and governments to educate themselves on how financially discriminatory many of the pension benefits are and to make changes so that there is financial equality and fairness in distribution of pension benefits for every Canadian,not just middle class married or coupled family units and the wealthy.
(This blog is of a general nature about financial discrimination of individuals/singles. It is not intended to provide personal or financial advice).