Pension changes for the better?

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This article was published 03/06/2023 (876 days ago), so information in it may no longer be current.

The times are a changin’, and so too are the foundations for many Canadians’ retirement.

Those being CPP and OAS.

The Canada Pension Plan and Old Age Security—as they’re formally known—have been undergoing plenty of modifications over the last few years, from the ability to delay OAS for larger payments down the road to the increase in CPP contributions to boost its payout once retired.

Most recently, OAS increased its payout to Canadians 75 and older by 10 per cent.

And for CPP, contributions have been rising since 2019 at first by 0.3 percentage points per year, then rising to 0.4 percentage points in 2021, and 0.5 percentage points in 2022 and this year.

That brings the contribution from 4.95 per cent of employed Canadians’ earnings to nearly 5.95 per cent.

With their employers’ portion, CPP contributions are now 11.9 per cent of earnings on a maximum of $66,000 of annual income.

Next year, there will be another increase for higher income earners. On income over the previous maximum threshold ($66,000 plus inflation), earners will have to contribute eight per cent of (employee and employer combined) wages up to $79,000 of annual income.

All of these changes can make your head spin, but the overall news is modestly good for most Canadians, says financial planners.

“Are these changes going to have a huge impact on most people’s retirement income?” says certified financial planner (CFP) Matt Morrish with BlueShore Financial, a credit union based in North Vancouver.

“No, but they’re still positive changes nonetheless.”

Recent changes aside, CPP and OAS offer a key benefit beside providing guaranteed income for life. They’re indexed to inflation—with CPP increasing annually (6.5 per cent in 2023) and OAS quarterly (1.1 per cent every three months until July).

“That’s a really good starting point for many Canadians—though not every single Canadian as not everyone is contributing to CPP and eligible to receive it,” he says.

With respect to the 10 per cent increase — or about $70 a month — to OAS for Canadians aged 75 and over, it will offer help to those on tight budgets, says Ian Wood, CFP and investment counsellor with Cardinal Capital Management in Winnipeg.

“For people with higher incomes, it may not matter much to them because it’s likely not a significant part of their budget.”

In fact, those older seniors with higher income are unlikely to benefit as their OAS benefits are clawed back through the recovery tax. (The benefit is reduced when earnings exceed $86,912 of annual net income.)

“So, that might mean for some there will be a focus on planning with the recovery tax in mind, drawing from savings and more tax-efficient income sources in the best way possible to reduce or even eliminate it,” Wood says.

“Then again, that’s not always possible.”

While the OAS boost helps older Canadians today, CPP changes are more likely to benefit younger workers later on.

“For people early in their working years, it (the higher contribution rate) will have a positive benefit because it’s forced savings,” Morrish says. “It affects their cash flow today because they are required to pay more into it.”

But it also means they will have more guaranteed income when they become seniors, he says.

And the small bump in contributions adds up over time.

According to the federal government, the contribution increases over a 40-year career translate to a 50 per cent rise in CPP benefit.

In today’s dollars, that would be nearly $2,000 a month compared with the current maximum benefit of about $1,300 today.

Of course, another way to juice pension benefits is to delay taking them until age 70 — now the preferred advice from financial planners.

“Typically, the advice is that unless you’re sick (with a shortened lifespan expectancy) or you really need the income, you’re better off to postpone it until age 70,” Wood says.

OAS increases by 0.6 per cent per month delayed. If you wait until age 70, your benefit will increase 36 per cent. Delaying CPP offers pensioners even more, 0.7 per cent per month, or a 42 per cent boost if delayed until age 70.

As well, it’s best to delay taking CPP until at least age 65 if you’re still working because you still have to contribute to the plan up to that age, and the benefit will only grow, says Doug Nelson, CFP and portfolio manager with Nelson Financial Planning Corporation in Winnipeg, and author of Master Your Retirement.

“For every year between 60 and 65, your benefit amount is guaranteed to increase by over eight per cent per year,” he says, referring to the heightened benefit of delaying receipt over taking CPP early. “Where else can you get a guaranteed return like that?”

While delaying taking both pensions is recommended whenever possible, and the changes to these plans will increase the guaranteed income folks will receive in retirement, OAS and CPP are never going to be game changers for most retired Canadians.

“Instead, I would emphasize the important role of the TFSA as the great equalizer,” Nelson says.

The Tax-Free Savings Account offers not only tax-free growth of investments inside the account. Withdrawals are also tax-free and do not affect income-tested benefits like OAS and the Guaranteed Income Supplement (GIS) for low-income seniors.

Of course, decisions around TFSAs, OAS, CPP and other income sources best require a fair bit of planning ahead of time, Morrish says.

“Because everyone’s situation is different, these decisions should be made in the context of a financial plan to provide clarity on whether you need to take these pensions early, or if you have the means to delay them for that boost.”