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Retirement savings

January 07, 2019

Will the enhanced CPP be enough to live on?

Canada Pension Plan benefits have risen, but you’ll probably need more than CPP for a comfortable retirement. To get there, start saving now.

You might have heard that the Canada Pension Plan (CPP) has been changed to increase payouts to seniors. If you’re still working and making contributions to CPP in 2019, you’ll get more from the CPP when you retire. That’s definitely good news. But if you’re already retired, you won’t be affected. In any case, it’s important to think of the CPP as just one slice of your financial retirement pie — you need to consider more ways to save for the future.

The 3 big government retirement programs are CPP, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).

While CPP is run by the federal government, it’s really “the defined benefit plan you never thought you had,” says Blake Griffith, a Calgary-based Sun Life Financial advisor.1 In truth, only employers and employees pay into the plan, not Ottawa.

The federal government says it believes as many as 1.1 million Canadians aren’t saving enough for retirement, so starting Jan. 1, 2019, annual CPP contributions will increase gradually over seven years. But is it enough to help fund your retirement years? And exactly how much more are you contributing to CPP? Here’s a breakdown:

Maximum CPP benefit to rise by nearly half

Once fully in place, the CPP enhancement will increase the annual maximum CPP retirement benefit by about 50% over the current maximum benefit of $13,110. In today’s dollar terms, that’s an increase of close to $7,000, bringing the maximum benefit to nearly $20,000 per year.

The increase in the maximum amount of income covered by the CPP has also changed. Once the program is fully phased in, the maximum will have risen to $82,700 from $54,900, so those with higher incomes can earn CPP benefits on a bigger portion of their incomes.

How much more are you paying for CPP in 2019 and onward?

Wondering exactly how your CPP contributions work? Here’s the gist: You contribute a percentage of your pensionable earnings with every paycheque and your employer matches your contribution until you reach an annual cap. If you’re contributing to CPP as a self-employed individual, you have to pay the employer’s share as well as your own.

So with the new CPP increase in mind, how much more are you paying now? A lot of it depends on your income, but the total paid by employees and employers has risen this year from 9.9% to 10.2% of pensionable earnings per employee. This means that your share as an employee has increased from 4.95% to 5.10%.

By 2023, the contribution rate will have gradually risen to 11.9%. So, as an employee, you would contribute to half of those pensionable earnings — 5.95%, to be exact.

As an example, picture this: If you earn $54,900 a year, you will contribute about $6 more a month in 2019. By the end of the seven-year phase-in period, you’ll be contributing about $43 more per month.

Why CPP may not be enough for retirement

Canadians should remember that unlike the CPP, programs like OAS and GIS are funded out of general tax revenue. “Those, in theory, could be eliminated with a change in legislation,” says Griffith. “They’re not funded by employer/employee contributions.”

Still, saving “enough” is a tough row to hoe. Canadians are living longer, many defined benefit employee pension plans are gone, returns are harder to get on investments and our debt load is at an all-time high.

Griffith encourages clients to sit down and look at what they are currently spending on an after-tax basis, think about what their needs are going to be in retirement, then compare that with the $20,000 enhanced CPP benefit.

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“I do in excess of 100 financial plans a year for people coming into retirement and I would say the average retirement budget we see is around $4,500 to $5,000 a month,” says Griffith. “If you use that as a benchmark, CPP — even with these enhancements — won’t meet even half of that needed retirement income, because that $20,000 is also a pre-tax figure and CPP is taxable.” That’s also assuming you’re eligible for the maximum benefit — which many Canadians are not.

Start saving for retirement early

Most people start to think about retirement when they turn 50 or so, but Griffith says this is a task people should be concentrating on from the very first day of their very first job.

“If you look at investing just $100 a month over your working career of 40 years, that could grow to over $250,000 by the time you’re 65. Now if we can assume that you haven’t done a retirement plan and figured out how much you need to save and you haven’t contributed that $100 a month, that could mean that you would have a shortfall at retirement of $250,000.”

If you wait until age 50 or 55 to start thinking about retirement, there’s really not enough time to make up that lost amount, so many Canadians will have to make do with a lower retirement income or work longer — despite the CPP increases.

A successful retirement needs planning ahead of time to estimate how long you have to work before you can retire comfortably. The time to start thinking about it is now.

  • Need help with your retirement savings plan? An advisor can help you review your options and work with you to create a solid financial plan that suits your goals. Find an advisor near you today

1Blake Griffith,CFP, BAFS, Griffith & Associates, Financial & Estate Planning Services Ltd., Sun Life Financial advisor

 Mutual funds offered by Sun Life Financial Investment Services (Canada) Inc. 
Sun Life Assurance Company of Canada is a member of the Sun Life Financial group of companies.

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