A Quick Guide to the Latest CPP Enhancements for Millennials

Sep 26, 2016

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Are you a millennial? If so, you’re probably not spending too much time yet thinking about your retirement. In fact, it might be the very last thing on your mind while you begin building a career, paying off student loans, buying a car, finding a place to live, buying food…well, you get the picture.

We get it, there are still many miles to go before you retire. But that time will come regardless. So you’ll be glad to know that while you were working hard this summer paying off those loans and scanning car ads, the Federal Finance Minister and his provincial counterparts were meeting up to beef up and expand the Canada Pension Plan (CPP), one of the cornerstones of our retirement system. Although all working Canadians will benefit, your generation will be the first in line.

Here is a quick look at what it means to you and for that matter every Canadian worker.  As a millennial, you are in a unique position to learn from the mistakes of the generations who came before. You have time on your side, even if the finance minister doesn’t believe you know what to do with that time.

Assuming the new legislation passes as planned, starting in 2019 you will begin seeing increased deductions off your paycheque. We all will. And yes, the payoff is some time off, about 40 years, but when it comes anyone in the workforce will see their monthly retirement benefit increase from a 25% of eligible earnings to about one third of their eligible earnings.

There are a number of reasons why millennials and all Canadians shouldn’t be lulled into thinking the CPP enhancement will ensure adequate income during your retirement years.  Recent studies of current retirees as cohort has led to some identifiable risks.  The first is longevity. Couple this longer life span with millennials often delaying entry into the workforce, and you might have to fund a retirement that that could stretch 30 or even 40 years. This means that planning for life after work will take a lot more than an expanded CPP...just as it did for the current crop of retirees.

The other risk, and this applies again to anyone in the workforce, is employment interruption and periods of low income. These two factors hurt your CPP benefit because the payout is directly tied to how much you have worked and contributed to the plan. For example, the current maximum CPP benefit is $1092.50 per month. Yet the current average amount that is actually paid to today’s retirees is only $664.57. As we can see, lower income or periods of unemployment has a significant impact on your CPP retirement payout.

The third big risk, is the rising cost of health related expenses. Whether that is cost of the health insurance or the actual cost of medical care and medications, it means the same thing to someone on a fixed income – less money for other things.  As healthy as you are today, new studies on aging are telling us there are some significant risks that we will be spending a lot more on health related conditions as we enter our 60s and 70s. Now that we are living longer, what will that look like in our 80s and 90s?

So, given the current average monthly payout of the CPP, it’s pretty clear that it provides only a small portion of your retirement income needs. We can’t rely solely on government benefits. We need to save more. You need to save more. This summer’s CPP expansion is just a small help but it comes with a little discomfort if you are among the many young people just entering the workforce.

Perhaps surprisingly, some say the CPP enhancement may, in fact, hurt the savings rate of the very generation it’s designed to help. A number of studies, including one from Statistics Canada, points out that a higher CPP savings rate simply results in a lower private savings rate into programs such as RRSPs and TFSAs. In other words, the assumption is that there’s a finite dollar amount of savings and that total savings rates won’t go up.

Even so, this reshuffling results in CPP providing a greater share of your retirement income. Yet, while this may be true, the current crop of young workers’ often meager income is entirely consumed with basic living need. So higher taxes or contributions at such a stage of life will be a difficult pill to swallow.

Whether you are a millennial, Gen-X or even a late baby boomer, spare a thought or two for your planned lifestyle when you decide to stop working for income. Because without planning, the flow of income will eventually decline. And that’s the one thing that is clear.
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