CPP and OAS

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
NOVICE99
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Re: CPP and OAS

Post by NOVICE99 »

Here I am living frugally with my family, and now will subsidise those who haven't saved for their retirement? I reckon they should increase the TFSA to $20k a year and stop messing with the CPP. There's a difference between helping the poor and helping the squanderers! E.g. if due to low education, ill health I've only managed to earn $20k a year and saved $50k for my retirement - vs I've been earning $80k+ every year and saved $50k for my retirement ...?
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Re: CPP and OAS

Post by brucecohen »

marty123 wrote: If the mega-CPP invests disproportionally in Canada, that could become the case. Practically, it could (and does) invest outside the country as well.
CPP Investment Board is currently focused almost entirely on investing outside of Canada. Has been ever since they embraced active investing five(?) years ago. This is partly driven by recognition that CPP's design calls for 75% "pay as you go funding" with investment portfolio income covering no more than 25% of liabilities. The PAYGO funding comes from employer-employee contributions and is thus heavily dependent on the Canadian economy.
2. the mega-CPP would become so large that it could move domestic markets
That's already the case. The CPP Fund is now the largest single-purpose capital pool in Canada.

Regarding comments by others above:
I don't see how there can be a retirement funding solution for spendthrift boomers now in mid-40s and above. They lack the time. Any CPP change should be properly funded on an actuarial basis. That means enhanced CPP would be of benefit -- potentially big benefit -- to younger people, but not pre-retirees. By no means should CPP be altered to provide unfunded benefits to boomers. That was done when CPP was created to help a generation that was denied opportunity to save by circumstances beyond its control. It then took decades to put the plan on a sustainable basis.

While the idea of mandatory retirement savings is appealing, we should bear in mind that this would make it even harder to young couples to have the children our society needs. This has been one of the pet themes of actuary Malcolm Hamilton. He has demonstrated that RRSP contributions are ill-advised during the early household formation years providing the couple does a catch-up later on. (Also, unlike almost everyone else, Malcolm has used hard data on actual retiree spending to show that the financial industry substantially over-estimates the amounts needed for a comfortable retirement.)
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Re: CPP and OAS

Post by marty123 »

patriot1 wrote:
marty123 wrote: I would much prefer a private model that is standardized by regulation (i.e. $xx,xxx now = $1,000/mth of pension).
Which would also be too big to fail. Any mandated plan would be too big to fail by definition.
I'm talking about regulatory definition of the offering. The government would define the rules for user fees, capital adequacy, marketing and features of deferred annuities, to permit apple-to-apple comparisons by future retirees. The investments would be spread over dozens of insurers, which IMHO is spread better than with a single-fund model. Users would hopefully be smart enough to spread their own risks (i.e. 5 units with Manulife, 8 units with Sunlife, 3 units with GWL, etc.), meaning that the cost or need for re-insurance would be limited.
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Re: CPP and OAS

Post by Flights of Fancy »

Great post from Bruce.

And to Marty123's most recent comment...except unless the plan is mandatory, how does what you are suggesting differ from buying a private annuity (whether deferred or not)?

It seems to me that people who have no longevity-risk aversion (and perhaps for good reason) should not be mandated to participate in an additional longevity-insured retirement income plan.

Has there been actual, hard evidence (a la Bruce's comment about Malcolm Hamilton) that masses of near-retirees will actually retire to lives of squalor in Canada? Seems to me the over-65 crowd became the wealthiest cohort some time ago, and I don't see that shifting as successive cohorts move up. So what problem are we really fixing?
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Re: CPP and OAS

Post by marty123 »

brucecohen wrote: CPP Investment Board is currently focused almost entirely on investing outside of Canada. Has been ever since they embraced active investing five(?) years ago. This is partly driven by recognition that CPP's design calls for 75% "pay as you go funding" with investment portfolio income covering no more than 25% of liabilities. The PAYGO funding comes from employer-employee contributions and is thus heavily dependent on the Canadian economy.
I wasn't aware. It makes perfect sense.
While the idea of mandatory retirement savings is appealing, we should bear in mind that this would make it even harder to young couples to have the children our society needs. This has been one of the pet themes of actuary Malcolm Hamilton. He has demonstrated that RRSP contributions are ill-advised during the early household formation years providing the couple does a catch-up later on. (Also, unlike almost everyone else, Malcolm has used hard data on actual retiree spending to show that the financial industry substantially over-estimates the amounts needed for a comfortable retirement.)
I'm of the same opinion. There are distinct phases in a person's life, and distinct financial requirements. Too much financial-porn is marketed by mutual fund salespeople, and it is typically presented as lost compounding from early years. Young couples are told that they lose decades of RRSP/investments compounding if they aggressively pay down their mortgages and debts, but there isn't any emphasis placed on the fact that mortgages, student loans and inflation also compound. There's nothing wrong with aggressively saving for a home downpayment (at the expense of retirement savings), aggressively repaying student loans or aggressively repaying mortgages, provided that future savings are eventually redirected to retirement savings. The idea of a mandatory extension of CPP premiums will accomplish nothings to help boomers (as you pointed out), and will only tighten younger people's budgets in other ways. We shouldn't regulate sound financial planning, the government should simply provide education and optional tools. One such optional tool is the improved CPP slidding scale (legislated in 2009) that continues to provide ants with benefits, but allows the grasshopper that blew their retirement nest egg on an RV at 50 to defer benefits and work until 70-75 to compensate.
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Re: CPP and OAS

Post by Shakespeare »

Flights of Fancy wrote: So what problem are we really fixing?
According to this it is Harper who overruled Cabinet:
But the consensus lacked a key player: Prime Minister Stephen Harper. He wanted to see significant action on pensions, and he wanted it right away, sources say.
Since Harper-the-politician trumps Harper-the-economist 10 times out of 10, my guess is that it was purely a political decision:

Walkom: Stephen Harper outflanks Liberals from the left
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Re: CPP and OAS

Post by Flights of Fancy »

Thanks for the links. Both of them (IIRC) characterize this as a "grey power" issue. But that's...wishful thinking, innit? I admit to a few grey hairs at age 42 but the comments from (for ex) CARP that this what Canadian seniors are waiting for (I'm paraphrasing) seem totally off the mark.
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Re: CPP and OAS

Post by marty123 »

Flights of Fancy wrote:And to Marty123's most recent comment...except unless the plan is mandatory, how does what you are suggesting differ from buying a private annuity (whether deferred or not)?

It seems to me that people who have no longevity-risk aversion (and perhaps for good reason) should not be mandated to participate in an additional longevity-insured retirement income plan.
I'm not one that has suggested that a mandatory retirement saving plan (beyond CPP) is required. What's required, is a no-brainer alternative for people that wish to supplement their CPP.

I think that RRSP are a great tool for sophisticated investors that are comfortable managing their current investments and that have a visibility in the future (i.e. understand risk, understand compounding, understand asset allocation, etc.).

I believe there are unsophisticated investors out there that can't understand the implication of putting $5,000 in an RRSP this year, and don't believe or trust projections of investment growth.

Deferred annuities is what I'm talking about, but they are still unknown to the common investor and still difficult to understand and purchase. I believe that if their marketing and fees are regulated and if:

- The government markets them as an RRSP alternative;
- Minimum purchase levels are eliminated (which is viable for insurers if the product is standardized and better marketed)
- The government sets up a plan (say a Retirement Annuity Savings Plan (RASP) under which deferred annuities can kept and managed
- Contributions to an RASP use RRSP contribution room (maybe boost limits from 18 to 20%) and provide a tax deduction.
- The government continues to restrict the use of non-standard annuity-type vehicles (Manu's GIC plus, market-indexed products, etc.) outside RASP.
- Plans are not insurer-dependent (i.e. I can have a single RASP with 3 units from Sunlife and 5 units from GWL without causing problems)
- The product becomes commoditized and heavily marketed by insurers and FIs
- Media outlets start introducing comparative tables that incite competition

...then, we will see a portion of the population that would otherwise be uninterested in retirement funding now begin the save for retirement. Give the RASP as a no-brainer alternative to RRSP for those that need predictability (ex-inflation). I want it to be as easy and common to buy a deferred annuity as it is to buy a GIC now.

As far as the grasshoppers are concerned (boomers or not), then my solution is to let them fend for themselves, and work until 70+ if needed. Providing them with an improved CPP sliding scale (as legislated in 2009) is a good step in that direction. If people with a life expectancy of 69 could work until 65 back in the 70s, then I'm sure that people with a life expectancy of 83 can now work until 70 or 75.
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Re: CPP and OAS

Post by Flights of Fancy »

Thanks for the clarification.

You know, when Bismarck introduced the first old age pension in 1889, payouts were to begin at age 70 while average life expectancy was 45.

If we maintained that distance between first payout age and life expectancy, payouts would begin at...what, 105?
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Re: CPP and OAS

Post by bwalter »

I wonder if some of the motivation behind increasing CPP is to reduce the GIS load as well. Currently someone receiving the maximum CPP would still qualify for GIS. If they double CPP, even for couples just one spouse receiving the maximum CPP would mean they would no longer qualify for GIS. This would shift some load from the government to the employee-employer freeing up some of the GIS money for other things.

An increase in CPP also reduces the ability of people to use a TFSA to generate tax free retirement income. GIS is one of those income tested benefits that potentially could have been "abused" though a TFSA and increasing mandatory CPP contributions means more taxable income at retirement and less cash flow to stash in TFSAs.

To me this smells a bit like a discreet tax hike, or maybe I'm just being cynical...

I should point out that I do support the idea of forcing people who work to save so they don't depend on GIS so I support the idea. Personally I'd just rather have the flexibility to choose how to invest, but then even $20k in CPP income (not that I'd qualify for a new doubled maximum by the time I retired) would remain a relatively small portion of my target retirement income and it's probably a reasonable cost for what you get.
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Re: CPP and OAS

Post by Shakespeare »

To me this smells a bit like a discreet tax hike
Yes, along with the EI premium increase. Unfortunately, they are payroll taxes - which is bad for the economy. But, as I said upthread, Harper-the-politician trumps Harper-the-economist 10 times out of 10. A GST hike would be economically better and politically worse....
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Re: CPP and OAS

Post by patriot1 »

Flights of Fancy wrote: You know, when Bismarck introduced the first old age pension in 1889, payouts were to begin at age 70 while average life expectancy was 45.
Life expectancy was lower because a lot of people died young. Smallpox, poiio, childbirth, wars, etc.

People who made it into middle age had a very good chance of living into their 70's. Go visit a cemetery some time.
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Re: CPP and OAS

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patriot1 wrote: Go visit a cemetery some time.
It's underlined......right at the end of my 'To Do' list.
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Re: CPP and OAS

Post by brucecohen »

Shakespeare wrote:
To me this smells a bit like a discreet tax hike
Yes, along with the EI premium increase. Unfortunately, they are payroll taxes - which is bad for the economy. But, as I said upthread, Harper-the-politician trumps Harper-the-economist 10 times out of 10. A GST hike would be economically better and politically worse....
There's a nitpicky yet significant difference between CPP and EI premiums. EI is a federal program and surplus premiums offset part of the govt's deficit. CPP is a federal-provincial program, the contributions are segregated from other govt funds*, and do not offset any of the deficit.

* International comparisons like those by the OECD include them in the govt's financial position to present an apples-to-apples comparison with other countries like the US that have no segregation. But legally Ottawa has no claim -- real or for purposes of accounting -- to CPP funds. That's one of the key reasons why CPP Investment Board has been able to avoid getting labeled as a sovereign wealth fund.
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Re: CPP and OAS

Post by OhGreatGuru »

bwalter wrote:I wonder if some of the motivation behind increasing CPP is to reduce the GIS load as well. Currently someone receiving the maximum CPP would still qualify for GIS. If they double CPP, even for couples just one spouse receiving the maximum CPP would mean they would no longer qualify for GIS. This would shift some load from the government to the employee-employer freeing up some of the GIS money for other things.
....
That's a very interesting point. But looked at from another perspective, if government agrees that max CPP + OAS is not enough to live one, (so taxpayer pays you ~$200/mo. GIS in addition), then that is an argument that the CPP pension is set too low. From the remarks the Finance Minister made at the fed/prov meeting it doesn't sound like doubling CPP will be on the table. At current rates, increasing it by about 22% would put you above GIS threshold if you had max CPP + OAS. That would be raising CPP from it's current 25% of AYMPE to about 30%
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Re: CPP and OAS

Post by twa2w »

Bruce
unlike almost everyone else, Malcolm has used hard data on actual retiree spending to show that the financial industry substantially over-estimates the amounts needed for a comfortable retirement.)
He may use actual spending figures but they are from the generation who is currently retired who likely are used to living on less than the boomers. I agree people can retire on a lot less than most people say but my question is will the Boomers want to?
The boomers are used to spending more liberally and likely don't want to give up on spending. Most of the current retired generation went into retirement with no debt. I see lots of Boomers heading into retirement over the next few years with a lot of debt. I am not sure how they are going to do it.
of course I am in the financial services industry so I have an interest in having allt hose Boomer s save millions for their retirement :D

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j
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Re: CPP and OAS

Post by Shakespeare »

The boomers are used to spending more liberally and likely don't want to give up on spending.
Yep, and they are in for a shock. They will have the choice between spending and retiring - but not both.

OTOH, for those of us who saved during our working years, retirement is the life of Riley, as you now get to spend it. :D
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Re: CPP and OAS

Post by brucecohen »

twa2w wrote:Bruce
unlike almost everyone else, Malcolm has used hard data on actual retiree spending to show that the financial industry substantially over-estimates the amounts needed for a comfortable retirement.)
He may use actual spending figures but they are from the generation who is currently retired who likely are used to living on less than the boomers. I agree people can retire on a lot less than most people say but my question is will the Boomers want to?
The boomers are used to spending more liberally and likely don't want to give up on spending. Most of the current retired generation went into retirement with no debt. I see lots of Boomers heading into retirement over the next few years with a lot of debt. I am not sure how they are going to do it.
of course I am in the financial services industry so I have an interest in having allt hose Boomer s save millions for their retirement :D

Cheers
j
You're right. But it's not govt's job to ensure that spendthrifts are able to maintain their lifestyle. Govt's obligation ends at ensuring that retirees have a reasonably comfortable place to live and an adequate diet. Many, many boomers are in for a big shock. For the sake of their children, grandchildren and future generations, I hope they don't force unreasonable demands on pandering politicians.
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Re: CPP and OAS

Post by bwalter »

OhGreatGuru wrote:That's a very interesting point. But looked at from another perspective, if government agrees that max CPP + OAS is not enough to live one, (so taxpayer pays you ~$200/mo. GIS in addition), then that is an argument that the CPP pension is set too low. From the remarks the Finance Minister made at the fed/prov meeting it doesn't sound like doubling CPP will be on the table. At current rates, increasing it by about 22% would put you above GIS threshold if you had max CPP + OAS. That would be raising CPP from it's current 25% of AYMPE to about 30%
Oh, I completely agree people should probably be forced to save more since that's fairer than giving them GIS. CPP may not be the worst way to do it and probably is the easiest. I'm just pointing out the government benefits financially so they have motives beyond simply wanting to "help".
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Re: CPP and OAS

Post by kombat »

marty123 wrote: Young couples are told that they lose decades of RRSP/investments compounding if they aggressively pay down their mortgages and debts, but there isn't any emphasis placed on the fact that mortgages, student loans and inflation also compound.
Minor point of order: Mortgages don't compound.

The only mortgages that can compound are so-called "negative amortization" mortgages, where the balance actually grows as the borrower makes payments. With conventional mortgages, each payment consists of an interest portion and a principal portion.

Compounding of a loan means "interest being charged on interest." That does not happen with mortgages in Canada. Interest is charged monthly on the outstanding principal balance, which is steadily decreasing. Thus, no compounding. Interest is never piled back on top of the principal - it is merely a component of each monthly payment. At any given point for a mortgage in Canada, the outstanding balance is entirely principal - no interest at all.
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Re: CPP and OAS

Post by like_to_retire »

Minor point of order: Mortgages don't compound.
But isn't the result of the front loaded interest portion of a mortgage somewhat like compounding? The savings on paying off a mortgage early are huge because of it....

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Re: CPP and OAS

Post by kcowan »

like_to_retire wrote:
Minor point of order: Mortgages don't compound.
But isn't the result of the front loaded interest portion of a mortgage somewhat like compounding? The savings on paying off a mortgage early are huge because of it....

ltr
The compounding is built into the amortization schedule. So paying twice a month will reduce the effects of compounding of interest.
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Re: CPP and OAS

Post by kombat »

kcowan wrote: The compounding is built into the amortization schedule. So paying twice a month will reduce the effects of compounding of interest.
Again, there's no actual compounding with a conventional mortgage in Canada. Interest is never charged on interest, which is the definition of compounding.

Mortgages in Canada accrue simple interest, but no compound interest. If you borrow $x at 5% interest over 30 years, you're going to pay almost $2x in total. That's not compounding, that's just how the math works out.
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Re: CPP and OAS

Post by adrian2 »

kombat wrote:
kcowan wrote:The compounding is built into the amortization schedule. So paying twice a month will reduce the effects of compounding of interest.
Again, there's no actual compounding with a conventional mortgage in Canada. Interest is never charged on interest, which is the definition of compounding.
This is semantics: as long as you pay at least the accrued interest, at least as often as it is accrued, you can argue there is never compounding.

OTOH, say you have a $100k mortgage @ 3%, semi-annually, not in advance (standard terms of a closed mortgage). The interest is $1.5k for 6 months, or about $250 monthly (ignoring the word you object to, i.e., compounding). If the term of the mortgage leads to a calculation of a monthly payment of $400, the standard definition is that you're paying $250 in interest and $150 in principal. But money is fungible, so I can argue that you're paying $400 in principal and capitalizing the $250 interest, it's exactly the same thing. In my interpretation, the interest is compounding (paying interest on interest) and the principal is declining faster. Once again, it's semantics, the end result is the same.
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Re: CPP and OAS

Post by marty123 »

adrian2 wrote:
kombat wrote:
kcowan wrote:The compounding is built into the amortization schedule. So paying twice a month will reduce the effects of compounding of interest.
Again, there's no actual compounding with a conventional mortgage in Canada. Interest is never charged on interest, which is the definition of compounding.
This is semantics: as long as you pay at least the accrued interest, at least as often as it is accrued, you can argue there is never compounding.
Yes, that's semantics.

The fact is, not putting $5,000 in a bond fund may cost someone $200 per year, but repaying the mortgage with it would equally return $200/year(*). What one does with the annual saving isn't really a factor. It can compound in the investment account, or be used to further reduce future interest costs. The effect is the same: it increases the net-worth and the benefits will compound over the years (in the form of investment compounding or in the form of reduced interest costs in the future).

Pushing young people to invest in retirement accounts aggressively borders on financial porn, and mostly benefits financial advisors and fund companies. The key is to strive to increase one's networth. Whether it be through debt repayment or investments is a matter of asset allocation. My fear is that increases in mandatory retirement contributions (e.g. increasing CPP contributions) will reduce a (savvy) young couple's ability to direct their savings where they feel it will best serve their interests (saving for downpayment, repaying student loans, repaying mortgage, saving for business ownership, etc.). In an attempt to fix a grasshopper's future problem, we're taking away an ant's freedom and it's flexibility to manage its own money.

(*): assuming same interest rate for both (4%), although mortgage rates are likely to be higher than bond yields.
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