"The baby boomers are getting older, and will stay older for longer. And they will run right into the dementia firing range. How will society cope? Especially a society that can't so readily rely on those stable family relationships that traditionally provided the backbone of care?"
-Terry Pratchett
Honestly, I'm not totally sure why I'm interested in this considering I won't be retiring from anything for at least 40 years unless I win those lotteries I never enter. Still, it's an interesting subject if only because it demonstrates that there appears to be a growing reliance on the government to force people to be responsible for themselves.
There has been some discussion in Canada about raising Canadian Pension Plan contributions due to concerns that the middle-class Baby Boomers are not saving sufficiently for retirement. Essentially, Prince Edward Island Finance Minister, Wes Sheridan, put forward the idea of raising the maximum contribution from $2,356.20 to $4,681.20 starting in 2016. The maximum annual benefit would then jump from $12,150 to $23,400.
Qualifying for this maximum benefit would require income of $102,000 as opposed to the current cutoff of $51,000. This means under the new plan, if you make over $102k, you will contribute $4,681.20 annually while working and receive $23.4k annually in retirement. I know this sounds boring but keep listening, it's important.
At the moment, payroll contributions are 9.9% on income between $3,500 and $51,000. This is split evenly between employees and employers. The new proposal would raise the contribution rate to 13% of income between $25,000 and $51,000 and to raise the combined contribution rate to 3.1% for income between $51,000 and $102,000.
All of these pension changes will only apply going forward so you will have to have spent roughly 40 years contributing at this rate in order to receive the larger benefit payout. Which is good because it would be pretty unfair if those who pocketed the difference instead of contributing it get to piggyback on this change.
This whole proposal is based on a 2009 report by tax specialist Jack Mintz. The report found that low-income Canadians generally have equal or higher incomes in their retirement years due to income supplements. For them, their working income needs to basically be replaced in full for them to maintain a decent standard once they finish working.
This means, there will be no change for low-income earner's pensions since they need all their income to live on while working and their incomes are topped up by Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) once they retire. For people making $90,000 or more, the report suggests 50% of their working income would be adequate for a good life as an old fogey. Which is what this proposal ensures would happen.
Basically, the concern is that many Canadians are not saving enough into voluntary retirement plans. The suggested solution is to force people to stick more of their money into the only pension plan all Canadians have so that we don't wind up with lots of broke old people.
Now, there is a certain logic to this. Although CPP was never supposed to be anyone's sole source of retirement funds, having large numbers of people who made good money during their working days living in squalor is a pretty stupid situation. It will also be an extremely frustrating one if those who willingly saved need to subsidize those who didn't because they blew their cash on nice cars and fancy gizmos. And the way things are going, subsidize them they will in the form of health care, social security, food stamps, etc.
Overall, I can get behind the general thrust of this proposal. Forcing people to save who wouldn't otherwise is smart so that others don't need to pick up their irresponsible slack. I know that simply allowing them to reap what they sow may seem appealing in order to change people's bad habits. Unfortunately, Canada's culture has generally decided that its people deserve a minimum standard of living which will need to be paid for somehow. Allowing people to just go broke and fall into degenerate poverty because they were irresponsible will wind up costing society more and will be paid for by those who were responsible and still have money. Social security nets need to be maintained by forcing people not to excessively take advantage of them.
This isn't the first alteration to the CPP in the last while. In 2012, there were several changes. One was that people who started collecting at 60 instead of 65 would receive a larger penalty to their benefits. Now, for each month of early retirement before 65, there would be a 0.5% reduction in benefits received. Someone retiring at 60 would annually get 30% less than someone retiring at 65.
This was the case for later retirement too with a 0.5% bonus to benefits for every month worked after 65. As of 2013, this bonus to benefits was increased to an additional 42% if you work until 70. Also changed was the number of low-paying years that could be ignored in the pension calculations. Previously, your 7 worst-paying years were ignored leading to greater benefits. This has been raised to 8 years.
There were also a couple of changes to account for the fact that many people who are basically retired haven't completely stopped working yet. One was dropping the work cessation period, a pointless two months before being allowed to collect your CPP where your income had to be very low to show you were finished working. The other is the addition of Post-Retirement Benefits. If you do work until you're 65 but are already drawing your pension, you can choose to have it so that you and your employer both continue contributing. This will lead to larger benefit payments starting the next year. It's essentially a way to start collecting while still having your employer pitch in a share to boosting your future pension earnings.
Still, these previous changes are small potatoes compared to the idea of expanding CPP to be roughly twice as important for people's retirement. So is the situation actually bad enough to justify the paternalistic notion of having government force people to save? If it is, the CPP is not a bad way to do it. It is fiscally sound and able to cover it obligations for the next 75 years with no changes if the value of its assets continues to grow 4% annually after inflation. Last year saw growth of 6.6% so no problems there for the time being.
At the same time, it's important to note that CPP contributions, unlike other investments, die with whoever paid for them. The CPP is more like insurance for a guaranteed minimum standard of living than traditional wealth. This means deaths can cause problems and leave one spouse in a bad fiscal situation if their partner suddenly croaks.
Some change is necessary though because the current situation does seem troubling. Canadians are only saving 4% of their income for retirement in RRSPs and TFSAs. In 2011, only 24% of those eligible made any contribution at all to their RRSPs. Manitobans actually had the lowest average RRSP contributions in 2011 out of all the provinces and territories. A recent survey found that 46% of Boomers are unsure they will be financially okay upon retiring. 60% of Canadian workers are without a work-based pension.
As of 2013, you need to be 67 to collect Old Age Security and the average monthly OAS payment is $514.56. For every dollar of income over $70,954, the government claws back 15% of your OAS. To get the secondary income topper, the Guaranteed Income Supplement, you need to be approved for OAS. The maximum benefit for GIS is $8,788 annually for single seniors and $11,655 for senior couples. You lose roughly 50 cents of GIS for every $1 of other income other than OAS. The first $3,500 of employment income is exempt and every dollar of capital gains from investments only costs you 25 cents. Overall, the cutoff will be roughly $22,849 for singles and $34,610 for couples.
The problem is that the expenditure on these are $36 billion a year. This number comes straight from government taxpayer revenue and is expected to triple in the next couple decades due to this lack of savings as more and more people fall below the threshold and begin collecting these. Additional assets in real estate and businesses mean the situation is a bit less grim than presented here but some kind of action makes sense, especially with the Canadian housing bubble gradually deflating and reducing the net worth of many homeowners.
Is this plan the right way to do it though? Finance Minister Jim Flaherty argues that, "I can see it being good in the long run for Canadians, at the right time. But I would want to see significantly more economic growth than we have now before we imposed an additional burden on Canadian employers and employees."
The Canadian Federation for Independent Businesses is also against it and have started a campaign in opposition to the proposal. One study they did estimated that: "700,000 “person years of employment” would be lost over the reform’s first 20 years." Quite possibly an exaggeration but worth noting.
On the other side, the Canadian Association of Retired Persons has come out in favor as have most of the provincial finance ministers who are now generally warming to the idea. A recent poll found 53% of Canadians want it expanded while 34% do not.
Overall, it seems that the momentum is behind expanding the plan. Although Canadian seniors are doing quite well at the moment with only 5% falling below the poverty line, the 4th best in the world, the situation won't last. As the BBs retire, the choice has been forced of either making people pay for themselves through forced savings or having others pay for them later through taxes. The answer seems to be forced savings. Don't allow your citizens to be flakes who save nothing. The big question is how to do it without royally screwing five main groups who have done nothing to deserve it.
The first is self-employed people who will be sorely taxed by the need to pay both the employer and employee share of their contributions.This one should be easily remedied by simply allowing self-employed individuals to negate paying their employer share. They won't wind up with the same safety net but that is a risk they accept by being self-employed. In any case, they should have other assets through their business that can get them through retirement.
The second is businesses in general who will need to increase their contributions for their employees. This will likely lead to reduced staff levels and a greater emphasis on contract work where they are not forced to contribute at all. This one is harder to deal with. Although the employer contribution will only be roughly an additional 1.5 percent, it will be treated as a payroll tax hike that will be factored into decisions regarding the off-shoring of manufacturing and exportable-service jobs. In addition, employers may take it as an excuse to stop providing pensions altogether in the same way companies in the US are using Obamacare as an excuse to cut hours and benefits.
I don't really have an answer to this. On one hand, it will move wealth from large, cash-flush, Canadian-stranded companies to consumers. Since large companies don't generally keep on more people than they need, there shouldn't be many layoffs and this will lead to greater customer demand and a healthier economy.
On the other, smaller and medium businesses with thin profit margins may have trouble competing and either have to lay off staff or close. In addition, jobs that can move to places with cheaper labor may do so. The only options are to either not force employers to match this larger contribution or to hope it turns out like in the 90s when a CPP premium hike did not slow economic expansion. If we wanted to play it safe, we could make it an employee contribution increase only. Although it wouldn't be as strong a solution, this might be the most logical answer if the problem is that people aren't saving enough because it forces them and them alone to do so.
The third group is those who save and invest enough of their funds so that they will not require OAS and GIS. They should be allowed to seek greater returns by putting their money into whatever they want instead of having it cautiously invested by the government. The easy solution here is allow people to opt out of the additional contribution if they can prove that they are fiscally solvent and will never need OAS and GIS.
The fourth group is the taxpayers as a whole that would be responsible for matching the contributions of public-sector employees who already have, on average, much better pensions than the private sector. Defined benefit plans are becoming almost non-existent outside of the public sector because it puts so much of the risk on the employer. The solution here is simple. Don't have the government contribute anything extra towards public-sector employee CPP. Allow government workers to pay more themselves if they'd like but the public sector already has good pensions, they are not the group we are worried about here.
The fifth group is the young. Their numbers aren't large enough to maintain the high standards of living the massive Boomer population is used to and birthrates aren't high enough to guarantee these social safety nets will still be around by the time they need them. Immigration helps but will likely not be able to cover the difference. Social security has traditionally been designed like a pyramid scheme; it relies on a steady increase of people participating.
Of course, this baby-making slowdown isn't necessarily a bad thing. The survival of the human race requires our population to reach some kind of equilibrium and this fortunately seems be happening as developing nations become developed and developed nations naturally trend towards smaller families.
Honestly, I don't know what to do about this. We will have to constantly adjust benefit and contribution rates in order to maintain a safety net. With slowing population growth, there will simply be less people taking care of more people. All we can really do is hope that technology and our political leadership will have brought us to a place where we can survive and be happy with the resources available.
So, in conclusion, there is a group of people that need to save more themselves so that the rest of society doesn't have to take care of their negligent asses through OAS and GIS. Since the Baby Boomers don't have time for this to take effect before they retire, society will just have to dig into its pockets and pay them enough to have a minimal standard of living.
Fortunately, the next generation will have been legally forced to handle their finances better since apparently we don't know how teach financial literacy no good.
AS
-Terry Pratchett
Honestly, I'm not totally sure why I'm interested in this considering I won't be retiring from anything for at least 40 years unless I win those lotteries I never enter. Still, it's an interesting subject if only because it demonstrates that there appears to be a growing reliance on the government to force people to be responsible for themselves.
There has been some discussion in Canada about raising Canadian Pension Plan contributions due to concerns that the middle-class Baby Boomers are not saving sufficiently for retirement. Essentially, Prince Edward Island Finance Minister, Wes Sheridan, put forward the idea of raising the maximum contribution from $2,356.20 to $4,681.20 starting in 2016. The maximum annual benefit would then jump from $12,150 to $23,400.
Qualifying for this maximum benefit would require income of $102,000 as opposed to the current cutoff of $51,000. This means under the new plan, if you make over $102k, you will contribute $4,681.20 annually while working and receive $23.4k annually in retirement. I know this sounds boring but keep listening, it's important.
At the moment, payroll contributions are 9.9% on income between $3,500 and $51,000. This is split evenly between employees and employers. The new proposal would raise the contribution rate to 13% of income between $25,000 and $51,000 and to raise the combined contribution rate to 3.1% for income between $51,000 and $102,000.
All of these pension changes will only apply going forward so you will have to have spent roughly 40 years contributing at this rate in order to receive the larger benefit payout. Which is good because it would be pretty unfair if those who pocketed the difference instead of contributing it get to piggyback on this change.
This whole proposal is based on a 2009 report by tax specialist Jack Mintz. The report found that low-income Canadians generally have equal or higher incomes in their retirement years due to income supplements. For them, their working income needs to basically be replaced in full for them to maintain a decent standard once they finish working.
This means, there will be no change for low-income earner's pensions since they need all their income to live on while working and their incomes are topped up by Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) once they retire. For people making $90,000 or more, the report suggests 50% of their working income would be adequate for a good life as an old fogey. Which is what this proposal ensures would happen.
Basically, the concern is that many Canadians are not saving enough into voluntary retirement plans. The suggested solution is to force people to stick more of their money into the only pension plan all Canadians have so that we don't wind up with lots of broke old people.
Now, there is a certain logic to this. Although CPP was never supposed to be anyone's sole source of retirement funds, having large numbers of people who made good money during their working days living in squalor is a pretty stupid situation. It will also be an extremely frustrating one if those who willingly saved need to subsidize those who didn't because they blew their cash on nice cars and fancy gizmos. And the way things are going, subsidize them they will in the form of health care, social security, food stamps, etc.
Overall, I can get behind the general thrust of this proposal. Forcing people to save who wouldn't otherwise is smart so that others don't need to pick up their irresponsible slack. I know that simply allowing them to reap what they sow may seem appealing in order to change people's bad habits. Unfortunately, Canada's culture has generally decided that its people deserve a minimum standard of living which will need to be paid for somehow. Allowing people to just go broke and fall into degenerate poverty because they were irresponsible will wind up costing society more and will be paid for by those who were responsible and still have money. Social security nets need to be maintained by forcing people not to excessively take advantage of them.
This isn't the first alteration to the CPP in the last while. In 2012, there were several changes. One was that people who started collecting at 60 instead of 65 would receive a larger penalty to their benefits. Now, for each month of early retirement before 65, there would be a 0.5% reduction in benefits received. Someone retiring at 60 would annually get 30% less than someone retiring at 65.
This was the case for later retirement too with a 0.5% bonus to benefits for every month worked after 65. As of 2013, this bonus to benefits was increased to an additional 42% if you work until 70. Also changed was the number of low-paying years that could be ignored in the pension calculations. Previously, your 7 worst-paying years were ignored leading to greater benefits. This has been raised to 8 years.
There were also a couple of changes to account for the fact that many people who are basically retired haven't completely stopped working yet. One was dropping the work cessation period, a pointless two months before being allowed to collect your CPP where your income had to be very low to show you were finished working. The other is the addition of Post-Retirement Benefits. If you do work until you're 65 but are already drawing your pension, you can choose to have it so that you and your employer both continue contributing. This will lead to larger benefit payments starting the next year. It's essentially a way to start collecting while still having your employer pitch in a share to boosting your future pension earnings.
Still, these previous changes are small potatoes compared to the idea of expanding CPP to be roughly twice as important for people's retirement. So is the situation actually bad enough to justify the paternalistic notion of having government force people to save? If it is, the CPP is not a bad way to do it. It is fiscally sound and able to cover it obligations for the next 75 years with no changes if the value of its assets continues to grow 4% annually after inflation. Last year saw growth of 6.6% so no problems there for the time being.
At the same time, it's important to note that CPP contributions, unlike other investments, die with whoever paid for them. The CPP is more like insurance for a guaranteed minimum standard of living than traditional wealth. This means deaths can cause problems and leave one spouse in a bad fiscal situation if their partner suddenly croaks.
Some change is necessary though because the current situation does seem troubling. Canadians are only saving 4% of their income for retirement in RRSPs and TFSAs. In 2011, only 24% of those eligible made any contribution at all to their RRSPs. Manitobans actually had the lowest average RRSP contributions in 2011 out of all the provinces and territories. A recent survey found that 46% of Boomers are unsure they will be financially okay upon retiring. 60% of Canadian workers are without a work-based pension.
As of 2013, you need to be 67 to collect Old Age Security and the average monthly OAS payment is $514.56. For every dollar of income over $70,954, the government claws back 15% of your OAS. To get the secondary income topper, the Guaranteed Income Supplement, you need to be approved for OAS. The maximum benefit for GIS is $8,788 annually for single seniors and $11,655 for senior couples. You lose roughly 50 cents of GIS for every $1 of other income other than OAS. The first $3,500 of employment income is exempt and every dollar of capital gains from investments only costs you 25 cents. Overall, the cutoff will be roughly $22,849 for singles and $34,610 for couples.
The problem is that the expenditure on these are $36 billion a year. This number comes straight from government taxpayer revenue and is expected to triple in the next couple decades due to this lack of savings as more and more people fall below the threshold and begin collecting these. Additional assets in real estate and businesses mean the situation is a bit less grim than presented here but some kind of action makes sense, especially with the Canadian housing bubble gradually deflating and reducing the net worth of many homeowners.
Is this plan the right way to do it though? Finance Minister Jim Flaherty argues that, "I can see it being good in the long run for Canadians, at the right time. But I would want to see significantly more economic growth than we have now before we imposed an additional burden on Canadian employers and employees."
The Canadian Federation for Independent Businesses is also against it and have started a campaign in opposition to the proposal. One study they did estimated that: "700,000 “person years of employment” would be lost over the reform’s first 20 years." Quite possibly an exaggeration but worth noting.
On the other side, the Canadian Association of Retired Persons has come out in favor as have most of the provincial finance ministers who are now generally warming to the idea. A recent poll found 53% of Canadians want it expanded while 34% do not.
Overall, it seems that the momentum is behind expanding the plan. Although Canadian seniors are doing quite well at the moment with only 5% falling below the poverty line, the 4th best in the world, the situation won't last. As the BBs retire, the choice has been forced of either making people pay for themselves through forced savings or having others pay for them later through taxes. The answer seems to be forced savings. Don't allow your citizens to be flakes who save nothing. The big question is how to do it without royally screwing five main groups who have done nothing to deserve it.
The first is self-employed people who will be sorely taxed by the need to pay both the employer and employee share of their contributions.This one should be easily remedied by simply allowing self-employed individuals to negate paying their employer share. They won't wind up with the same safety net but that is a risk they accept by being self-employed. In any case, they should have other assets through their business that can get them through retirement.
The second is businesses in general who will need to increase their contributions for their employees. This will likely lead to reduced staff levels and a greater emphasis on contract work where they are not forced to contribute at all. This one is harder to deal with. Although the employer contribution will only be roughly an additional 1.5 percent, it will be treated as a payroll tax hike that will be factored into decisions regarding the off-shoring of manufacturing and exportable-service jobs. In addition, employers may take it as an excuse to stop providing pensions altogether in the same way companies in the US are using Obamacare as an excuse to cut hours and benefits.
I don't really have an answer to this. On one hand, it will move wealth from large, cash-flush, Canadian-stranded companies to consumers. Since large companies don't generally keep on more people than they need, there shouldn't be many layoffs and this will lead to greater customer demand and a healthier economy.
On the other, smaller and medium businesses with thin profit margins may have trouble competing and either have to lay off staff or close. In addition, jobs that can move to places with cheaper labor may do so. The only options are to either not force employers to match this larger contribution or to hope it turns out like in the 90s when a CPP premium hike did not slow economic expansion. If we wanted to play it safe, we could make it an employee contribution increase only. Although it wouldn't be as strong a solution, this might be the most logical answer if the problem is that people aren't saving enough because it forces them and them alone to do so.
The third group is those who save and invest enough of their funds so that they will not require OAS and GIS. They should be allowed to seek greater returns by putting their money into whatever they want instead of having it cautiously invested by the government. The easy solution here is allow people to opt out of the additional contribution if they can prove that they are fiscally solvent and will never need OAS and GIS.
The fourth group is the taxpayers as a whole that would be responsible for matching the contributions of public-sector employees who already have, on average, much better pensions than the private sector. Defined benefit plans are becoming almost non-existent outside of the public sector because it puts so much of the risk on the employer. The solution here is simple. Don't have the government contribute anything extra towards public-sector employee CPP. Allow government workers to pay more themselves if they'd like but the public sector already has good pensions, they are not the group we are worried about here.
The fifth group is the young. Their numbers aren't large enough to maintain the high standards of living the massive Boomer population is used to and birthrates aren't high enough to guarantee these social safety nets will still be around by the time they need them. Immigration helps but will likely not be able to cover the difference. Social security has traditionally been designed like a pyramid scheme; it relies on a steady increase of people participating.
Of course, this baby-making slowdown isn't necessarily a bad thing. The survival of the human race requires our population to reach some kind of equilibrium and this fortunately seems be happening as developing nations become developed and developed nations naturally trend towards smaller families.
Honestly, I don't know what to do about this. We will have to constantly adjust benefit and contribution rates in order to maintain a safety net. With slowing population growth, there will simply be less people taking care of more people. All we can really do is hope that technology and our political leadership will have brought us to a place where we can survive and be happy with the resources available.
So, in conclusion, there is a group of people that need to save more themselves so that the rest of society doesn't have to take care of their negligent asses through OAS and GIS. Since the Baby Boomers don't have time for this to take effect before they retire, society will just have to dig into its pockets and pay them enough to have a minimal standard of living.
Fortunately, the next generation will have been legally forced to handle their finances better since apparently we don't know how teach financial literacy no good.
AS
The
baby boomers are getting older, and will stay older for longer. And
they will run right into the dementia firing range. How will a society
cope? Especially a society that can't so readily rely on those stable
family relationships that traditionally provided the backbone of care?
Terry Pratchett
Read more at http://www.brainyquote.com/quotes/keywords/baby_boomers.html#67yhoCfFFjqOsO2Q.99
Terry Pratchett
Read more at http://www.brainyquote.com/quotes/keywords/baby_boomers.html#67yhoCfFFjqOsO2Q.99
The
baby boomers are getting older, and will stay older for longer. And
they will run right into the dementia firing range. How will a society
cope? Especially a society that can't so readily rely on those stable
family relationships that traditionally provided the backbone of care?
Terry Pratchett
Read more at http://www.brainyquote.com/quotes/keywords/baby_boomers.html#67yhoCfFFjqOsO2Q.99
Terry Pratchett
Read more at http://www.brainyquote.com/quotes/keywords/baby_boomers.html#67yhoCfFFjqOsO2Q.99
The
baby boomers are getting older, and will stay older for longer. And
they will run right into the dementia firing range. How will a society
cope? Especially a society that can't so readily rely on those stable
family relationships that traditionally provided the backbone of care?
Terry Pratchett
Read more at http://www.brainyquote.com/quotes/keywords/baby_boomers.html#67yhoCfFFjqOsO2Q.99
Terry Pratchett
Read more at http://www.brainyquote.com/quotes/keywords/baby_boomers.html#67yhoCfFFjqOsO2Q.99
Ugh, the whole notion of raising it sits badly with me.
ReplyDeleteI agree that we need to take care of our elderly, but why should the ants be forced to pay their hard earned money into a program so that the grasshoppers can retire comfortably?
Why should these Hummer driving, ATVing, Jet Skiing, Snowmobiling, "I just spent $570,000 on a brand new tiny home in Bridgwater Forest because I can't live in a 'used house' " people be held to the same standard as others who have scrimped and saved and invested properly their whole lives?
IMHO CPP and OAS should be adopt a system similar to employee and school health plans, where you may opt out of the increased contributions so long as you provide proof that you are saving $X amount toward retirement annually. Come on, we already include RRSP info with our taxes... so why not just have a look at it?
Don't have an RRSP? Pay for the increase. Don't have a retirement plan? Pay for the increase. Have a seasonal job and collect EI on the off season? Pay for the increase. Never aspire to anything above minimum wage? Pay for the increase.
When smoking was linked to lung cancer, taxes on cigarettes went through the roof because the people who smoke cigarettes would be more likely to drain the system later. Taxes on everything don't rise because the costs have been passed on to the people who will be relying on the system later.
This may cause more of a rift between the classes than it helps. I will be forced to pay into a system that does not pay out when I die instead of investing in vehicles that allow me to leave a legacy to my family.
In Aesop's tale, the grasshopper is lazy and unprepared for the winter and dies at the end, serving as a warning that we should all prepare for the future.
In Canada's tale, we all die at the end and the grasshoppers who failed to prepare their whole lives and the government are each rewarded with the ants' hard earned money.
Yeah, opting out of the increase needs to be an option if your finances are healthy. Still, forcing those too flakey to save for their retirement to save is the only way to stop the rest of us from having to pay for them later through OAS and GIS.
DeleteThe system would have to change to be able to opt out of OAS since it comes directly from tax funds, not anything you've contributed to. And unfortunately, being able to opt out would sort of defeat the purpose since the people who rely on it would not be able to contribute enough to keep it funded. Trying to force people to make enough income in retirement to have their OAS clawed back is the best I can think of.