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Why the Canadian Pension Scheme will still be solvent – and then some – when you retire


As the Canadian Pension Scheme Investment Board released its annual report this week on its billions of dollars in control, many Canadians remain unsure about where their own PPP funding is and how safe it could be.

Financial advisers say that there is a misconception that the government can become immersed in the money, as well as an unfounded concern about whether it could end when babies raise everyone's retirement and start to draw their pensions.

People also don't know when to take a CPP and what benefit they could get, says Craig Hughes, director, senior financial planning, at IG Wealth Management.

"The thing we see most is 'What am I going out of?' People don't understand the mechanics and, at the end of the day, what am I & # 39; I'm going to get it when I retire, "he told CBS News.

The CPPIB manages a huge fund of cash – $ 392 billion from the end of March 2019 – with a mandate to invest on behalf of Canadians and keep the CPP sustainable over several generations. The professionally managed investment group has earned an average of 10 per cent a year on that money over the last 10 years.

1. But will it not run out before I get it?

People see the money coming out of their payroll and confused about where we are going, which is why the government will spend it, says Hughes.

Your CPP contribution will be kept entirely separate from the general government accounts. And in 1997, the federal government created a rule that pension benefits must be included each year by the money coming in from Canadian employers and employees. The benefits of that year come out of what the population works and any extra money – and extra money – goes to CPPIB.

That is because the contribution rates have been set at a level where there is more to set them in an investment fund. That will pay the extra costs of the baby boomers, who will retire in large numbers until about 2030 and could live years beyond that.

The investment fund is operated at arm's length from the federal government, not at whatever party is in power.

"In terms of functionality, CPP has separated it and is not part of the government's general revenue. That money is managed independently. The main actuary looks at the every three years, ”said Hughes.

2. Wouldn't I invest myself better?

Some people think they can do better, says Hughes. They choose not to pay into CPP at 65, even if they are still working.

"The profit on the investment must be quite high to fit with CPP. The thing you have to remember is that CPP is indexed to inflation," he added. while your investment is the will of what the markets do, "he said.

A man with his dog is silvered against a landscape with night against the Pacific Ocean. The CPP is intended to provide around 25 per cent of retirement income. (Rodrigo Abd / Associated Press) t

3. If the CPPIB has $ 392 billion – why is the benefit so low?

The maximum annual benefit for someone retiring in 2019 is $ 13,610, but most people don't get the maximum, says Benjy Katchen, executive vice president and chief digital strategy officer, t Home Capital Corp.

The CPP was designed to replace just 25 per cent of average income. Your benefit is based on how much you have contributed through your working life – from about 18 to 65, or 47 years of age. In order to receive the full benefit, you must contribute the maximum amount each year for the vast majority of these years. The maximum pensionable earnings are set each year, based on average income, and for 2019 is $ 57,400.

"I think we shouldn't rely 100 percent on CPP," Katchen said.

"CPP provides a basic amount of income that everyone should know is there, but people should know that it is very moderate, so anything extra above and beyond has to come from your company pension or investment t money in CHCs [guaranteed investment certificates] or other instruments. "

4. But I went to university for four years and made peanuts early in my career?

When your CPP is calculated, the eight years with the lowest earnings are written off – for example, the years when you were in education or were made redundant in your 60s.

But you don't need to guess what you'll get, says John Krasevec, a financial adviser to Edward Jones, who has been based in Burlington, Ont.

It advises its clients to have an account with MyService Canada and ask for the record of their personal CPP contributions over their working lives.

"It will show all your retirement history, what years you have worked, have you contributed the maximum each year, did you skip a year? They'll give you an estimate that says, based on what you have to contribute, at the age of 60. You'll get X's 65, you'll get the 70's….

5. I stayed at home with children, so will I get a very low pension?

Not necessarily. The federal government allows parents to cancel extra years of low earnings when they have children under the age of seven. The custody is, you have to apply for it, says Krasevec.

"This is called dripping parenting. If you are a parent – and either parent or the other can do this – you can get… those years taken out of & # 39 Your census, "he said.

"This is not automatic, you have to apply to fill in a form that says, I want to take those years, because I had a child under seven."

6. Should I not take the CPP at 60 so I can get the most out of it?

If you take a CPP at 60, you will have a lower benefit compared to one that you take at 65 or 70 years of age. In fact, you can increase your benefit by 42 per cent if you wait to be 70, compared to 65 years. But knowing what to do is bet on how long you live.

"Everyone's situation is different, and there is no universal solution when to take it," Krasevec said.

"I always start with the first question – is your health to compromise? Someone may have had a heart attack or may have a lifetime that is for whatever reason, cancer or family history.If it's the answer, that means taking a CPP. "

The next question, he said, is: "Do you need it?"

At 60, many people still work and may not need to draw up the pension.

"If I am the answer, I need it because I have different expenses. I need that income to support my lifestyle, the answer is yes. Take it."

The next question is, "Will you put in a preferential or unfavorable tax bracket?" If you put in a higher tax bracket, don't take it, it's advisable.

"If you have another pension. If you made $ 100,000 in income and you had collected $ 10,000 in CPP, you made $ 110,000 and you'll pay tax on that."

Krasevec said that it is better to continue to ask these questions yourself every year.

7. So why are they taking more money this year?

Since 2003, people in the workforce have contributed 4.95 per cent of their earnings up to the maximum annual pensionable earnings of $ 57,400 for 2019. This year this contribution goes up to 5.1 per cent. , and will gradually increase to 5.95 per cent in 2023. Employers match the employee's contribution. And the highest pensionable earnings figure is also likely to rise.

What is going to mean is that Canadians who are retiring will eventually get up to 33 percent of their average income after retirement. In terms of today's dollar, the extended CPP would be $ 7,000 more, up to the maximum benefit of nearly $ 20,000.

That is necessary because fewer Canada has good pensions and people don't save as they should, says Hughes. The younger Canadians who have retired for years will benefit most.

"The government has shown a very good commitment to CPP, the fact that they have made that improvement with more money going to CPP on the understanding that they need to give a guarantee to people with CPP with longevity and pensions that are Decline. "

8. Why is CPPIB not investing in Canada and promoting the Canadian economy? Why is my money going to China and India?

We invest in Canada. Around 15.5 per cent were invested in Canadian assets at the end of March.

But it wouldn't be a good idea to put all that money into Canadian markets and Canadian companies, partly because any investment is more secure if it's diversified, according to Katchen.

"They wouldn't invest in CHCs or bonds insured by the government alone. They should have some diversification. And I think it's the same thing at a national level," he said.

"And the other area is that the CPP is far enough from the government. Do you really want the investment to be driven politically depending on which political party is in power?" he said.

Instead, CPPIB has a mandate to optimize the return on investment and keep the risk profile low, "so that Canadians today and the future Canadians generation can be safe in the share of t they are relying on it by CPP, "Katchen said. t

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