Changing CPP

[Jerry J. Fortin]

Abolishing CPP is not even an option. What perhaps should be placed on the table for consideration is pension plans period. The entire RRSP thing is a good deal, but the benefits of it decrease for folks with RPP's. I think that the best option of all is to increase disposable family income, through tax reductions. Of course I would prefer to abolish income tax altogether to accomplish this.........................

[msj]

A few random thoughts:

1) The point of higher contributions was not only to continue with the pay as you go system but to create an excess which is invested to ensure that CPP would be around through to 2075 (at least).

The rate of return that CPP uses is something like 4.1%. Unlike, say, a New Jersey State pension which was assuming a rate of return of 8+% (and which is going broke, hmm, maybe they should have paid more in and assumed a lesser rate of return but that would be prudent and people don't like that).

2) People can opt out of the CPP.

Become self-employed, incorporate a company and set up a bona fide profit sharing plan. Voila, no CPP to pay, company still gets the deduction, you still earn RRSP room.

Or set up the company and take dividends and don't earn the RRSP room.

3) As for the hand-holding - most people are better off with a forced savings plan.

I used to not bother with CPP (am self-employed with a company) but I changed my mind since I discovered that with the reduction in the small corporate tax rates in BC that I'm just as well off paying corporate and personal income tax and full CPP (I pay 9.9% since I'm self-employed) than to pay corporate tax and personal tax on dividends with no CPP.

It's a back up for my retirement savings in case I screw up with my RRSP's, TFSA's etc... It really is a small price to pay for some peace of mind - I consider the CPP as part of my conservative holdings in my retirement plan.

4) Of course, we always hear about how this pension plan or that has unrealized losses on its investments. Pension plans report because they are accountable.

Individuals take their losses and we don't get to see that reported in the papers.

This is why most people tolerate CPP - either because of #3 or because the average person would perform poorly compared to the CPP investment board.

5) Canada has a pretty sweet system and it really is too bad that more people don't take the time to find the links to the changes (yes, that's aimed at you, Topaz) or take the time to read about the CPPIB and the changes to the CPP in the 1990's.

Instead we get the same old "it won't be there for me so shut it down mentality" which is an opinion based solely on ignorance of the facts.

6) Read up or shut up.....

7) One more thing - abolishing income tax would be nice. So would having a threesome with Monica Bellucci and Gisele Bundchen.

It ain't going to happen, for what one would assume, obvious reasons....

Edited June 12, 2009 by msj

[Visionseeker]

Your CPP contributions are supporting current pensioners. My CPP contributions (I'm not a baby boomer) will be supporting the baby boomer's pensions.

Correct. Unfortunately many a boomer failed (and continues to fail) to understand this.

Forgive my ignorance, but could someone explain what the 1990 changes were that will fix CPP contribution problems when the boomers retire? I don't know anything about it sorry

Changes to contributions are noted elsewhere above. But the other change was the creation of the Canada Pension Plan Investment Board charged with investing existing CPP surplus contributions in more aggressive ways than the plan previously allowed. Over ten years, the board has averaged a 4.9% rate of return. As I've posted elsewhere, this is wholly insufficient and, without other changes, will only delay the funds' bankruptcy by 2 or 3 years.

CPP can only remain solvent by increasing penalties for pre 65 retirement and, more importantly, raising the retirement age to 70.

What most people don't understand is that the 65 year retirement age was set when only 49% of males and 53% of females lived that long: CPP was simply a big 50/50 paying out to the 50% who lived long enough to collect it.

We're living longer and, relatively speaking, working less. CPP won't survive unless we recognize this.

[msj]

Correct. Unfortunately many a boomer failed (and continues to fail) to understand this.

Changes to contributions are noted elsewhere above. But the other change was the creation of the Canada Pension Plan Investment Board charged with investing existing CPP surplus contributions in more aggressive ways than the plan previously allowed. Over ten years, the board has averaged a 4.9% rate of return. As I've posted elsewhere, this is wholly insufficient and, without other changes, will only delay the funds' bankruptcy by 2 or 3 years.

CPP can only remain solvent by increasing penalties for pre 65 retirement and, more importantly, raising the retirement age to 70.

What most people don't understand is that the 65 year retirement age was set when only 49% of males and 53% of females lived that long: CPP was simply a big 50/50 paying out to the 50% who lived long enough to collect it.

We're living longer and, relatively speaking, working less. CPP won't survive unless we recognize this.

Given that the CPPIB is targeting a rate of return of 4.1% there is no reason to suspect that the rate of return of 4.9% is anything but adequate.

The contributions have been increased to keep the surplus contributions high for many years (i.e. they have been set up to take into account the baby boomers paying into the system and being paid out of the system).

I will trust the judgement of the actuaries who look at the details of the plan over your opinion any day.

[Visionseeker]

CPP contributions take 10% of a 40K salary now and will go higher as the boomers retire.

WRONG!

The maximum allowable CPP contribution for 2008 was $2049.30 regardless of income (check your tax forms)See line 308.

That represents just over 5% for someone earning 40K a year, and less than 2% for someone making 103K a year.

But I don't dispute that contributions will be forced higher in the future.

[Visionseeker]

It takes until October to pay off CPP and EI, the rest of the year we get a nice little raise!

That little piece of information gives me an idea as to your annual earnings. Some pay it off in May, others by July, but most actually go as far as December because it is deducted as a share of earnings. About a quarter of employed Canadians contribute less than the maximum.

[msj]

WRONG!

The maximum allowable CPP contribution for 2008 was $2049.30 regardless of income (check your tax forms)See line 308.

That represents just over 5% for someone earning 40K a year, and less than 2% for someone making 103K a year.

But I don't dispute that contributions will be forced higher in the future.

Given that employers match the deduction that the employee pays into the system, Riverwind is not wrong at all.

If you are self-employed then you will pay about $4,236 in CPP for 2009 (assuming you earn at least $46,300 in wages/business income) - half as the "employee" and half as the "employer."

Which begs the question of who is really paying the "other half" of CPP when you have a typical employee/employer relationship - the employee through less wages or the employer through less net income?

Either way, CPP is still going to get that $4,236 contribution on earnings of $46,300+ no matter who is paying it.

[mjp]

You can choose your own path now.

no you can't choose your own plan, you can not say I dont want cpp taken off.

also the other part of cpp, is if you make less then your min personal deduction you get your cpp back on your taxes.

the fact is, its a system of gov't welfare anyway you slice it, you can call it whatever you want. its still welfare. while both EI and CPP are both listed in the constitution as federal jurisdiction, welfare in general is a provincial matter... kinda odd but thats how its written.

[msj]

no you can't choose your own plan, you can not say I dont want cpp taken off.

And, once again, if you do not want to pay into CPP then you can organize your life to not pay into it.

Become self-employed and incorporate a qualified small business corporation and you can arrange to not pay CPP.

[Renegade]

And, once again, if you do not want to pay into CPP then you can organize your life to not pay into it.

Become self-employed and incorporate a qualified small business corporation and you can arrange to not pay CPP.

Somewhat like saying paying income tax is optional because you can organize your life to earn no income and thus pay no tax.

[madmax]

no you can't choose your own plan, you can not say I dont want cpp taken off.

also the other part of cpp, is if you make less then your min personal deduction you get your cpp back on your taxes.

the fact is, its a system of gov't welfare anyway you slice it, you can call it whatever you want. its still welfare. while both EI and CPP are both listed in the constitution as federal jurisdiction, welfare in general is a provincial matter... kinda odd but thats how its written.

Each Province can create their own pension plan. CPP is a Good thing and if each Province wanted to create their own, that would be better and people would be better off with it.

I want to know that our elders are well taken care of.

Today, I see people who lost 700,00 and 900,000 back in September. Their pension revenues have declined and they are seeking work because their private plans have collapsed, and are unlikely to recover in their lifetime.

Every Little bit helps and CPP does just that.

Nobody is hard done by, by paying into CPP.

And anyone who suggests that if their CPP payments where put elsewhere and their future would be brighter, is full of it...

I have many (unfortuneately) private pension plans, none of which can be amalgamated to make them stronger. They have been going in reverse. It feels like 1989 today, when I look at the figures.

I consider them a write off, and anything that comes from them in the future is a bonus.

All in all, pensions were (once upon a time) to be based upon deferred wages. However, because of scandalous corporations, many pensions were pillaged, and creating CPP created a level of security for all.

The other problem is private scammers who have taken people to the cleaners over the decades, and at retirement, discover they are victims of a long term ponzi scheme.

Possibly the most interesting thing that can come from this discussion, is that it is time for Provincial Pension Plan that can provide a modest pension.

Today, a pension is no longer a deferred wage, but a diversion of earnings into stock market gambling in hopes that something will be there when you can no longer work.

[Renegade]

I want to know that our elders are well taken care of.

Unless YOU have the financial capability to take care of our elders, you are also asking that someone else's money be used to take care of elders, unless of course, what you favour is a scheme where each elder is entitled to the equivalent of what they have contributed.

Every Little bit helps and CPP does just that.

So does a rainy-day savings account. Are you proposing that people be forced to save for bad times?

Nobody is hard done by, by paying into CPP.

When someone's freedom is taken away they are hard done by. Since people are are forced to contribute, they lose their freedom of choice.

And anyone who suggests that if their CPP payments where put elsewhere and their future would be brighter, is full of it...

Unless you have future vision, you cannot possibly know if an investement outside CPP would be better than a CPP investment.

All in all, pensions were (once upon a time) to be based upon deferred wages. However, because of scandalous corporations, many pensions were pillaged, and creating CPP created a level of security for all.

This is precisely why the onus of making pension choices shoudl be up to the individual and not the corporation. Corporations should not be running pensions because it forces them to take unwarrented risk, and risk that they seem to be bad at guaging. If individuals take undue risks, it is they themselves who will suffer the consequences.

Today, a pension is no longer a deferred wage, but a diversion of earnings into stock market gambling in hopes that something will be there when you can no longer work.

Would you instead propose that deferred wages be put into GICs or Treasury bills? Sure it is safe but it earns only a small rate of return.

[Jerry J. Fortin]

I should think that Provincial Pension Plans ought to be a no-brainer. These things could provide needed income to fixed income individuals. I think that in Alberta we could convert the Heritage Trust Fund into exactly this kind of thing.

[Smallc]

Unless YOU have the financial capability to take care of our elders

Ah yes, the cry of the right....ME, ME, ME!

[msj]

Somewhat like saying paying income tax is optional because you can organize your life to earn no income and thus pay no tax.

Not at all - one could easily (well, by working hard/smart) earn hundreds of thousands of dollars per year in a CCPC and set up a bona fide profit sharing plan.

The company would get the deduction, the individual(s) would pay income tax but no CPP (profit sharing plans are exempt from CPP contributinos) and earn RRSP room to max out RRSP contributions.

Alternatively, one could earn hundreds of thousands of dollars in a CCPC and pay little income tax on it (13.5% in BC) and take out dividends to live on. Depending on the lifestyle (i.e. how much one needs to take out of the company to live on) this can be a effective way to defer tax (although not as good as setting up the profit sharing plan above).

The options are there for those willing to use them.

[Jerry J. Fortin]

Not at all - one could easily (well, by working hard/smart) earn hundreds of thousands of dollars per year in a CCPC and set up a bona fide profit sharing plan.

The company would get the deduction, the individual(s) would pay income tax but no CPP (profit sharing plans are exempt from CPP contributinos) and earn RRSP room to max out RRSP contributions.

Alternatively, one could earn hundreds of thousands of dollars in a CCPC and pay little income tax on it (13.5% in BC) and take out dividends to live on. Depending on the lifestyle (i.e. how much one needs to take out of the company to live on) this can be a effective way to defer tax (although not as good as setting up the profit sharing plan above).

The options are there for those willing to use them.

You mean the options are there for folks with access to them right.........

[msj]

You mean the options are there for folks with access to them right.........

Sure, the mentally ill and physically infirm may have some trouble doing this (well, I know one guy in a wheelchair who is capable of doing this - he pays into CPP for the same reasons I pay into as mentioned above).

Other than that, it really is just a matter of doing it - either you have the drive or you don't. If you don't like CPP and don't want to pay into it then arrange your life accordingly and stop the whining.

It really is not as difficult as you think it is.

It's also not about being the "folks with access" but a matter of making oneself into a person with access.

[Jerry J. Fortin]

Sure, the mentally ill and physically infirm may have some trouble doing this (well, I know one guy in a wheelchair who is capable of doing this - he pays into CPP for the same reasons I pay into as mentioned above).

Other than that, it really is just a matter of doing it - either you have the drive or you don't. If you don't like CPP and don't want to pay into it then arrange your life accordingly and stop the whining.

It really is not as difficult as you think it is.

It's also not about being the "folks with access" but a matter of making oneself into a person with access.

There are a whole bunch of citizens that just work for a living. I have no idea what the split is but I would say there is likely not more than one in every twenty that has the "got what it takes" to own and operate a business. Most citizens don't or can't run their own shop. That is what I am really saying. It is that "most" that I am talking about. Those citizens simply don't have access to the system.

[msj]

There are a whole bunch of citizens that just work for a living.

Sure, and most of them are happy with CPP (well, assuming they are more informed about its viability than some [most?] of the people on this forum).

I have no idea what the split is but I would say there is likely not more than one in every twenty that has the "got what it takes" to own and operate a business. Most citizens don't or can't run their own shop. That is what I am really saying. It is that "most" that I am talking about. Those citizens simply don't have access to the system.

And "most" people are happy with the CPP system.

The whiners who aren't do have options to become the "one in every twenty" and not pay into CPP if they so choose.

[geoffrey]

It seems like people think that CPP is there to protect people. Not sure how?

If you didn't have CPP deducted and invested that money instead into an RRSP, you'd be just as well off (probably better than). If someone doesn't have the discipline to save that? Too bad. They can suffer.

Me on the other hand, shouldn't be susidizing the retirements of others while earning inferior returns on my assets. Give me my money back!

[Riverwind]

It seems like people think that CPP is there to protect people. Not sure how?

It provides an inflation adjusted income stream that is not affected by the markets.

If you didn't have CPP deducted and invested that money instead into an RRSP, you'd be just as well off (probably better than). If someone doesn't have the discipline to save that? Too bad. They can suffer.

Most people make shoddy returns on their RRSPs even if they have an investment advisor because they lose 2-3%/year to MERs in funds that often don't beat the market. Lecturing people because they don't have the knowledge/skills required to invest their money is like lecturing people for not being able to fix their own car.

Me on the other hand, shouldn't be susidizing the retirements of others while earning inferior returns on my assets. Give me my money back!

The people who need CPP would end up collecting some form of welfare so you would pay no matter what.

[August1991]

It seems like people think that CPP is there to protect people. Not sure how?

If you didn't have CPP deducted and invested that money instead into an RRSP, you'd be just as well off (probably better than). If someone doesn't have the discipline to save that? Too bad. They can suffer.

Me on the other hand, shouldn't be susidizing the retirements of others while earning inferior returns on my assets. Give me my money back!

Geoffrey, you and others in this thread (including msj) seem to view CPP as some sort pension/savings scheme but that gives an entirely wrong image. CPP contributions amount to a payroll tax (which, under some circumstances as msj notes, can be avoided). CPP benefits amount to a welfare/transfer scheme. There is at most an arbitrary connection between what one pays in and what one receives. It is closer to the truth to imagine CPP like OAP which is paid from general tax revenue.

At any time, the government can arbitrarily change CPP contribution rates (which they have done numerous times since its inception). The government can also change net benefit payouts through the simple expedient of changing income tax rates. Pensioners in higher tax brackets in effect return most of their CPP benefits to the government.

The better question is why the CPPIB even exists. We have nothing similar for provincial health insurance or the OAP which have no funding for future liabilities. OTOH, what are the consequences for society and people when the State takes over these broad-based insurance schemes?

I'll just add that CPP contributions amount to an extremely regressive tax and are almost a head/poll tax. Whether your income is $40,000 or $400,000, you pay the same amount - about $2,000. No other tax in Canada is like that and I'm amazed a government can get away with this. Margaret Thatcher lost power because she tried to install a poll tax.

And "most" people are happy with the CPP system.

The whiners who aren't do have options to become the "one in every twenty" and not pay into CPP if they so choose.

You can develop a scheme not to pay into CPP until Revenue Canada arrives and wants to do an audit.

We used to have a poster here who laughed at the rest of us who pay taxes. He doesn't post now; perhaps he has bigger problems.

Edited June 13, 2009 by August1991

[msj]

It seems like people think that CPP is there to protect people. Not sure how?

If you didn't have CPP deducted and invested that money instead into an RRSP, you'd be just as well off (probably better than). If someone doesn't have the discipline to save that? Too bad. They can suffer.

Me on the other hand, shouldn't be susidizing the retirements of others while earning inferior returns on my assets. Give me my money back!

Sure, if I put the $4,100 or so into an RRSP rather then into CPP then I could be better off.

I could be worse off, too.

I tolerate the "forced savings" exactly because it is conservative and is more likely to be their in my retirement then that 5% of my portfolio that I consider my "play" or "gambling" money.

The point is this - if you are so confident in yourself then I suggest you find a legal means to avoid paying into CPP which I have already mentioned above numerous times.

As for subsidizing the retirements of others - then why aren't you complaining about the OAS, the Guaranteed Income Supplement, the age amount tax credit, the pension amount tax credit and pension income splitting?

These are huge subsidizes going to everyone from poor seniors to very wealthy seniors (I have some clients who save $9,000+ in income tax/OAS clawback per year thanks to pension splitting).

[Jerry J. Fortin]

Sure, if I put the $4,100 or so into an RRSP rather then into CPP then I could be better off.

I could be worse off, too.

I tolerate the "forced savings" exactly because it is conservative and is more likely to be their in my retirement then that 5% of my portfolio that I consider my "play" or "gambling" money.

The point is this - if you are so confident in yourself then I suggest you find a legal means to avoid paying into CPP which I have already mentioned above numerous times.

As for subsidizing the retirements of others - then why aren't you complaining about the OAS, the Guaranteed Income Supplement, the age amount tax credit, the pension amount tax credit and pension income splitting?

These are huge subsidizes going to everyone from poor seniors to very wealthy seniors (I have some clients who save $9,000+ in income tax/OAS clawback per year thanks to pension splitting).

I will have to concede the fact that if someone really wants to "opt" out of CPP, that it is possible. The only sticker is that you will have to work even harder than you already do.

[msj]

I will have to concede the fact that if someone really wants to "opt" out of CPP, that it is possible. The only sticker is that you will have to work even harder than you already do.

Hmm, I thought that was the point about reducing taxes for people: to create the incentive for them to work harder, blah blah blah.

Of course, there are other rewards for being self-employed: pay is much higher, flexible hours (albeit more), get to delegate work, get to tell clients off when they really deserve to be told off, tell the same old jokes to the staff and watch them nervously laugh while knowing full well that they have already heard the joke a hundred times before, etc....

I suppose the whine can now be changed from I don't want to pay into CPP to "it's too hard to not pay into CPP."

The thing is, most of the heavy lifting has already been done for people.

Thanks to Allan Greber who successfully fought off the CRA to ensure that he and his wife could take money out of his incorporated law practice as employee profit sharing and thereby avoid CPP (amongst other benefits).

Thanks to various governments who have lowered small business tax rates (or even the dividend rate for dividends from medium/large Canadian corporations, for that matter) a person can live off of dividends to avoid CPP and not be penalized like in previous years [by penalized I mean pay higher income taxes due to very poor "tax integration" between the corporate taxes and individual taxes].

Just because this sounds to be too hard to folks like you doesn't mean it is for the rest of us who take an interest in our financial well being.