“Because it has become increasingly difficult for individuals to build their own security single-handed, government must now step in and help them lay the foundation stones.” – Franklin Roosevelt
You may be worried about your retirement finances – or feeling pretty good about them. Regardless of your personal situation, you know from ongoing media coverage that many workers are concerned about being adequately financially prepared for retirement.
Same themes, over and over again
Employer defined benefit pension plans have become a rarity. People haven’t been saving enough personally and are carrying too much debt.
They aren’t confident about how to invest. They are worried about the future.
The news stories seldom provide any insight or ideas for possible solutions. However, a recent Globe and Mail article featured CIBC CEO Gerry McCaughey’s ideas on CPP reform.
He states that Canadians should be allowed to make voluntary contributions over and above what they already pay through payroll deductions.
This would ensure a forced savings – with no withdrawals allowed – in order to get a secure, predictable lifetime payout on retirement.
We already have voluntary savings plans in place – RRSPs, TFSAs – that the majority of Canadians are not fully utilizing.
24% of eligible tax filers contributed to an RRSP in 2011 with a median contribution of only $2,830.
The numbers are equally dismal for TFSA use, with only 23% owning a plan in 2010.
The problem with optional plans is – well, they’re optional.
Those people in low and medium income brackets are the least likely to participate in any of these retirement plans, and they are the ones who have the least financial security.
For some of those with plans their savings are insufficient for retirement income and are unlikely to last for twenty or thirty (or more) years.
A legitimate pyramid scheme
A pyramid scheme is a financial arrangement in which a small number of early members receive payment from a larger number of later members.
The schemes collapse, because they can’t recruit enough new members at the bottom to make payments to the old members at the top. They are unsustainable.
Related: Learn From Baby Boomer Mistakes
CPP originally was set up as a “pay-as-you-go” approach, meaning that the current workers’ contributions that are going in are used to pay the retired workers’ benefits that are paid out.
The goal was to provide a safety net for a few years and is funded by equal contributions from workers and their employers, out of everyone’s paychecks.
But the ratio of workers paying into the system has fallen in comparison to the number of retirees collecting benefits.
A lower birth rate means fewer workers paying in. An increasing life span means people are taking longer and longer to kick the bucket.
A small number of old people were like the early pyramid members at the top, and a large number of workers were like the later members at the bottom.
This retirement approach worked because it was relatively inexpensive per worker. It was also sustainable, because most people didn’t live to be that old.
Related: Are You Counting On An Inheritance?
But as people live longer and there are fewer workers, the top of the pyramid gets broader compared to the bottom. This has never happened before and changes to the system will have to be made as it will eventually become much more expensive per worker.
CPP Reform: A new approach
Every pensioner feels entitled to his or her monthly payment and looks forward to it. For many, it is their largest source of income.
Future recipients of that monthly payment feel just as entitled.
With the total contributions coming in shrinking in proportion to the total payments going out, we’ll need to either increase the contributions or reduce the benefits. Neither of these options will be popular.
Optional CPP contributions may be the answer, especially if one were able to “top-up” their contributions (as allowed by some company pension plans) to make up for any times of unemployment or low income.
It would be more palatable to know it’s for your own benefit, rather than paying for the retired old geezer down the block.
Would you be willing to increase your CPP payroll deductions to secure a larger pension payout that would last for the rest of your life?