Liveable Wage in retirement

Richard Thaler, who won the Nobel Prize suggests that employers should use the opt-out option rather than the current opt-in option to help employees invest for retirement. This is a good idea and one that the Canadian government follows with its pension plan, the Canadian Pension Plan (CPP). Everyone in Canada who works for another person has to pay into the Pension Plan, there is no opt-out clause. The Canada Pension Plan started in 1965.

The CPP was a response to growing poverty among retired Canadians. The aim of the CPP was to cover 25 percent of a worker’s average lifetime earnings, up to a stated ceiling on earnings covered. The CPP was originally financed entirely by payroll taxes (or contributions) levied on employers, employees and the self-employed. Benefits depended on current contributions.

The CPP now earns investment income, along with payroll contributions, which are split equally between employers and employees, with the self-employed paying the full rate. The average annual CPP pension received by a retiring 65-year-old person at the end of 2016 was $7,728 – versus a possible maximum of $13,368. 

Plan participants can opt to start receiving their pension anytime between the ages of 60 and 70, with the annual pension amount adjusted up or down on an actuarially fair basis. The Plan also features an array of ancillary benefits for survivors, for disability and for death. The employer and the employee investment in the Plan at the end of 2016 was 9.9 percent of pay (split 50-50) on annual earnings between $3,500 and the maximum eligible earnings cap of $54,900.

In an earlier post, I suggested that the Financial Planning Industry would like us to invest about 15% of our income toward saving for retirement. Saving this amount is very difficult for young workers or even workers in their 40’s. However, if we recognize that we are already saving about 10% of our income through the Canada Pension Plan, then saving another 5% may not be difficult for some. For others, the idea of saving more is still something they cannot do on their income.

In Canada, there has been a movement to increase the amount of money Canadians save in their Canada Pension Plan, by raising the amount paid by the employer and the employee. If the rate was raised by 2.5% for each this would bring the Canadian worker to the 15% mark and would provide more income at retirement. The government could also raise the eligible earning cap from $54,900 to $75, 000. 

In Canada, every person no matter how rich or poor is entitled to receive an Old Age Security (OAS) check every month, at age 65. The amount of this check is $ 570.52, However, if you earn over $ $73,757 a year, the government starts to clawback (reduce) the amount you receive every month. Once you earn $118,000 a year you receive no OAS.  If the workers of Canada had more money from their CPP when they retired, the government could reduce the clawback ceiling for the OAS, from about $118,00 to a more equitable amount and most seniors would be better off than they are with the current system.

By adding more to CPP and reducing OAS clawback, this the government would have more money to give to those who did not work and should receive a pension. Some of the provinces in Canada are starting to look at the idea of a livable wage instead of paying welfare. This idea is normally seen as one that would affect young and middle-aged individuals and families, who are now on some sort of welfare. Moving toward the idea of a livable wage is a good idea, but it should also be carried into retirement for those who did not work, could not work or chose not to work, so we do not go back to high levels of poverty for seniors.