How the enhancement of Canada Pension Plan will affect your financial plan

OTTAWA – Proposed changes to the Canada Pension Plan will help significantly boost retirement income for Canadians, but only long after they are implemented.

Those already in the workforce, especially those closer to the end of their working lives than the beginning, shouldn’t be looking to the enhancements for help in retirement, experts say.

Investment specialist Robert Kazan of Alterna Savings suggests that those who are going to benefit fully from the changes haven’t yet even started their careers.

“It’s really going to be the teenagers, those born after the year 2000, who are going to get the full benefit, more so than the middle-career earners or pre-retirement workers,” he says.

The tentative changes will see the amount Canadians receive from CPP increase from one quarter of their eligible earnings to one-third. The maximum amount of income covered by CPP will also increase by 14 per cent to roughly $82,700 by 2025.

That means workers are also going to see more deducted from their paycheques to pay for the enhanced benefits in retirement.

But the phase-in is going to take time and won’t even begin until 2019, with full implementation scheduled for 2025. That means anyone retiring before 2019 won’t see any difference and those retiring shortly after that will see very little improvement.

Cynthia Caskey, a vice-president at TD Wealth, says it’s important to remember that CPP should be only part of your retirement plan. Even combined with Old Age Security, it is probably not enough to provide what many would see as a comfortable retirement.

“It is still very important to think about saving on your own and your own savings strategies,” she said.

The average monthly retirement pension at age 65 paid by CPP this year is $664.57, a little more than half the maximum of $1,092.50.

Caskey also noted that while young people will benefit from the improvements to CPP, they will also face the challenge of likely entering the workforce later than earlier generations.

In the past, she said Canadians worked for perhaps 40 years and had 20 years in retirement, but now workers aren’t entering the workforce until they are older and can expect to live longer.

“Because of the longevity, you could be in retirement for 25 or 30 years,” Caskey said.

“So the importance of saving is even more important.”

Kazan says there are two ways to look at what a larger CPP will mean for the investment strategies of young Canadians.

“There’s the one school of thought, (those) who look at their Canada Pension Plan, their Old Age Security, their workplace pensions as a safe haven … which then facilitates or allows them to take on more risk on the investment side of things,” he said.

In the other school of thought are investors who want to take as little risk as possible and can be even more conservative now knowing that they will receive a larger CPP payment in retirement.

Kazan says which is right for you will depend on your risk tolerance and financial plan.