You Shouldn’t Rely on Government Benefits

The American Social Security system has been under a lot of scrutiny lately, many questioning its sustainability. With the potential downfall of American social security, we thought it would be interesting to take a look at the current status of the Canadian government benefit system.

The main government benefit in Canada is the Canadian Pension Plan (CPP). It was established in 1965 under Prime Minister Lester B. Pearson. CPP is funded by contributions from both the employee and the employer. In 2017 the CPP Investment Board managed $328.2 billion on behalf of 20 million Canadians.

Most people plan on retiring at some point in their life, but how people plan on funding their retirement can differ. Retirement funding can be thought of as a three-legged stool; personal savings, pensions, and government benefits. When one is weaker, the others must be stronger to compensate.

A lot of people believe that the Canadian Pension Plan (CPP) and Old Age Security (OAS) will be enough to survive on later in life, but that may lead to some uncomfortable realities. Sole reliance on government benefits will only provide a very basic income that we are not used to living on.

At age 65, the maximum CPP a retiree can receive in 2018 is $1,134, and OAS is $586. This amounts to a total of $1,720 on a monthly basis or $20,640 annually. Remember that this is the maximum CPP and that the average Canadian receives a CPP benefit that is much lower, at only $666 a month or just over $15k annually (including OAS).

Eligibility for maximum CPP benefits is calculated on the best 25 years of your 40 years of working and contributing. Contributing the maximum to CPP and being eligible for the maximum CPP benefit at retirement is not very common. Having taken any significant time off, or having years with lower taxable income can decrease your CPP entitlement substantially. In 2018 terms, you must earn at least $55,900 of annual taxable income in order to have made the maximum CPP contribution in that year.

In some cases, people may be able to survive on $15k a year, but that is the exception, not the rule. Especially with the ever increasing drug costs and seniors residences/assisted living home fees.

Those that can currently survive on CPP and OAS alone, must be careful to maintain a modest quality of life. They most likely would be carrying no debt, not expect to do any traveling, and keep expenditures at a bare minimum. Any unforeseen expenditures could quickly become unaffordable and cause the retiree to look at cutting lifestyle spending just to make ends meet.

For some, this might be possible, but not desirable. We always advise our clients to plan out what they want their retirement to look like. The earlier you can clearly state your goals, the more time you have to work towards them and the more obtainable they become.

We never know what expenses might come up in retirement or if our lifestyle goals will change. It is better to have extra savings then it is to run close to the line. With more than adequate savings you are able to do things that otherwise wouldn’t be possible; leave an inheritance, last minute vacations, helping grandkids with education costs.

Social security was never meant to be the primary income of all retirees but as a supplement for those who weren’t able to save enough during their working years.

We are not suggesting that the demise of Canadian government benefits is looming by any means. In reality, CPP is in great financial standing. Since the changes that were made in the mid-1990’s to increase contributions, it has seen the funds under management grow from $35 Billion to $328 Billion.

The Chief Actuary, an independent body that checks CPP finances every three years, says the plan is sustainable until at least 2090 without increasing contributions or scaling back benefits based on annual investment returns of around four percent after inflation.

CPP and OAS are likely to be sticking around for our lifetimes, and might even outlive their US counterparts, but have you planned out what type of income and lifestyle you want to live in retirement? Contact us if you’d like our opinion on how ready you are for retirement!

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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy.



Don’t Rely on Social Security