CPP awareness still lacking, poll suggests

(March 1, 2005) If the growing number of Canadians opposed to mandatory retirement is any indication, traditional goals and dreams are shifting and retirement expectations are perhaps becoming more realistic. On the other hand, many people don’t have a solid understanding of pensions, and the personal planning needed to cover their income needs in retirement.

In particular, there’s a lack of knowledge of how much Canadians will get from the CPP when they retire. Since reforming the plan in 1997 and creating the CPP Investment Board (CPPIB) to manage the plan’s reserve fund, the board and the chief actuary of Canada have been on a campaign of assurances with one main message: that plan assets are growing and the CPP is sustainable for at least another 75 years.

A recent survey by Decima Research says despite this, many Canadians don’t know what the CPP will deliver and those who guess expect much more than the plan offers. Half of respondents could not even offer a guess as to what their CPP benefits would be, including four out of 10 people over age 55.

Younger respondents were far more optimistic than older people. Those who did guess imagined that CPP benefits were over $20,000 a year. Those already retired provided an average guess of $9,600. In reality, the maximum available benefit in 2005 is $9,945. Estimates provided by survey respondents averaged around $13,200.

Although the survey suggests the younger generation’s expectation are somewhat unrealistic, they are not that far off once the CPP’s two indexing formulas are taken into account. The CPP is indexed to average wage growth. Once benefits start, they are indexed to inflation.

Bruce Cohen, author of The Pension Puzzle, suggests another reason for the discrepancy. “There’s an inherent problem in polls like this, which is many Canadians don’t understand that there are two federal retirement programs — Old Age Security (OAS) and CPP. Everyone tends to lump them together as CPP,” he says. Also, he says the polls don’t often distinguish between current dollars and future dollars. “So a young person, if they’re thinking in terms of future dollars, they’re not that far off.”

For example, the CPP maximum of $828.75 per month, indexed to average wage increases of about 3% over 20 years is worth $17,962 annually in 2025 dollars. The OAS is also tied in this way to the consumer price index and indexed for inflation.

When accounting for these amounts in a financial plan, Cohen says advisors can rely on CPP benefits existing in the future. “The CPP is not a federal program. CPP is sponsored jointly by the federal government and the provinces except for Quebec,” he says, and making changes to the program requires agreement from each of the related parties.

OAS on the other hand is funded by the Federal treasury and, although it’s unlikely, the program could be the victim of cost cutting measures in future budgets. “Already the governments over the years have made three attempts to reign in the growing cost of OAS,” says Cohen. “Only one of those attempts was successful and it wasn’t all that big a deal, but it is significant that the federal government alone can change the rules on OAS.”

For middle and higher income clients he suggests cutting the OAS credit in half during the accounting process, or leave it out of the financial plan entirely and keep it on the side as a perk.

“I think what I said in my book is if you and your spouse expect to have a joint retirement income of about $60,000 a year then your OAS entitlement is probably safe. If you expect a retirement income of more than that, then you might want to reduce it or not include it at all. Just keep it as a fudge factor.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com