Tuesday, April 1, 2014

Feds Announce Sweeping CPP Changes



Of course, this is an April Fools’ joke.  No government could survive trying to make such a change.  Too many Canadians cling to the vain hope that they can retire comfortably with minimal savings at age 60 on CPP and OAS.


Experts say that Canada’s new Finance Minister is trying to make his mark on his new job by announcing sweeping changes to the Canada Pension Plan (CPP). Claiming that “average Canadians don’t want to think about how to invest their savings,” Oliver declared the current dominant model of defined-contribution pensions “a failure.”

Citing evidence that individual investors consistently make poor choices buying high and selling low, “people need to be able to save their money in a fund they can trust, and that fund is CPP.” The current level of mandatory CPP contributions will stay, but additional contributions up to an income-tested maximum will be permitted “and encouraged.”

A further problem is that CPP payments are just too low. “Canadian who don’t save any of their income are left with CPP payments too small to live on.” To remedy this, there will be a gradual shift to CPP benefits starting at age 75 for those who make no extra contributions. “It’s a personal choice. If you choose not to save, you can work until you’re 75. If you save, then you can get CPP payments starting earlier.”

There will be a phase-in period so that Canadians under 55 currently will fall under the new system where all their mandatory contributions will be directed toward payments after they are 75. “Canadians will have meaningful CPP benefits after age 75 instead of meagre payments starting earlier.”

Those older than 55, but not currently collecting CPP benefits will get a hybrid between the old CPP rules and the new rules. Those currently collecting CPP will see no change, which means that they will not get larger payments at age 75. “We are creating a model where your CPP benefits are based on your contributions rather than just taking more from the young and giving it to older Canadians.”

With the expected growth in CPP contributions, keeping costs low and avoiding political interference in CPP management will be more important than ever. “We favour an approach based on incentives. CPP employees will receive bonuses based on how low the overall costs are. This creates a strong incentive to avoid growth of bureaucracy.” Strict auditing of costs will be used to determine bonus amounts.

Another planned change in how CPP is run is to adhere to a strict investment model of creating a portfolio investing in a representative sample of the whole world without any discretion for the investment managers. “Misguided attempts to beat the market and possible political interference in how funds are invested will be eliminated.”

Future CPP benefits will no longer be based on inflation. Any increases in benefits will come from how the CPP investments perform. “Rather than shift risk to taxpayers, all Canadians will share in global growth. Every effort will be made to smooth out benefit increases from year to year.”

We are entering “a new era” where all Canadians must make mandatory CPP contributions to give themselves a meaningful standard of living past age 75. This who choose to save more than this will have the option of saving their money in CPP and collecting benefits before they turn 75.

6 comments:

  1. Looking forward to tomorrow's post -- presumably it will be a follow-up? :-)

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    1. @Returns Reaper: Yes, this important story of the future of CPP will no doubt stay in the news for some time.

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  2. I'm shocked, just SHOCKED! How could the government do something so drastic and far reaching and then sneak it in under the radar by announcing it only on Michael James' blog!

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    1. @Greg: Knowing the high intelligence of this blog's readers, the government must be testing such big ideas here first to gather feedback and make necessary improvements.

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  3. This is almost as good as CCP's announcement of the new couch potato mutual fund with Mer's of only 2.4 % and a a choice of a 5 or 7% sales or trailer fee. April is sweeping in new great ideas.

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    1. @Paul: Dan's post is very funny. I liked the option of paying both the 5% front-end load AND the 7% deferred load.

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