Tax Season

CPP: How Canada's retirement bedrock has held up through the economic shakeup

In the wake of the financial crisis, what can the average Canadian expect from the Canada Pension Plan in their golden years?

Once an unassailable pillar of Canada's retirement system, the Canada Pension Plan came under attack during the financial credit crunch of 2008.

Nervous Canadians, seeing the carnage inflicted upon global financial markets in 2008 and early 2009, became worried that the CPP was in danger of disappearing.

The CPP Investment Board (CPPIB) — the organization responsible for maintaining the national pension plan's investment assets — said the fund shrank to $105.5 billion by the end of fiscal 2009. That represented a substantial drop from an asset base of $123.5 billion in the previous year, and was especially worrying for a fund where the word 'loss' is rarely heard.

So in the wake of the financial crisis, what can the average Canadian expect from the CPP in their golden years?

Retirement crunch

Canada's public pension plan was not the only retirement vehicle to face tough times in the past 15 months.

RBC Dexia, which provides various investor services, regularly surveys Canadian pension plan managers running assets worth more than $310 billion and found 2008 to be the worst year in recent memory. All told, these funds posted returns of negative 15.9 per cent for the year, it found.

In a more recent survey, the same firm asked plan managers how they felt about the prospects for Canada's pension system. In October 2009, 38 per cent of the 370 professionals polled said they believed the country's pension regime — which includes public and private plans — was "poorly positioned" to pay for future obligations.

Some of the negative feelings towards Canada's pension plan, however, likely stemmed from high-profile bankruptcies, such as Nortel Networks Inc., where the retirees may end up getting little from their private plans.

Turning the CPP around

So what's the outlook for the Canada Pension Plan?

In spite of the economic downturn, Canada's main pension pillar appears to be on the comeback trail.

"I don't think the CPP is going away," said Sid Giroux, a financial planner based in Okotoks, Alta.

So far in fiscal 2010, the CPPIB has reported that the plan's asset base had risen to almost $124 billion, recovering all of the losses it suffered in the previous year.

To be fair, gains from improving investments accounted for approximately two-thirds of the fund's improvement. The rest came from increased payments from existing plan holders and new contributors.

Still, in July 2009, Canada's chief actuary said the CPP should remain solvent for the next 75 years based on current projections.

Thus, the 17 million Canadians covered by the CPP should have more confidence that the plan will remain an asset they can include in their financial plans.

"This stands in sharp contrast to countries such as the United States, where social security has yet to be reformed and is clearly unsustainable as currently constituted," said David Denison, the CPPIB's president and chief executive office, in an October speech.

Plan improvements

Indeed, as the CPP makes a return to a more solid financial footing, its importance in Canada's retirement pantheon might actually increase.

With a growing number of Canadian companies reducing pension plan benefits or eliminating their plans altogether, the government has proposed a series of mild reforms to CPP.

For example, Canadians who are still working, are under the age of 65 and receiving the CPP, cannot continue to contribute to the national pension plan under the current rules. The government's proposed changes, which could be in place by 2011, would permit these workers to keep putting money into the CPP.

In addition, Ottawa wants to expand the number of low-income years you can exclude from your pension payout calculation.

These changes, while not radical in nature, show a public plan looking to expand, not contract, its coverage.

What you can expect from the CPP

"For retirement, the CPP is very important," said Lee Anne Davies, head of retirement strategies for the Royal Bank of Canada.

Under the current regime, Canadians can receive a maximum monthly payment of $908.75, which translates into a yearly stipend of almost $11,000.

The average payment works out to $493.25 a month, or nearly $6,000, according to government calculations.

That is a nice chunk of change, but still not sufficient to have Alberta's Giroux make it the centrepiece of the retirement strategies he works out for his clients.

"We just plan for it as a bonus," he said.

Instead, Giroux relies upon a long-term program, keeping a balance between fixed-income and other low-risk investments and higher return equities, to build his customers' nest eggs.

Giroux's concentration on other pieces of the retirement puzzle makes sense when you consider that the average elderly family in Canada earned $54,200 in 2007, according to Statistics Canada. Thus, a couple would get approximately 11 per cent of their total income from CPP payments, an important financial asset to be sure but not the majority of their monies.

Given the monthly income it can be expected to generate in the coming years, CPP shouldn't be the only money Canadians plan to live on in retirement.

Drilling down further into the data, for example, shows that single elderly women in Canada who did not work to supplement their finances had a typical income of just $13,700 in 2007. In those cases, the CPP payment made up much of their annual income.

Generally, the CPP has kept its pensioner payout low in order to improve its solvency, according to Richard Shillington, author and pension critic.

Even typical payments from the much-derided American pension system replace a larger portion of the retiree's working income than does Canada's, he said.

"The CPP is just so un-generous," said the Manotick, Ont.-based public policy consultant.