Tag Archives: CPP

RRSP Over Contribution

I finished a draft run on my taxes from last year for both my wife and I and realized I have a small problem.  I did much better on contributing to our RRSPs than I thought I did.

On the plus side I should be getting back over $4000 in a refund.  On the down side I believe I have burned through all my backlog of RRSP contribution room and then some.  At first I thought I was fine and then I realized if I claimed all the contribution in the first 60 days of this year on my 2013 taxes I would end up over contributing by just under $200 than my limit.

Now I have two potential solutions to this RRSP over contribution issue:

  1. Don’t claim $200 of RRSP contribution in 2013 and carry it for use in 2014 or
  2. Do nothing and realize I can over contribute by $2000 in an RRSP for a given year.

I had forgotten option #2 existed until I was reviewing some tax websites, so I tempted to just do nothing and take the refund.  After all it will balance out next year anyway.

In the longer term I now have to look at potentially doing something, but I’m not 100% sure I can.  I’m out of back contribution room in my RRSP, but my wife has about $20,000.  Yet she earns so little she doesn’t pay any income tax.  So I’m looking into if she contributes lets say $10,000 to her RRSP that would drive her income to zero and then does that trigger the transfer of her basic income deduction to me?  Thus giving us a tax savings at my marginal rate.  That is all in theory, I need to confirm we could do it.

Yet that plan would have a downside of introducing a zero income year on my wife’s CPP calculation.  Which would be fine if that occurs during a year when she could claim a child rearing provision to her CPP calculation, but otherwise may lower her CPP benefits in the long run. Ah choices in life.

So have you run into any odd situations with your income taxes this year?  If so, please share what it was and how you dealt with it.

Expanding the CPP Won’t Kill Jobs

I think I may lose it here.  If I read just one more article about someone saying expanding the CPP (Canada Pension Plan) will kill jobs because it is like a tax hike…. I think I might throw up.  Let’s ignore the fact, it won’t be a tax at all and really a savings plan, and go right for the heart of this insane defense: raising taxes will kill jobs.

In effect people arguing that a tax hike will reduce GDP(Gross Domestic Product) and thus reduce the number of jobs, but of course this really doesn’t hold any water.  Money that goes into the federal government doesn’t just turn into mud and be utter useless.  The government spends the money…shocking I know.  With all the services they provide and the infrastructure they have to keep up the government really does have to spend money.

For example, the federal government pays their employees to do work and guess what those employees spend their money on housing, utilities and even beer and popcorn.  Is government money magically different and doesn’t get added to the GDP?  No of course not.  So when the government gives a grant to build a water treatment plant, does that not help the GDP? Of course it does.  Or if the government starts a new program and hires staff does that not create jobs?  Of course it does.

It really doesn’t matter who spends the money: business or government.  As long as it goes out the door it will help the GDP and create some jobs as well.  It’s like arguing that leaving by the door on the right if different then the door on the left…both get you outside so there really isn’t any difference.

Yet, if it goes into a savings it won’t be spent, so won’t that kill jobs?  Um, do you know where all that excess money that the CPP gets right now goes?  Oh right, the CPPIB invests the money into businesses, which will usually take the money to grow their operations and grow the GDP…of course if the company is outside Canada it won’t directly help our GDP, but if our trading partners are doing better that also helps us.

Long story short: raising a tax won’t kill jobs…it will likely shift some around, but not remove them from the total.  So don’t hide behind that as an excuse to avoid changing a program that will help the majority of people save for retirement.  It’s not like the boomers did a great job saving for their retirements, so I think we have enough evidence that the current set of programs aren’t working well for the majority of people.

So what are you thoughts on PEI’s proposal to expand the CPP?

CPP Isn’t a Good Deal

Tim’s post on pension reform struck a chord with me. I agree with him that the proposals by government for expanding the CPP are a bad idea. I have three major problems with this idea, only one of which I will explore in detail. First, the idea that Canadians aren’t saving enough is based on too many assumptions for me to be convinced. It’s also the result of a conflict of interest, in that the CPP investment board would rather manage more funds. But whether or not the conclusion is correct, my second problem is that $127.6 billion (or more) is too much money to entrust to the care of a small group of people. Third, CPP doesn’t offer Canadians a good deal. This is the idea that I want to explore.

Let’s begin by looking at how much is saved each year on your behalf. The total contribution, employer + employee, is 9.9% of your pensionable income (maximum of about $47,200). That is an increase from 3.6% in 1985. For 2010, the maximum contribution (for anyone earning over $47,200) is $4672.80 (for self-employed people, or split equally between employer and employee). Benefits are calculated based on 25% of average pensionable earnings, so for this example we will assume that the maximum was saved each year.

For the purpose of this example, let’s assume an individual graduates from university at age 22 and begins working with an income of $47,200 (or more) and maintains at least this level of earnings over their career. They retire at age 65, having worked for 43 years. We will use constant dollars, ignoring the effect of inflation since benefits are adjusted for inflation. This means that the 22 year-old graduate will contribute, either personally or from the employer, $4627.80 each year for 23 years. The total contributions will be $107,474.40.

The resulting amount of capital, $107,474.40, includes no investment return. To see what rate of return is implied by CPP benefits, let’s look at the current cost of annuities. (Disclaimer: this uses data for a female, whereas an annuity for a male at the same age would cost less, implying a lower return from CPP.) At age 65, a woman can expect an annuity to pay out interest and capital at a rate of about 6.84% per year. This will last to the end of her life, with no value at death. In this way, it works exactly like CPP. At age 65, the maximum CPP benefit is $960.00 per month. This is the amount of the benefit that would be earned in the example given above. In order to buy an annuity with a similar benefit, assuming a 6.84% payout rate, would cost $168,421. An indexed income, which CPP provides, would cost somewhat more than this.

Now it’s time to complete a future value of money calculation. Saving $4627.80 each year over 23 years and finishing with $168,421 implies a rate of return of 3.95% per year compounded. Add to this the fact that CPP may be around 20% funded, with the goal of being 30% funded by 2075. The fact that the fund is transitioning from pay-as-you-go (ie. current workers pay for current retirees) to a hybrid structure (ie. partly funded by current workers saving for their own future benefits) explains the low rate of return. The difference between this and the expected (market) return is what increases the funding level and the stability of the plan.

Personally, I expect not to rely on CPP. I can get a better return than 3.95% and I can take responsibility to save for my own retirement. And it’s a good thing, since I won’t even have the option of paying into CPP if I have no earned income. When I retire early and begin to rely on investment income (or move abroad), my contributions to CPP will end and my expected benefit at age 65 will stop increasing. People who are self-employed also have this option. If they take their income as dividends instead of salary, they don’t contribute to CPP and are wholly responsible for their own savings.

I don’t believe CPP is a bad idea. It provides a minimum income so that elderly Canadians are less likely to live in poverty. A couple who receives maximum CPP for a single spouse and OAS for each spouse should receive around $2000 per month. But it doesn’t mean we should expand CPP. It provides only a safety net and, as was mentioned in the comments to Tim’s prior post, different people prepare themselves in different ways. Who am I to say that choosing to reduce your spending, choosing to move to a lower cost country or choosing to reverse mortgage your house aren’t equally valid ways to deal with the need for income in retirement.

How do you feel about CPP? Do you appreciate the safety net it provides? Should people be forced to save more? Is it the government’s place to help us retire?