My latest Financial Post blog looks at the misplaced perception that the Canada Pension Plan (CPP) might not be there for future generations. Click on the headline to retrieve the full article: No reason to fear CPP’s stability, CEO Machin says, but people do it anyway.
Mark Machin is president and CEO of the Canada Pension Plan Investment Board (CPPIB.) Speaking Tuesday to financial advisors attending Advocis Symposium 2017 in Toronto, he said “unlike virtually every other industrial country in the world,” Canada “has solved its national pension solvency issues.”
While you could argue that even America’s Social Security system is not solid for the next generation of American retirees, the CPP is on a solid actuarial footing. Canada’s chief actuary says CPP is sustainable over 75 years, assuming a 3.9% real [after-inflation] rate of return: CPPIB’s 10-year annualized real rate of return is 5.3%.
Despite this, many Canadians — and perhaps some of their advisors — continue to profess their belief that the CPP won’t be around for them by the time they retire. 64% believe either that CPP will be out of money by the time they retire, or don’t know whether it will be there to pay them in retirement, Machin told Advocis.
Half of retirees greatly rely on CPP
However, in practice, Canadians tend to have more faith in the CPP than they claim: 42% of working-age Canadians expect to rely on the CPP when they retire (up from just 13% 15 years ago). In 2016, more than half of Canadians who are actually receiving CPP said they rely “to a great extent” upon it.
Of course, most everyone who receives CPP or expects to can also count on Old Age Security (OAS) once they turn 65, unless their retirement income is so high that it gets clawed back.
But Machin reminded advisors that CPP (or OAS) was never meant to be the sole source of retirement income. It was designed to “replace” about 25% of working income. Addressing Millennials, he said this will go up to a third once the Expanded CPP is fully implemented (gradually into the future).
The fortunate who have employer pensions will have a good “second pillar” of income to retire on but even then, the long-established trend to replace guaranteed-for-life Defined Benefits with Defined Contribution pensions that vary with market performance has “forced many retirement savers to become stock market investors” Machin said. And young Millennials who came of age during the financial crisis of 2007-2008 often lack confidence to invest in the market.
But that shouldn’t be an excuse not to save to supplement CPP/OAS. And that’s the role that Advocis and financial advisors have to play: to help overcome the “confidence deficit” of investors. That means taking advantage of the so-called “third pillar” of retirement income: personal savings, whether held in tax-advantaged vehicles like RRSPs or RRIFs, TFSAs or even non-registered savings.