Here’s my latest MoneySense column, which looks at the headline-grabbing “news” that an Enhanced Canada Pension Plan (CPP) would mean roughly 243,000 low-income seniors might not be eligible for the Guaranteed Income Supplement (GIS) once the full-bore enhanced CPP system is in place in the year 2060.
Click on the highlighted headline for the full piece: Retirees should be happy not to qualify for GIS.
None of the five financial experts whose input appears in the piece disagreed with this article’s premise: that far from being a bad thing to make so much from CPP (or any other source of retirement income) that you exceed GIS minimum income thresholds, it’s actually a good thing. Yes, you have to work at a job to earn CPP benefits, whether “enhanced” or not, and yes, this entails payroll contributions taken off the top. That’s no different than anyone with a good employer pension or who saves in RRSPs or any other vehicles.
That’s what saving is all about: providing for future needs by taking a little out of current income. It’s all about living within your means, being responsible for your own future and all the other themes that the Financial Independence Hub espouses every day.
One of the sources for the GIS article was TriDelta Financial’s wealth advisor, Matthew Ardrey. Time and space limitations meant we could include only a snippet of Matthew’s analysis in the MoneySense column itself but he has given us permission to run his whole opinion below:
The government plans to enhance CPP through two measures. One, increasing the contribution amount from 25% to 33% and two by increasing the income limit on which contributions are made to $82,700. Combined these two measures will take the maximum pension of $13,370 today to about $20,000 in the future.
There will be some measures to offset these contributions for the employee including an enhanced Working Income Tax Benefit (WTIB) to help offset the cost for lower income workers and making the enhanced contributions a tax deduction instead of a tax credit. Though that helps out today it does nothing for the low-income earner in retirement.
As of Q1 2017, the maximum GIS and OAS payment was $1,442.62 ($578.53 OAS + $864.09 GIS) per month. Like OAS, GIS has a clawback. This clawback is calculated based on a person’s net income (line 236 of their tax return) less GIS, OAS and up to $3,500 of employment earnings less CPP & EI contributions. If any other income is received every $2 of income reduces GIS by $1.
In looking how enhanced CPP would affect a GIS earner, we can probably assume that they were not maximizing their CPP in their lifetime. So the more concerning part of the equation is the income replacement percentage. Let’s consider the following example to compare:
John Doe is 18 in 2025, when the CPP enhancement is fully implemented. His annual earnings are $25,000 per year. Under the old CPP his pension would be about $6,250 and under the enhanced CPP it would be $8,250. An increase of $2,000 per year. That increase of $2,000 per year would create a loss of $1,000 of GIS income. In addition, the CPP income received is taxable and the GIS non-taxable.
Original CPP = CPP $6,250 + OAS $6,942 + GIS $7,244 = Pre Tax $20,436 – Tax $258 = After-tax $20,178
Enhanced CPP = CPP $8,250 + OAS $6,942 + GIS $6,244 = Pre Tax $21,436 – Tax $558 = After-tax $20,878
So if someone has more money in their hands after the enhancement, why the concern? Even though the taxpayer is taking home more net, they are effectively being taxed at 50% by the CPP enhancement, as GIS is clawed back $1 for every $2 of income. This is hitting the most vulnerable members of our society as well. There can also be some further loss of any income-tested benefits.
Some may also consider that the lower-income employee is having their take-home wage reduced while contributing. The government’s enhanced WTIB should offset a good portion of that, along with the tax deductibility of CPP enhanced contributions. Before I could sign off on that I would need to see some detailed calculations on how it would work.
So when compared to a non-GIS CPP recipient, those receiving GIS are getting the shorter end of the stick on this deal. Who is really benefiting is the government. They are able to trade part/all of a fully government funded income stream for one funded by private citizens, both employee and employer.