How the New Changes to CPP Harm Women

The good news is Canadians, especially Canadian women, are living longer. A 65-year-old woman today can expect to live to 87, three years longer than a man. The bad news is this increased longevity comes with a hefty price tag, one that many women are ill-prepared to face. And, recent amendments to the Canadian Pension Plan may also harm women’s financial health in retirement.

The expanded CPP, Bill C-26, comes into effect in 2019. It gradually bumps up both employer and employee contributions— in 2019, the increase is 0.03%. By 2025, CPP payments will represent a third of previous average earnings, instead of a quarter. Another amendment allows a spouse to receive survivor benefits immediately regardless of age, disability or dependent children.

So far, so good.

But the government has also removed a clause that actually helped women. Now, those who temporarily step away from the paid work force to do reproductive work or to care for family members will no longer be able to exclude those low or no income years from their lifetime average earnings.

Instead, the government will “drop-in” an amount based on a formula that averages earnings of the past 5 years. “For women who have maxed their CPP contributions, this should still be okay but for those who have a more limited earnings history prior to starting a family, they’ll be a little more worse off,” says Fred Vettese, chief actuary at Morneau Sheppel and the author of Retirement Income for Life. “And, it’s likely that if a woman starts a family in her 20s, she won’t have had the chance to maximize CPP contributions, so my feeling is this change is more harmful than good for women.”

Since low-income women are the main beneficiaries of means-tested government pensions such as the Guaranteed Income Supplement, higher CPP payments may cut some women off from those benefits. (According to a recent report by The Broadbent Institute, 28% of senior women in Canada live in poverty, although it’s important to keep in mind that as average incomes continue to increase, the threshold for poverty increases as well.)

In addition to greater longevity, other factors to consider are expectations of slower global growth and lower investment returns. These put more pressure on both women and men to save more for retirement—or plan on spending a lot less. According to a recent poll by CIBC, most Canadians say they don’t know if they’re saving enough for retirement, with women reporting that they are less retirement ready with 25% fewer savings than men.

How can Canadian women close the gap to improve their financial health in their senior years?

Work for the federal government

If you already suffer from a bad case of defined benefit pension envy, better stop reading. Federal employees are eligible to receive enriched pension benefits compared to the likes of you. In an example of self-dealing, federal employees are not subject to the 60% income cap in their plan, called PSSP. This difference can represent hundreds of thousands of dollars in retirement.

Delay CPP and OAS

“CPP is cash-for-life,” says Vettese. “CPP is secure and government backed. By delaying receiving payments until 70, you can increase your payout by almost 50%.” Many people underestimate the steady erosion of buying power due to inflation. Even 2% inflation will destroy more than half your wealth after 25 years. (Vettese’s recent book, Retirement Income for Life covers other retirement strategies as well.)

So why don’t more people go for it?

“Some people aren’t aware that you can do it,” says Vettese. For others, “there’s a reluctance to tap into savings or take the risk that they will die early and will have missed out on collecting CPP when they could have.”

Delaying CPP in order to receive a bigger payout in a few years’ time, is an excellent de-risking strategy that shifts the risk of meeting your retirement income needs to the government instead of the market. Also, increased payments translate to increased spousal benefits. Since women typically live longer than men, delaying CPP helps senior women more.

“It’s also possible to defer OAS. Deferring payments to 70 would increase them by 36%, less than the CPP increase but also inflation-adjusted,” says Vettese.

For affluent women, delaying CPP and OAS should be easy to do since there are sufficient assets to bridge the income gap until 70. However, for lower income women, enhanced CPP and OAS benefits can make an especially big difference in later years.

There is one quirk though: if you’re planning to continue working past 65 and to delay CPP until 70, you will pay an additional $25,000 in contributions but not receive the extra benefit, says Vettese.

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