The next few decades will see Canada’s senior population erupt to levels that have not been approached in our nation’s history. Indeed, the senior population is set to increase by 68% from 2017 through to 2037. That means there will be increased pressure on social, economic, and political spheres as Canada looks to support our seniors in their twilight years.
Today, I want to discuss the Canada Pension Plan (CPP). What is it? How does it function? What recent changes have been made? And how can Canadian retirees take advantage of these new benefits? Let’s jump in.
What is CPP?
In 1965, the Liberal government of Lester B. Pearson established the very first CPP. This monthly, taxable benefit was and is designed to replace part of a citizen’s income at retirement. If, and when, you qualify, CPP retirement pension will run until the end of your life. To qualify, a Canadian must be at least 60 years old and have made at least one valid contribution to their CPP.
Your CPP amount will depend on your average earnings through your working life and the age you start your CPP retirement pension. You may start to receive CPP benefits as early as the age of 60 or as late as the age of 70.
The enhancement of the CPP benefit
Canadian leaders have been forced to recognize the shifting landscape for retirees in recent years. The cost of living in Canada has climbed steadily, putting increased pressure on those who enter retirement. In 2017, the Justin Trudeau-led Liberal government announced a plan to enhance the CPP to provide much-needed financial aid to working Canadians.
Pension coverage, particularly in the private sector, has fallen off dramatically in the first quarter of this century. Indeed, the defined-benefit (DB) pension plan covered 48% of male workers in 1971. That fell to 25% in 2011 and it is falling further still. New CPP enhancements are designed to make up for this decline.
How do investors take advantage of these changes?
From 2019 onwards, Canadians who make enhanced contributions can expect to realize the increase in CPP pension. The enhancement adds two additional components to the CPP; the first additional component, which has been phased in between 2019 and 2023, and the second additional component, which will be phased in between 2024 and 2025.
Canadians who make enhanced contributions for over 40 years will increase the maximum CPP retirement benefit by more than 50%.
An alternative to CPP: Target dependable dividend stocks
The sharp decline of DB pension plans should inspire Canadian workers to build their own nest eggs. This typically means committing to saving in a registered account like a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP). Meanwhile, you should look to target dependable dividend stocks, especially as you near retirement.
Emera (TSX:EMA) is a Halifax-based company that is engaged in the generation, transmission, and distribution of electricity to various customers. Shares of Emera have dropped 3.7% month over month as of close on June 21. The stock is still up 3.6% so far in 2023.
Shares of Emera currently possess a favourable price-to-earnings ratio of 12. This dividend stock has delivered 16 consecutive years of dividend growth. It offers a quarterly distribution of $0.69 per share. That represents a strong 5% yield.
