Pension plan reform is a major concern in Canada. Discussions on how to prop up payouts to retirees have been going on for years. The Canada Pension Plan (CPP) introduced new rules in 2011, including an incentive for users collecting past 65 and a penalty for early takeout at 60 or before 65.
The biggest change is a two-phase enhancement of the CPP in seven years, beginning on January 1, 2019. However, CPP contributions must increase to support program enhancements. The total increase in contribution rate (per employee and employer) from 2019 to 2023 is 1%.
Also, a higher earnings limit or a top-up to the base will be introduced in phase 2 (2024 to 2025) so those who earn more have CPP protection. When fully implemented, the maximum CPP retirement pension will increase by 50%.
CPP enhancement beneficiaries
Younger generations or those who worked and contributed to the mandated contributing pension plan in 2019 or after are the ultimate beneficiaries. Unfortunately for older folks, baby boomers and Generation Xers, the pension increase from the modifications is minimal.
Millennials, Generation Z, or those 30 years old and below (employed or self-employed) will contribute more in exchange for a significant boost in the future. There will be no further CPP rate increases for those earning below the estimated first earnings ceiling of $65,700.
However, after 2023, contributions of those with incomes between the first income ceiling and second income ceiling will increase by 4%. For 2024 and 2025, the second earnings ceiling will be 7% and 14% higher than the first earnings ceiling, respectively.
A simple hack to boost the CPP
As mentioned earlier, the CPP incentivizes those who delay payments until 70. The benefit after 65 will increase by 0.7% per month (8.4% per year). Assuming you take your CPP at 70, the permanent increase to your pension is 42%. On the contrary, the pension payment will reduce by 0.6% each month (7.2% per year) if taken early. If you claim at 60, the permanent reduction is 36%.
The Canada Pension Plan Investment Board (CPPIB) reminds CPP users that the pension isn’t a retirement plan because it will only replace 25% (33.33% with enhancements) of the average pre-retirement income. Financial planners suggest filling the income with investment income.
Build a nest egg
A high-quality stock like the Toronto Dominion Bank (TSX:TD) must be your core holding if you’re building a nest egg from investment income. The $148.8 billion bank is Canada’s second-largest financial institution and boasts an impressive dividend track record. It has been paying dividends since 1857 (166 years).
The Big Bank stock trades at $80.88 per share and pays a decent 4.77% dividend. Assuming you take a $21,208 position (260 shares), your money will generate $250.77 in passive income every quarter. Assume further that you won’t collect the dividends and reinvest them. The capital will almost double in 15 years.
TD has surplus capital after terminating the deal to acquire First Horizon in the United States. Its CFO, Kelvin Vi Luan Tran, said the bank has more financial flexibility and plans to return some capital to shareholders through a buyback program.
Higher cash flow
The primary and only purpose of the CPP enhancements is for future pensioners to have higher spendable cash flow in retirement.
