The Canada Pension Plan (CPP) was introduced by the Liberal government of Lester B. Pearson in 1965. This program was first introduced to provide added security for Canadians when they entered retirement. The post-war dividend gave birth to the middle class in the 20th century.
Today, I want to discuss whether the CPP, as currently constructed, still meets the needs of the current and future crop of Canadian retirees. Moreover, I want to look at some alternative income streams that Canadians can explore as they battle rising costs. Let’s jump in.
Does the CPP meet the needs of Canadian retirees in 2023?
Canada saw inflation rates climb to heights not seen in decades in 2022. This spurred the Bank of Canada (BoC) to pursue an aggressive string of interest rate hikes. While this has put a strain on borrowers and capped growth for some lenders, the policy shift has successfully brought down inflation as it stands in the early summer of 2023.
Despite the inflation rate decline, Canadians are still wrestling with a high cost of living. According to recent data, the average Canadian would have trouble cobbling together even a small emergency fund. Canadians who are nearing retirement have also experienced increased anxiety. Fidelity Investments recently published a retirement report that found 73% of pre-retirees were feeling positive about their retirement outlook. That is down from 80% five years ago.
Here’s how the government has moved to bolster CPP
In response to these pressures, the Liberal government of Justin Trudeau moved to bolster the CPP. The 2017 reforms were set to be phased in over a seven-year period starting in 2019. When fully realized, the CPP enhancement is designed to provide a replacement rate of one-third of covered earnings. That is up from the 25% covered in the previous reforms.
The reforms will also increase the maximum amount of income covered by the CPP by 14% by 2025. Retirees will see a significant boost due to these reforms. For example, the maximum income by the CPP is calculated to reach $79,400 in 2025 compared to the previous maximum of $69,700. Indeed, total retirement pensions are projected to receive a 33-50% boost.
Canadians should be aware that to qualify for that 50% CPP maximum boost, it will require 40 years of contributions on the new maximum. That narrows down the qualifiers to a much younger demographic. However, the decline of defined-benefit pension plans in the private sector means that a boost will be welcomed.
Retirees can seek an alternative route with a future Dividend King
Not all Canadian pre-retirees and retirees may be satisfied with this increase. For those who are still dreaming of a more comfortable retirement, there are alternative solutions. Canadian retirees always have the Tax-Free Savings Account (TFSA) at their disposal. This allows you to churn out passive income with a dividend stock. All the income generated in a TFSA is entirely tax free.
Fortis (TSX:FTS) remains one of the most dependable dividend stocks on the TSX. This St. John’s-based utility holding company has delivered 49 straight years of dividend growth. That means this stock is on the cusp of becoming just the second Dividend King in the history of the TSX. Shares of Fortis have dropped 2.7% month over month as of close on July 7. The stock is still up 1.1% so far in 2023.
This dividend stock currently possesses a favourable price-to-earnings ratio of 19. Fortis last paid out a quarterly dividend of $0.565 per share. That represents a solid 4% yield.
