Are you just starting to think about retirement, and worrying about whether CPP benefits will be there for you when you retire?
You’re not alone.
Many Canadians worry that the CPP program will become insolvent and no longer have the funds to pay them when they retire. Although there is no risk of this happening in the near future, it could potentially happen in the distant future. In this article, I will explore the possibility of the CPP program becoming insolvent, and what you can do about it.
Why some think that the CPP program won’t last
Some people think that the CPP program won’t last because it has more obligations than assets. In order to pay for the benefits it is expected to pay out in 2050, the CPP program will need more assets than it has now. If it doesn’t have enough assets it may not be able to pay Canadians’ benefits. This was a particular concern in the 1990s, when politicians were caught spending CPP premiums on unrelated activities. This hasn’t been as much of a problem in recent years, but it could happen again. Also, the CPP program could fall short if not enough people join the workforce, or if the CPP pension fund does not return as much as expected.
Canadians are not currently reproducing at a rate sufficient to replace all current workers. We rely on immigrants to keep bringing fresh CPP premiums and taxes into the system. Should Canada cease to be attractive to migrants, the CPP program could get in trouble. Likewise, a sufficiently poor return on CPP portfolio assets could call the program’s solvency into question.
How to protect yourself against possible insolvency
As we’ve seen, the CPP program is not at risk of going insolvent soon, but it could become insolvent in the very distant future. If you are something like 20-30 years away from retirement, it would be wise for you to plan to fund your own retirement with your own assets.
It’s here that investing comes into play. By investing in dividend stocks and interest bearing bonds, you can create a steady stream of income that arrives in your RRSP or TFSA every single quarter.
Consider Fortis Inc (TSX: FTS) for example. It’s a dividend stock that has a 4.33% yield at today’s prices. The company has raised its dividend every single year for the past 50 years, making it a Dividend King. Management aims to increase the dividend by 4% to 6% per year over the next five years.
Fortis tends to be a very reliable dividend stock because of its business model. It’s a utility company, 98% of its services being regulated utilities. Regulated utilities tend to be stable because they enjoy a kind of “natural monopoly” status, being protected from competition by high barriers to entry. Also, heat and light are essential services that people wouldn’t normally just stop paying for.
Most would rather cut back on groceries or sell their cars than go cold in the Winter. All utilities enjoy these advantages, but Fortis has performed better than the average utility stock. Over the last decade, it has outperformed both the TSX and the TSX utilities sub-index. That’s because, unlike many utilities, it invests heavily in growth. The end result is a stock that delivers capital gains as well as dividends.
