Canada Pension Plan with Doug Runchey | E094
CPP: Everything you need to know.
On today's episode Jason Pereira is going to talk to Doug Runchey, owner and operator of DR Pensions Consulting. Doug is probably the foremost authority when it comes to understanding Canada Pension Plan and what it is in the implications and decisions that go around that simple enough topic. But there is actually a fair amount of complexity to the program and a lot of myths to dispel.
Episode Highlights:
1.25: Doug worked with service Canada and its various forms and worked with the Canada pension for about 30 years. He took retirement from the government and at an early age started his second career working at the Home Depot and got talking with a lot of the staff there and realized how nobody understood Canada Pension Plan.
2.06: Doug started his consulting career 10 years ago on Canada pension and all the age security, but primarily Canada pension.
03.38: You pay for Canada Pension Plan if you have earnings from employment or self-employment. Those are the only two incomes that you can make in CPP contributions.
05.24: In the past, the contribution rate was 1.8% when the CP first began for each of employee and the employer, and there wasn't enough going to be enough money. But the contribution rate increased from there to where it is now, says Doug.
06.33: Unlike the US, Canada has a true pension plan, which is, hey, there is money being banked for your future, or your money goes into that and that's where it goes.
07.34: Talking about the CPP rates, Dough says that the benefits were going to go up from the 25% earnings replacement formula to a 33.33% earnings replacement formula. And that's what has resulted in the most recent increase basically being staged over five years. From 2019 through 2023 an increase of 1% for each of employer and employer, up from 4.95% to 5.95%.
10.11: Canada Pension Plan was always designed to cover a percentage of a certain amount of earnings. Dough talks about the entire calculation. The percentage up until recently was 25% of an employee's average lifetime earnings.
13.10: If a person is working from the age of 18 to 22-23 in school, barely earning any money, and that is counting against his/her average, that's not great, says Jason.
15.05: Doug talks about the benefits formula. If you take your sentence, CPP right at age 60. And then you can take it earlier than age 65 and there is a reduction to that amount, or you can delay after age 65 and the benefit amount goes up.
17.07: If you are going to stop working and you would have drop out. You can end up with a better calculation of your average income by following few simple methods.
18.29: The first step in the process of the calculation is to bring all of your lifetime earnings up to a current year value. In the way that occurs is whatever year your benefits start, you take the average YMPE for the five years ending with the year that your benefits start, says Doug.
20.25: A pension is 50% higher if you wait five years. That is, government backed and guaranteed for life.
21.29: You can't compare a variable return with no guaranteed floor of income, says Jason.
22.52: If you have worked five more years until 70, you can take those five years of maximum earnings, replace five years of zero or lower earnings and increase your average lifetime earnings significantly, says Doug.
24.36: If you take your CPP while you are still working and you are earning a fairly high salary, then you are also paying tax at a fairly high rate on the CPP earnings that are on top of your salary, says Doug.
25.49: If you have a good reason to suspect a shorter than average life expectancy then you probably should be taking your CPP early.
27.33: There is a complex formula if you are eligible for both a retirement pension and a survivor's pension, and that can play a big factor in when you should take your own retirement pension.
28.25: There are sometimes other benefits such as the guaranteed income supplement if you are low income and you are receiving new old age security, you might be eligible for the guaranteed income supplement and the amount that you receive for that is dependent upon other income that you have, says Doug.
30:30: If you have RSP savings, you may want to spend those first to defer your CP at a larger fully indexed CPP, says Doug.
31.27: The CPP retirement pension, as we say started at 65 or as early as 60 prior to that. If you become disabled while you are working, there is a disability benefit under CPP.
35.00: If you have got your own corporation and you have the choice to pay yourself a salary or pay yourself dividends, then if you pay yourself. Salary. You are paying the CPP contributions both as the employer and as the employee, so you are paying both halves of it out of the company somehow. But if you pay yourself dividends, you don't pay CPP contributions, then you don't have a pension at the end of it, says Doug.
37.13: As per Jason it does complicate matters when we talk about wanting to start taking Canada Pension Plan because now successful business owners typically also have holdings and investments in their corporation that skews the calculation on when is the optimal time to take it.
3 Key Points:
Dough talks about the contribution rates in the Canadian Pension Plan, what are the contribution rates today and where are they scheduled to go?
Doug explains if you want to take your CPP earlier than age 65, there are a couple of things happening. First of all, your calculated CPP, meaning your 25% of your lifetime earnings are calculated at the time you take your benefits.
If you don't take your CPP and you keep working beyond age 65, you can use each year of earnings to replace one of your earlier years of lower earnings, explains Doug.
Tweetable Quotes:
"For so many people, the concept of pension age is retirement age. And I always say, you know, pensions and retirements are two separate things. One is someone is going to pay you an income for their life. The other one is your ability to actually live off whatever means you have." - Jason
"The contributions are the only incoming money to the fund except for the reinvestment of those contributions and that's all managed by us." - Doug
"We are not at the stage where the fund is 100% still funding, I understand. But you know, yeah, and not for the right where you know this is not like a situation in US where Social Security is paid for by way of tax receipt." - Jason
"Childbearing dropout is a specific dropout that applies to anyone that's raising a child under age 7 and stops working or works part time for those years they get to drop out those childbearing years in addition to the general drop." - Doug
"Even if you are paying a fairly high tax rate on your CPP because you are still working. And you are the sources of income. Doesn't mean you still don't take it early." - Jason
Resources Mentioned:
Full Transcript;
Producer: Welcome to the Financial Planning for Canadian Business Owners Podcast. You will hear about industry insights with award-winning financial planner and entrepreneur Jason Pereira. Through the interviews with different experts with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success and make the most of your business and life. And now, your host, Jason Pereira.
Jason Pereira: Hello ****. Today on the podcast, I have Doug Runchey, owner and operator of DR Pensions Consulting. I brought him on the show because Doug is probably the foremost authority when it comes to understanding Canada pension plan and what it is and the implications and decisions to go around that. Simple enough topic most people think, but there's actually a fair amount of complexity to the program and a lotta of myths to dispel, so I brought him in to take care of all of that. And with that, here's my interview with Doug. Doug, thank you for taking the time today.
Doug Runchey: Thanks for inviting me.
Jason Pereira: Oh, it's an absolute pleasure. So, Doug Runchey, tell us a little bit a bou5t what it is you do.
Doug Runchey: Well, I, I work, first of all, I worked with Service Canada and its various forms, and worked with the Canada Pension for about 30 years, uh, in my first life, first job, uh, at least anyway, so I got to know it very well, and then I, I took, I retired from the government at an early age, uh, started my second career working, actually, at the Home Depot, and to talking with a lot of the staff there and realized how nobody understood the Canada Pension Plan, knew much about it other than they paid in some money and maybe they'd get something back at the end, but they had very little, uh, detail on anything about it, so I started providing the information free to all my co-workers and then thought, hey, there's a, there's a market for this information so I started my third career about 10 years ago consulting on Canada Pension and old age security, but primarily Canada Pension.
Jason Pereira: And industry's all the better for it. And I will say that I will **** first hand, I've seen it many times. I still remember very early on in my career, maybe first or second year, goin' to see a family who's a blue collar father who just retired, stay-at-home mother was there and daughter was there to go through all their options and went through a CPP **** to pay them and they're like this is ridiculous, you know, you work all your life for this to contribute to this and this is all you get, you know, who, you know, this isn't enough for these people to love off of and my response was, it's not meant to be the thing that basically gets you more than the fundamentals quite honestly. And it's one of those things where that's a, there's a gentleman who basically took a blind eye to the entire thing, just assumed he was making pension contributions and he was gonna get, you know, his retirement is gonna be taken care of. And, and for so many people, the concept of pension age is retirement age, and I always say, you know, pensions and retirements are two separate things, one is someone's gonna pay you in come for life, the other one is your ability to actually live off whatever, whatever means you have, and people just have a hard time with that, so I'm getting off my soap box, and let's talk about basically Canada Pension Plan, so talk to me about how Canada Pension Plan works, and let's start it off in particular with how benefits accrue, how do you pay for, it, and then we'll get into the benefits portion of it afterwards.
Doug Runchey: Yeah, okay. So you pay for it. If you have earnings from employment or a self-employment, those are the only two incomes that you can make CPP contributions on, and rough rates, it's, it's, uh, right now it's almost 6 percent for an employee and, uh, 6 percent for the employer, or your lucky enough to be self-employed, you get to pay both parts of that, so it's almost 12 percent, uh, next year is, is when it's gonna reach that level and it's 5.95, so 11.9 percent total, call it 12, when you're paying both, uh, shares of it, so those contributions go in, they, they build up a fund, uh, the fund gets, uh, invested and, and, uh, creates a lot of, uh, the, uh, ability to pay benefits in that way, so it was it just the funding that you were asking about?
Jason Pereira: Yeah, ****.
Doug Runchey: Yeah, so, I mean, that's, contributions are the only incoming, uh, money to the fund except for the reinvestment of those contributions and that's all managed by, uh, it used to be, at one point in time, the money was all loaned to the provinces at bond interest rates and it wasn't making a lotta money and, and there, we're probably goin' back 30 years or 40 years now when there was a lot of talk about the, the fund being insufficient to, to pay benefits, and whoops, it's not gonna be there. At that point in time the contribution rate was 1.8 percent when the CPP first began for each of the employee and the employer, and, uh, there wasn't enough going to be enough money, and, but the contribution rate increased from there to where it is now as I say, and it's going up a little bit more next year, and, uh, the projections are that there's lots of money in the fund now to pay benefits for the next, the fund is financially sound for the next 75 years if you believe the actuaries, and, and I heard very little, uh, about the fund going broke any, any longer, so –
Jason Pereira: ****.
Doug Runchey: Yeah, yeah.
Jason Pereira: Still **** that exists, so the, it's funny, 'cause I think there's a big hangover of advisors of a certain age who grew up here, came into the business hearing about how Canada Pension Plan was, was insolvent, and at the time critically, it was, and you know, since then that fund's been, been growin' and, you know, the CPP and uh, investment board came into existence and has basically been managing this on our behalf and doing a, you know, depending on who you, who **** good job, all right, we can leave as an argument there, but they're at 523 billion dollars right now and continue to grow every year, so we're not, we're not at the stage where the fund is a hundred percent still funded, I understand, but, you know, enough at the point where, you know, this is not like a situation in the U.S. where, Social Security's paid for by way of, of tax receipt, right, so it's a pay as you go system. We actually have a true pension which is, hey, there's money being banked for your future, part of your money goes into that, and that's where it goes, so let's, let's go back to the contribution rates. Now, a couple of years ago there was an overhaul of the CPP, and they changed the benefit amounts which we'll get to shortly, and the contribution rates, so where are the contribution rates today and where are they scheduled to go?
Doug Runchey: Yeah, well, as I said, they started out at 1.8 percent, they went up with a concern about the security of the fund, they went up to 4.95 percent and, and that was about 20 years ago and they stayed there until 2019 and then that's probably what you're referring to, the enhanced CPP where the benefits were gonna go up from the 25 percent earnings replacement formula to a 33.33 percent earnings replacement formula, and that's what has resulted in the most recent increase, it's basically been staged over 5 years, uh, from 2019 through 2023, an increase of 1 percent for each of the employer and employer up from the 4.95 percent to 5.95 percent, and that's as high as anybody sees it going at, at this point in time for the level of benefits that's currently planned, and then there's one small further change that starts happening in 2024 and 2025 where you only contribute right now on earnings on up to what's called the YMPE or Year's Maximum Pensionable Earnings, and that's currently $63,900. Starting in 2024 that, there's gonna be a new ceiling above that called the YAMPE, Year's Additional Maximum Pensionable Earnings, that'll be 7 percent above the YMPE ibuprofen 2024 and 14 percent above it in 2025 and beyond, and the contribution rate between the YMPE and the new upper, uh, earnings ceiling is anticipated to be 4 percent for each of the employer and employer.
Jason Pereira: So I mean, yeah, there's been a, **** have created a bit of complexity. We can get to the, to the benefits in a minute here, but I mean as, on the contribution side we kinda put a bow on this. There is, to be clear, there's a personal amount which we haven't talked about, personal exemption, which she does not qualify for a ****, for Canada Pension Plan which is $3,500.00, so no Canada Pension Plan's paid on the first $3,500.00 and then it goes up the YMPE which we talked about, which this year is $64,900.00, and then there's gonna be, and that increases every year, and there's gonna be the additional, you know, YA, YAMPE, I gotta get used to this, whatever this new acronym is, that goes beyond that, and, you know, we've gone from 4.9 percent of the, the amount between the YMPE and the basic to now 5.7 and eventually to 5.95 in those numbers, and then anything beyond that number up to another cap is gonna be 4, so it's gotten a lot more complicated, but bottom line is that for the average employee, it is not gonna be more than 5.95 percent of their earnings is going into this. Okay. So the, well, let's talk about the benefits side, okay? And actually, well, one last thing. So that's, to be clear, that's a cap, 2022 it's a cap of $34,980 for per employee, per year, and we'll talk about self-employed people later, but now let's talk about the benefit side. So you had mentioned percentages, okay? So let's talk about this. Canada Pension Plan was always, always basically designed to cover a percentage of a certain amount of earnings. Can you speak to that entire calculation?
Doug Runchey: Yeah, so the percentage up 'til recently was 25 percent of your average lifetime earnings, so it's sort of a 5-step process and when you become eligible for a benefit, all of your earnings for every year back to age 18 get escalated to a current year value and then there's a few different dropout provisions that get applied, so that you're not, everybody's allowed what they call the 17 percent general dropout, so you get to dropout between 7 and 8 years of y our lowest earnings so whether it was at the beginning when you turned 18 and you're still going to school and maybe working part time or whether you start right out of high school working and you stop working at age 55 and you have some low earnings or zero earnings years there before you start receiving your pension, whatever the reason for period of low earnings, you get to drop out, as I said, 17 percent of that time so that it doesn't affect your average, but then the rest of the time your earnings after they're escalated to current year value, get added together, divided by your whole contributory period, and the amount of your pension is 25 percent of that average lifetime earnings worked out to a monthly, uh, amount, and that's prior to 2019 when, as I say, from that point on, it's, uh, intended to replace 33.33, so going from a quart of your lifetime average earnings up to a third, and that's what it will replace in terms of a retirement pension but, again, with the enhanced, there's a 40-year transition period before anyone will receive a third of their lifetime earnings au you have to pay into it for 40 years starting from 2019.
Jason Pereira: Yeah, so I mean, ****, you said, so going back over it, at the end of the day, they were talking about a small percentage, a quarter of what was, you know, effectively for years let's call it close to $50,000.00 so we're talking, we're talking about, this is where I said before, you know, we're not talking about a huge ton of money, we're talking about $1,250.00 a month, that about $12,500.00 a year was roughly, and I mean, that number's increased and continues to increase, but the point here is that, when I talk about the need to prepare for retirement, you know, CPP and OAS are there really, and we'll talk about OAS in the future episode, are there to provide for basic lifetime ****, you know, food and shelter, that's it, so am I gonna be that, it's on you, but now we're saying the, you know, now they're saying A, it's gonna increase to 33 and like you're right, like it doesn't retroactively increase to 33, it's for future contribution going forward, so it's like whereas previously, I was earning a 25 percent credit, now I'm earning a 3.3 percent credit, so yeah, it'll creep up, but it'll be my, you know, my kid will be, will be the one who starts off and, or, or people's children are starting off earning the full credit, and then there's the, the second point on dropout years, which is an important one, right, in that, yeah, if I'm working from 18 to 22, uh, 23 in school, barely earning any money, and that is counting against my average, that's not great, right, or, or, you know, the years off for child rearing, or, you know, more commonly now taking care of senior, uh, yeah, your parents **** retirement. Yeah, that's pretty unique, I mean, I don't know about you, but I don't think a new dropout ratio thrown in to any other pension calculation, like the, the ability that the government's saying, look, you know, here's kind of a **** years to accommodate for life issues, it's, it's a pretty good benefit quite honestly.
Doug Runchey: Yeah. Well, you men, I had mentioned only the general dropout and that applies to everybody, you mentioned the child rearing dropout and that's a separate one.
Jason Pereira: Uh, that's two different ones.
Doug Runchey: Yeah, that's a specific, uh. dropout that applies to anyone that's raising a child under age 7 and stops working or works part time for those years, they get to drop out those child rearing years in addition to the general dropout.
Jason Pereira: So overall summary, the formula for the benefit it years, so basically years you've been a member of the plan or basically years you've been working, times the 25 percent of the, you know, the difference between YMPE and the dropout amount, so whatever that equation is, times, the number, the average earnings and the average earnings is modified based off of your dropout years, so, hey, they're not gonna penalize you for these lower years because you were either in school or something happened, but there's enough data there that over a 40-year, 40-50 years we can make an assumption, so that's how it goes. Okay, so then that's the benefit formula.
Doug Runchey: That's the benefit, if, if, or that's the formula if you take your CPP right at age 65, and then you can take it earlier than age 65 and there's a reduction to that amount, or you can delay after age 65 and the benefit amount goes up.
Jason Pereira: So you beat me to it. My next question was, let's talk about, okay, so that is, that is, 65 is normal, CPP retirement age, in the U.S. the have **** called full, uh, full retirement age, but again, like you said, in Canada we provide optionality. You are able to take it later, you're able to take it sooner, so it used, and I remember when I got in the industry a lot of the, the, the, advice was around take it as soon as possible, you know, that's flipped, so let's talk about the calculation first. And let's talk about trade off, the benefit, the loss and benefit and then we'll talk about what makes sense for either one, so by all means, please take us through this.
Doug Runchey: Okay. So if you wanna take your CPP earlier than age 65, there's a couple of things happening. First of all, your calculated CPP, meaning your 25 percent of your lifetime earnings, is, uh, calculated at the time you take your benefits, so say you take it at the earliest opportunity at age 60, and you're not working any longer, that makes your average earnings at age 60 is gonna be higher than if you wait 'til age 65 and add 5 more years, unless you're able to drop though years out, so you may get a higher average lifetime earnings by doing the calculation at age 60, but then you, you only g et to claim 6, you lose .6 percent per month for every year you take it early, so that works out to 7.2 percent per year or 36 percent if you take it at the earliest opportunity at age 60, so instead of getting 100 percent of your, of 25 percent of your average lifetime earnings, you get 64 percent of your calculated CPP at age 60, but you get it for 5 years longer, so again, if you live to a normal life expectancy, you'll probably receive about the same total dollar payout if you take it at age 60 or if you wait until age 65. On the other end of the scale, if you wait beyond age 65, the benefit amount is increased by .7 percent for every month that you defer, so 8.4 percent for every year you defer up to a maximum increase of 42 percent if you defer right up 'til age 70.
Jason Pereira: So to be clear on that, 36 percent less at age 60 when you receive at 65, 42 percent more. Now couple things to touch upon those numbers 'cause I know you know that there's so much crap to this. As you said, earlier, you could actually, if you're gonna stop working and you have dropout years that you're beyond dropout years, you can actually end up with a better calculation of your average income at 60, than at 65, but at age 70, that number can actually be substantially bigger than just 42 because now we're talking about different NMPEs, right, we're talking about the **** has increased, so talk, so, so talk to me about that and how that imp0acts the payout at 70.
Doug Runchey: Yeah, well, I, I mentioned, uh, earlier that the first step in the process of calculation is to bring all of your lifetime earnings up to a current year value, and the way that occurs is whatever year your benefit starts, you take the average YMPE for the 5 years ending with the year that you're benefit starts, so if you defer from 2022 to 2027, you defer 5 years, the earnings get escalated up to a 2027 value instead of a 2022 value, so you're getting 42 percent more but, as you said, depending on what the YMPE does between now and '27, you'll get that increase, as well, and that will be a tradeoff. If you had started your benefit in 2022, your benefit is indexed for life according to price increases as measured by the Consumer Price Index, so you'll go up that way. If you defer your benefit for a period of time, it doesn't get escalated with price increases, it gets escalated with wage increases, as measured by the YMPE, so again, sometimes, those two things go up together, and sometimes one or the other goes up at a slightly faster rate, so you should look at the numbers and what's happening with wages and prices as part of the decision of when to start your CPP.
Jason Pereira: Yeah, and this gets, this is where it gets complicated, right, 'cause I mean, I've seen calculations where, I mean, pre-inflation picking up, okay? I was seeing numbers of, of studies done where it was 50 percent more, not 42. And when you start doin' the math on, and a lotta times the math, uh, do I take it, do I take it late, is solely based on the tradeoff of, well, what's the break-even year, like when am I, if I take it now, how many years can I collect for? And I would say that logic is, is pretty flawed, it's pretty flawed because, look, you know what, if you're someone who's got a medical issue that is pretty severe, and, and it's a logical medical issue, but if you're not like that, the reality is is that, like, the reality is, is that a pension that is 50 percent higher if you waited 5 years, you wait 5 years, that is government backed, and guaranteed for life, and we have to talk on this inflation index, which right now, that is something that everybody's concerned with, right/
Doug Runchey: Yeah.
Jason Pereira: That is something that you cannot replace, so the break-even analysis, you know, the, the inflation increases on a 50 percent greater pension than at 65 or date I say it, almost double what you would get at 60, those inflation index increases are much more valuable than, you know, if you defer.
Doug Runchey: Yeah, I won't, I won't argue with any of those, uh, points, and, and you, you can take different periods in time when that might not have been quite true, but those are, are, the current facts.
Jason Pereira: And say, but **** go there, and I'm gonna say that you're absolutely right, but I also think that that's a point to reflect the fact that pensions themselves are just not about retirement income, they're about risk mitigation, and I think we lose track of that too often in that I always see things like, well, I can make a greater rate of return than my pension did. Well, you can't compare a variable return with no guaranteed floor of income to a pension. One is an absolute zero in risk as far as it goes, like short of Canada imploding as a nation, this is the most solid **** you can get. You know for sure you're gonna get something for life, and you've eliminated all mortality risk which gives very few products on the market to do that, versus, you know, investing yourself, even if you're doing something very conservative, it's not going from 0 to 1, it's going from 0 to 100 in terms of a risk scale differential, right?
Doug Runchey: Yeah.
Jason Pereira: And that's, that's the challenge, and people have a hard time wrapping their head around that.
Doug Runchey: Yeah, no, I agree.
Jason Pereira: Yeah. So that's my soap box on that. So let's talk about what happens if you continue to work post-65, 65, 'cause there's something important that happens there.
Doug Runchey: There's a couple of things and it depends on whether you take your CPP or don't take your CPP. If you don't take your CPP and you keep working beyond age 65, you can use each year of earnings to replace one of your earlier years of lower earnings, so again, assuming you didn't have, you didn't have 39 years of maximum earnings already, but you've got a good job now, and you're 65, if you work 5 more years until 70, you can take those 5 years of maximum earnings, replace 5 years of 0 or lower earnings, and increase your average lifetime earnings significantly and then get 42 percent more than that increase, plus, as you said, whatever the YMPE has gone up, so increase it significantly. If you take your CPP at age 65 or earlier and you're still working, you get a choice of whether you don't take any CPP contributions and you just save that money yourself, or you can make contributions and you will earn what's called a post-retirement benefit or a PRB for each year that you work after you start receiving your CPP, whether that's at 65 or even as early as 60. If you took you CPP right at 60 and you're still working for the first 5 years until age 65, it's mandatory that you continue to make contributions and earn a PRB.
Jason Pereira: I wanna hit that note very hard 'cause there's a huge misconception in the advisor community. You're all trained that basically you can opt out of paying for CPP after 65, but what is typically left away from that literature is the fact that you have to start it and most advisors don't realize that, and they think it's, oh, I can stop paying at this point, no, no, no, you have to start CPP, which if you're at 65, now you're getting a deferral benefit, yes, you are gaining this post-retirement benefit for contributions beyond that if you choose to keep on doing it, but it's, so it's not a binary decision of do I, do I take it or keep contributing? You can do both, but you can't stop contributing unless you're taking it, which, which will often **** many people.
Doug Runchey: Yeah, for sure. And the other thing that if you take your CPP while you're still working and you're earning a fairly high salary, then you're also paying tax at a fairly high rate on the CPP earnings that is on top of your salary now, so it's tax at your marginal rate there and so you have to throw that all into the mix and I'm not saying what decision you should make, but you should know what the numbers are before you make it.
Jason Pereira: Absolutely, ****, but the, before then it's definitely something to think of and it's, it's, here's the thing. Even if you're paying a fairly high tax rate on your CPP because you're still working, and you have other sources of income, doesn't mean you still don't take it early, right? Those are, it is a consideration, it's a factor, but it's not the overwhelming overriding factor, whereas things like old age security, which we'll talk about in a different episode, is, is a different story, because of the claw back, right, so if your income is too high, you're not gonna get it anyway, so you may has well defer and benefit from that benefit, so that's, that's the benefit stuff. Uh, we talked about the benefit stuff. Now let's talk about, and this is just a retirement benefit. We, we kinda zeroed in on this when we finish this up. Let's talk about what should be your thought process about what goes in to determining when you take CPP at 60 or 65 to 70 or any point in between, you know, what are the factors that one should really take into consideration before making that, that decision?
Doug Runchey: Well, I, I think you mentioned briefly earlier how long do you expect to live and, and so, if, if you have a good reason to suspect a shorter than average life expectancy, then you probably should be taking your CPP early, but that's, I think a fairly small group of people that have a good reason to suspect a shorter than average life expectancy.
Jason Pereira: Yeah. **** to say people misunderstand the concept of life expectancy all the time. It is not a **** date, is an average, and that's a 50 percent one, so if your life expectancy for 65-year-old, that's 20 years, just to pull a number out of the air, that does not mean that you're likely to die at 85 **** 50 percent of the people in your group are likely to die before you're 85, but 50 percent live well beyond that. In fact, like a large percentage of those, and in addition to that, and this really, this really messes up people's minds is that every year of life you have your life expectancy actually increases a little bit because you survived, and now the people who died are not being counted in the data anymore, so it's one of these things where don't just, I've seen it happen, people say, well, life expectancy's X, no one in my family's ever lived beyond Y, well, that's, that's them, let's talk about you, and, and you can be a very different situation. Now if you have a, if you have a **** health issues at 60, then odds are you know.
Doug Runchey: Okay, so that's one issue, and do you need the money now? Uh, what are your current expenses and what are your current and future incomes, and when do you need the money most? Do you need it now or, or will you need it later? One important consideration and, and we haven't really talked about the, as you said, the other benefits, but there, there's survivor benefits, uh, payable under the CPP and there's a complex formula if you're eligible for both a retirement pension and a survivor's pension, and that can play a big factor in when you should take your own retirement pension, so you should understand the complex calculations for a combined retirement survivor's benefit.
Jason Pereira: And that's actually another interesting, I had a case a while back where someone was on a survivor's benefit. Why did they stop paying for CPP 'cause they were over 65, they were like 67, and they couldn't do that, they had to file for their own pension first, in order to basically do that, and, yeah, it was a bit of a mind bender goin' through the rules on that one, and I actually manually calculated what the additional upside of the contributions were versus that, so it's a com, I, I will first hand say it was a complex contribution calculation that you should probably seek help quite honestly.
Doug Runchey: Yeah, yeah, and then there's, there's some kinds of other benefits such as the guaranteed income supplement if you're low income and you're receiving the old age security, you might be eligible for the guaranteed income supplement and the amount that you receive for that is dependent upon other income that you have, so when you take your CPP could be affected by whether or not you know you'll be eligible for the guaranteed income supplement, so again, sometimes it's better if you took it earlier, got a smaller rate and you get more GIS as a result, sometimes it might be better if you didn't take your CPP until age 70 and, and get 5 years of higher GIS benefits in the interim, so again, I, I don't think there's a single answer if you're eligible for GIS, but know ****, so talk to a financial planner, somebody who knows the ins and outs of those two benefits and how they interact before you make your decision on when to take your CPP.
Jason Pereira: I would say that at the end of the day, frankly, I wanna see this tested. There are way too many variables in terms of how this interacts with taxation, how this interacts with other benefits, the question comes down to how, again, you **** completely benevolent, just, I'm applying for my pension, and you could end up in a less than optimal situation because your timing did not take into consideration other factors, so you were to mention, let's see, we were to mention life expectancy, you mentioned basically capacity, right? If you can't, if you can't support yourself and you need the money, then, well, all the optimization calculations go out the bloody window quite honestly.
Doug Runchey:Right.
Jason Pereira: So there's that, and then in addition to that, what, any other consider, I mean, you said how it interplays with other benefits. Anything else we should consider?
Doug Runchey:Yeah, do you have, uh, children or do you wanna leave, uh, an estate for anybody and, and is that a factor or not, 'cause again if that's not a concern for you and you may want to, uh, spend some of your other, if you've got RSP savings, you may wanna spend those first to defer your CPP and get a larger fully indexed, uh, CPP, spend some of your RSP monies, 'cause you're not worried about, whereas if you wanna keep a, a large estate, then maybe you take your CPP earlier, keep your RSP, uh, dollars, uh, savings and because they will form the majority of your estate. And again, I'm not a financial planner so I don't get into the details of that with any of my clients, but it's, it's a factor you, you should think about.
Jason Pereira: Agreed. I would say that it's a little bit overplayed in that I will say that a couple years the CPP probably isn't gonna make a difference for most, I also say that if you really wanna make sure **** insurance is the best way to do it, frankly, and sometimes that point is there's lots, there's considerations. Okay, so we've got all those consideration, largely **** the considerations, let's talk about the other benefits beyond just retirement, that CPP brings to the table, 'cause it's far more robust program than **** any other, like any employment pension, that's for sure.
Doug Runchey: Yeah, well, so the CPP retirement pension as we say started at 65 or as early as 60. Prior to that, if you became disabled while you were working there is a disability benefit, uh, under CPP. You have to be incapable of regularly of performing any substantial gainful occupation. That's the definition if disability for CPP purposes. So you, you can't just be, oh, I can only work 4 days a week instead of 5 days of week, that's not gonna qualify for CPP disability, so you have to be fairly disabled but if you are, two things happen. You, you get a pension and it's, it's more than the retirement pension, the calculation is 75 percent of what you would receive as a retirement pension, plus a flat rate benefit that currently is a little over $500.00 so it works out to about $200.00 more than what the retirement pension would be generally, plus if you've got any children under age 18 or between 18 and 25 attending school or university, they could be eligible for some benefits, as well, and then the other thing that does, if you're disabled and receiving a CPP disability pension that period of time is excluded from your contributory period, so that ultimately whenever you receive a retirement pension, those years of low or zero earnings while you're disabled get dropped out of your contributory period to make your retirement pension a higher calculation than if you're not working and you don't receive the CPP disability, and then the other benefits payable are survivors benefits if and when you die, whether you were receiving the retirement pension or if you died at a young age, there are, uh, monthly survivor, there, first of all, there's a lump sum benefit payable to $2,500.00 to assist with funeral expenses, that's not a big factor but it, it can help a little bit with funeral expenses, and then there's a monthly pension again if you've got a surviving spouse or if you've got children, uh, the same restriction, under age 18 or between 18 and 25, there is monthly benefit payable to them.
Jason Pereira: Yeah, so I mean, disability, survivor benefits, uh, orphan's benefits, and these are things that are just not commonplace elsewhere. Again, I will make, I will reiterate your point on disability. This is definitely not someone's first form of disability coverage, or only in those cases because it is, you know, severe and prolonged, so it basically means, there's not chance you're goin' back to work. If you're gonna be, you know, disabled for a year and a half because you got some sort of a condition, you probably not gonna see a penny out of Canada Pension Plan so don't count on that. Okay, so excellent, uh, oh, I mean, all in all, it's, I'd say it's a pretty, it's a pretty good national program, I think we've stood up pretty good compared to other countries. Now' let's talk about, we're gonna come back to, uh, to the kind core of this, of this podcast, which is business owners, so let's talk about what the difference for Canada Pension Plan with business owners versus being an employee, and, you know, I'll let you tackle that and I’m gonna go into some other questions.
Doug Runchey: Sure. So the main difference, and I think you mentioned earlier is, is that you're paying both sides of the contribution ****, so it, the only time in my mind where that's a real factor, if you're a small business owner, you're self-employed, it's, it's not that you have the choice anyway, if you have net earnings from self-employment, you must pay contribution on that money. The type of individual that has the choice is if you've got your own corporation and you have the choice to pay yourself a salary or pay yourself dividends, then if you pay yourself a salary, you're paying the CPP contributions both as the employer and as the employee, so you're paying both **** of it out of the company somehow, but if you pay yourself dividends you don't pay CPP contribution, then you don't have a pension, **** or if you had paid in for some years as an employee before you incorporated and, and, uh, began to have this choice, then your pension would be smaller because of the, the years that you pay yourself dividends counting as zeros for your, uh, average earnings.
Jason Pereira: So couple things we hit upon there, so yes, it's the optionality between dividends or, or income, and how you don't pay CPP to pay dividends. Now, I have unfortunately many accounts or bookkeepers that pass this off as tax savings. It's not tax savings, you're giving up a benefit, and when I've sat down with many, many employers who believe they were paying less tax because they're **** dividends, and I explain to them how integration worked and really, the only real savings of note were Canada Pension Plan and that their pension would be smaller, they were displeased, uh, the vast majority of them opted to keep Canada Pension Plan, and I know people got around to sayin', well, if you look at, you know, the fact, they looked at double the cost that gets paid, you know, the ROI's not great, and my response is always like, again, it's, it's a guaranteed index pension for life with all these extra benefits, you're, you can't compare to an investment portfolio, one for one, and then the last point to be made here is, and I said this at the beginning, the entire employer pays X and the employee pays Y is nothing more than a mental accounting trick. The employer pays the employee 100 percent of money, okay? Whether, if it a hun, let's just use a round number. If I paid him a hundred thousand, and I gotta pay, what is it, $3,000.00 for a CPP on top of that, I'm payin 'em a 103,000, as an employer, I care about total cost of my employee. I don't care just about their salary, so guess what, if it's the exact same thing. A CPP **** and said, well, no, no, no, employers can pay a hundred percent of it now. Do you think everybody would get a $3,000.00, you know, do you think they would get a, a $3,000.00 reduction on their income, quite possibly, or they would just not get another salary increase until they got $3,000.00 of, of total cost growth, right, so it's, it's just a truck, right? And the employer pays 100 percent full stop, right, whether we're just, we're just arguing about what we're calling it in the end.
Doug Runchey: Yeah.
Jason Pereira: So that's the, the business owner stuff is pretty straightforward. Now, I think it does complicate matters when we talked about when to start taking Canada Pension Plan because now a successful business owners typically also have, you know, they may have holdings in investments in their, in their corporation. That's, use the calculation on when, you know, when is the optimal time to take it, right? So lots to consider there, so we, we've really gotten, I think a pretty in depth conversation of how this works, uh, Doug, and I think you for it. Is there anything else about pensions or about Canada Pension Plan in particular that you think we didn't cover that people should know about?
Doug Runchey: In lookin' over my notes here, I don't, I, I think we've covered all the points I had, so, I, I can't think of anything else that we haven't talked about.
Jason Pereira: So, so that is, I'll take that as an endorsement that we did a good job of covering everything comin' from you.
Doug Runchey: Yeah.
Jason Pereira: So, uh, Doug, thank you so much for taking the time today, greatly appreciate, and I hope uh, everybody enjoys, uh, talkin' to one of the, the biggest experts in the space on this and covering all the bases.
Doug Runchey: Hey, thanks for that, Jason, and thanks for inviting me.
Jason Pereira: My pleasure, and where can people find you?
Doug Runchey: On line drpensionsconsulting. That's, uh, the best way to get a hold of me, email drpensions@shaw.ca.
Jason Pereira: And that was today's episode of Financial Planning for Canadian Business Owners with Doug Runchey on CPP. I hope you enjoyed that and I hope that you learned a little bit about, a little bit more or a lot more about Canada Pension Plan, how it does benefit you, how it is beneficial, how it's not going bankrupt, how it works and how, especially when it comes time to claim, there's, or start receiving benefits, there's a lot to think about. As always, if you enjoyed this podcast, please leave a review on Apple Podcasts, Sound Cloud, Spotify or wherever, you get your podcasts, and until next time, take care.
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