February 22, 2012

Canada Pension Plan and Old Age Security benefits are changing.  The reason is simple – we are living and working longer then when these plans were designed.

The changes to CPP began January 1st of this year.  These changes may make it more attractive to delay taking CPP until later if you are health and having a greater indexed pension is preferred.  Here are the changes and their implications:

1 – Monthly CPP pension amount increases by a higher percentage if you take it after 65.  It becomes more attractive to take CPP later if an individual has other options to replace that income (like an RSP) or would benefit from a greater guaranteed and indexed pension for life.

2 – Monthly CPP pension amount decreases by a greater percentage if you take it before 65.  It becomes less attractive to take the CPP early if an individual has other options to replace that income (like an RSP) and if healthy and can expect a normal life expectancy.

3 – The number of low or zero earning years dropped from the calculation will increase.  With one less low income year impacting the calculation, a greater CPP benefit may result for some people.

4 – The “work cessation” test will not apply.  Now individuals will not have to stop work or reduce earnings to begin receiving CPP.

5 – A new “Post Retirement Benefit” is a new lifetime benefit and is indexed like the CPP.  If an individual begins collecting CPP and continues or goes back to work, they (and their employer) will have to contribute to CPP for this benefit.  The post retirement benefit will be added to CPP each year based on contributions and additional years worked.

From a planning perspective we need to consider when to begin withdrawing CPP.  Along with comparing the lifetime guarantee and indexing of CPP to our own investment returns, we need to consider our health and potential life span.  If we were to consider only the cumulative pension money paid out, we need to know the cross over point.

The “cross over” point is the age to which an individual must live beyond in order to benefit from taking the pension later vs earlier.  With the new changes the cross over point for taking the pension at age 65 vs 60 is now 73.

However, if we consider the CPP as one of the few guaranteed and indexed pensions available to us and we are in good health and expect an average to longer life expectancy, it may make sense to take CPP much later – possibly at age 70.  The cross-over point for someone who delays taking CPP until age 70 is now age 76.  In other words, the cumulative amount of pension money paid out from age 60 is exceeded by age 76 if started late – at age 70.  After age 76, the amount paid out increases significantly than what would have been received if started at age 60.

We’ve also read recently that the government is planning to increase the age at which Old Age Security is paid from age 65 to age 67 (for those currently 57 or younger).  This benefit is paid from general revenues to which all taxpayers have contributed.  Although clawed back at a specific income, OAS does not begin to be clawed back until an individual earns $69,562 for 2012.  Most Canadians would continue to qualify for OAS given this claw back limit.

The need for understanding the implications of the above on longer term retirement income has never been more important.

The Impact of Economic Policy

The key reason for the slow recovery is “economic policy uncertainty” according to Professor Steven Davis.  He suggests that the uncertainty of government direction regarding monetary and tax policy prevents the recovery from happening faster.   This study suggests the sooner governments clarify direction, the quicker recoveries may occur.

Dow 15,000 maybe 17,000 by end of 2013

According to Jeremy Siegel (professor of Finance at the Wharton School, University of Pennsylvania and author of several books) the Dow Jones index which holds 30 broadly diversified large company US stocks has a 2 in 3 chance of rising about 20% over the next 2 years.  He bases this on 141 years of stock market history which says periods of worse than average performance (that’s right, like what we’ve just had) have a tendency to be followed by periods of better than average performance.

For the whole article:

National Housing Outlook – the Art of Analysis

This is an interesting article from a mortgage industry writer on recent housing market bubble projections of some economists in Canada.  Another example of economists looking at the same data and making different predictions.

The Case for Emerging Markets

The following video is an interview with Gerardo Zamorano of Brandes Partners discussing the opportunities in emerging markets.

video interview