It’s no coincidence that retirement is a hot button election issue. With the aging baby boomer population already starting to enter retirement, pensions are once again at the forefront of the conversation. There’s a looming retirement crisis in Canada: Canadians are living longer than ever, yet workplace pension plans are disappearing at an alarming rate. The Ontario Retirement Pension Plan (or ORPP for short) is meant to address this mismatch.
In Ontario, just like the rest of Canada there are two groups: the pension ‘haves’ and the pension ‘have nots’. The trend is not the friend of those with workplace pension plans. Today, roughly one-third of employees have the luxury of a workplace pension plan; that leaves the majority (two-thirds) without any help in saving for retirement at their workplace. The ORPP is designed to force those without a workplace pension plan to save for their golden years.
The Nuts and Bolts of the ORPP
The ORPP is designed to provide income in retirement to workers in Ontario making a maximum salary of $90,000 annually, who are not already covered by a pension plan. Any employer part of the ORPP would be required to match a worker’s contribution of up to 1.9 percent of pensionable earnings. For example, if an employee earns $45,000 per year, the employer would contribute $855 per year towards the ORPP. Although some employers view this as a payroll tax, it would provide employees with much-needed income in retirement. ORPP is similar to CPP. It’s targeted at replacing 15 percent of income during an employee’s working years. Anyone without a workplace pension plans looks to benefit.
What About RRSPs and TFSAs?
I know what you’re thinking: what about RRSPs and TFSAs? Canadians already have plenty of ways to save. While this is true, not enough Canadians are taking advantage of the savings vehicles at their disposal. The facts speak for themselves: less than a quarter (24 percent) of eligible tax filers made an RRSP contribution in 2012, according to Statistics Canada. The TFSA is another way to save towards retirement. Just 17 percent had contributed the maximum to their TFSA in 2013, according to Statistics Canada.
The bottom line is voluntary retirement savings don’t work for the vast majority of people. People find other things to spend their money on. Whether it’s buying a bigger house, taking an extravagant vacation, or buying a big screen TV, there are plenty of things to spend money on. Retirement savings usually falls last on the list.
Why save for tomorrow, when you can spend and enjoy your money today? The problem is you won’t be able to work forever. CPP and OAS are only supposed to be a part of your retirement income. If you don’t set money aside, you can look forward to a pretty bleak retirement. The ORPP is supposed to address the lack of saving willpower, by forcing people to sock away money towards retirement.
Now there are valid concerns as to how the mandatory ORPP affects those already close to the poverty line and earning minimum wage, as it further takes money off the table for those already struggling to make ends meet. This amongst some other concerns has both employers and employees worried.
Nevertheless, the ORPP is being phased in over four years starting in 2017 for larger employers. There’s still plenty of time to save towards retirement. Furthermore you need to explore how this personally affects you and your family and plan appropriately. Even if you expect to be covered by the ORPP, it’s still a good idea to continue to contribute towards your RRSP and TFSA. If you’re looking to invest in your RRSP and TFSA, or have questions feel free to contact our office and let us help you fully weigh your options.