Government has created a lucrative Ponzi scheme to line their own pockets
Why Business Owners Should Avoid the Canada Pension Plan
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I received an email last week asking me what happens to your Canada Pension Plan Contributions when you pass away. After explaining the process and reflecting on the fact that my father in law passed away at 52 and my mother at 62, made me pause and think. Yes, we on average are living longer but just because the average age of death is 77, that only means that half of us go before and half of us go after.
The Canada Pension Plan (CPP) is a contributory, earnings-related social insurance program. It forms one of the two major components of Canada’s public retirement income system, the other component being Old Age Security (OAS). The CPP program mandates all employed Canadians who are 18 years of age and over to contribute a prescribed portion of their earnings income to a nationally administered pension plan. The plan is administered by Human Resources and Social Development Canada on behalf of employees in all provinces and territories except Quebec, which operates an equivalent plan, the Quebec Pension Plan.
The CPP is funded on a “steady-state” basis, with its current contribution rate set so that it will remain constant for the next 75 years, by accumulating a reserve fund sufficient to stabilize the asset/expenditure and funding ratios over time. Such a system is a hybrid between a fully funded one and a “pay-as-you-go” plan. In other words, assets held in the CPP fund are by themselves insufficient to pay for all future benefits accrued to date but sufficient to prevent contributions from rising any further. While a sustainable path for this particular plan, given the indefinite existence of a government, it is not typical of other public or private sector pension plans.
The Liberal government of Prime Minister Lester B. Pearson in 1965 first established the Canadian Pension Plan. Contribution rates were first set at 1.8% of an employee’s gross income per year with a maximum contribution limit. By the mid-1990s though this low contribution rate increase was not sufficient to keep up with Canada’s aging population. As a result the total CPP contribution rates for both employee and employer together were raised to an annual rate of 9.9 per cent by 2003.
For 2013, the Year’s Maximum Pensionable Earnings (YMPE), on which CPP contributions are based, was increased from $50100 (2012 level) to $51100. This means that CPP contributions will be deducted at a rate of 4.95% up to a maximum contribution level of $2,356.20 for an employee or 9.9% up to a maximum contribution level of $4712.40 for a self-employed individual.
The federal government is currently considering increasing CPP and QPP benefits, which would mean a significant premium hike for working Canadians and even more serious impacts for the economy. The proposal being considered by government would phase in increases over 10 years. The maximum annual premium would go up by about $2,200/year over that time, impacting all working Canadians. The employee portion of maximum annual CPP/QPP premiums would increase by about $1,100/year over 10 years. The employer portion would also increase by about $1,100/year per employee. That means a company with 15 employees would be paying an additional $16,500 per year. The self-employed, who pay the entire premium themselves, would be paying an additional $2,200/year.
One thing that is always overlooked in the debates and the calculation is the government never discuss the individuals that died before they had a chance to collect on their government pension. CPP was introduced in the ‘60s when the average male Canadian died at 62.
Based on current contribution rates if you make $51000 a year, you and your employer will be forced into saving $4700 a year. Say you work for that company for 20 years and die the day before you start collecting your government sponsored pension at a simple 3% growth that pension would be worth almost $112 000. And what would the people you love receive on your death? $2500. Remember, not only do you contribute to your CPP but your employer does as well. Do you see where the Government paid in one single penny?
This is money that you save in a Government bank to insure you to have a retirement cheque from the money we put in, not the Government and they have the audacity to refer to CPP as an entitlement program. Remember Senator’s benefits?—- free healthcare, outrageous retirement packages, 67 paid holidays, three weeks paid vacation, unlimited paid sick days. They call CPP an entitlement even though most of us have been paying for it all our working lives, and now, when it’s time for us to collect, the government is running out of money.
The critics will say that the government is doing a noble job by creating a forced retirement income savings program, I say they have created a lucrative Ponzi scheme to line their own pockets, sacrificing tomorrow to pay for today’s greed. But is there a better way?
With all of the debate, I can’t help but wonder what would an Insured Deposit Fund look like for that same working individual. For example take a business owner, say he or she decides to opt out of contributing their annual 9.9% to the Governments so called pension plan and instead takes that same money and transfers it into a Permanent Cash Value Life Insurance policy for the same 20 years. at the end of 20 years based on similar projections employed within the CPP framework there would be $149 947 in liquid cash, but the magical part is should this business owner pass away before collecting on their pension $430000 would be paid tax free to the people they love and the causes they care about. A slight difference, only 172 times what CPP would pay the survivor.
Employees have next to no rights as it relates to whether they have to pay into CPP or not, but Canadian self-employed business owners can stand up, end the insanity and protect their families.
Kevin Cahill, B.Sc.(Hons), CFP, CHS, CLU, EPC