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On January 26, 2016, Premier Kathleen Wynne and two of her ministers announced new details of the Ontario Retirement Pension Plan (ORPP). Associate Finance Minister Mitzie Hunter said the design of the ORPP is "now complete".
The Ontario government's position is that CPP is insufficient for middle-income earners. Other parties have argued that the ORPP is a solution in search of a problem.
That said, the ORPP is scheduled to be rolled out over the next three years. It will eventually apply to all employees who do not participate in a mandatory pension plan (the province has to agree that the employer's plan is sufficient). If the employer's plan is optional, the individual will still have to contribute to the ORPP.
Self-employed people will not pay into the plan, nor will they receive benefits.
In 2017, large employers (500+ employees) without their own pension plans will start to contribute. In 2018, medium-size employers (50-499) without their own plans will start. In 2019, small employers without plans will join. In 2020, employers that have plans will be covered.
The employee will pay 1.9% of his income (up to $90,000) and that contribution will be matched by the employer. As with the CPP, the first $3,500 of earnings are exempt.
The attractive part – the payout – is anticipated to be $12,815 per year, for someone who earns the maximum $90,000 (assuming 40 years of contribution and retirement at age 65). For someone earning $70,000, the payout would be $9,970, and at $45,000 the payout would be $6,410.
Is it an attractive proposition?
Well, it depends. If you have trouble saving, then being forced to do so could benefit you in retirement.
If you have important things to do now with your money (like saving up for a house, paying down your mortgage or going on a trip), then the fact that it's compulsory will interfere with your other plans.
If you are a saver, then the question is whether the ORPP will be a better investment than your other alternatives. Because it is a defined benefit plan, there are two major factors in determining whether you're a winner or loser: the rate of return and how long you will live.
Real rate of return
If the rate of return on your investment is high, you would probably prefer to invest your money on your own. Think about it. The government is promising you a fixed dollar amount. If you invest better, you can beat that. If you invest poorly, you will do worse.
Of course, it's the real rate of return – after inflation – that matters, because inflation just jacks up the numbers without making you better off. And risk matters, too. The ORPP is virtually risk-free, so it's not directly comparable with investing in the market.
With the ORPP, because the payout lasts as long as you do (or as long as your spouse does), the longer you live, the more you get. When you invest your own money, your lifespan doesn't affect how much you get.
So if you expect to live a long time, the ORPP could be a better bet. If you're a male smoker with diabetes, not so much.
Of course, most employees don't get to choose their compensation, so a worker with a terminal illness is still paying into the program, even though he knows he won't get anything out.
So – the numbers already
The ORPP seems to be designed around an expected real rate of return of something close to 2%. Assuming this is appropriate, for a person starting work at age 25 and retiring at age 60, the "break-even" point (where the ORPP is a good investment), is around age 83. That's not far off from the average age of death in Ontario.
If you expect real rates of return to be around 3%, then you have to live until age 94. If you think they'll be near 4%, you have to become one of the oldest people ever to have lived to make this a good idea. Of course, if that happens, there's a chance the plan will lower contribution rates (uh, not really) or hike benefits (okay, maybe). But that's all speculation for now.
How it works for employees
How it works for employers
To learn more about the ORPP and how it may impact you, contact Kevyn Nightingale, CPA, CA, CPA (Illinois), TEP, Tax Advisor, at 416.515.3881 or [email protected], or your local MNP Tax Advisor.
Related Topics:Retirement; Personal Tax
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