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CPP – Long Term Viability?

Canada has a growing, concerning issue. We have more than a generation of people groomed on the “Freedom 55” concept. Build your retirement up and don’t wait until you are 65. Choose a better path and retire ten years earlier and enjoy life. But, we also have an attitude, sub-conscious or not, that the government will take care of us.

January 1st 1966 was a momentous date for Canadians. On that date, the CPP (Canada Pension Plan) Act came into existence. It was “An Act to establish a comprehensive program of old age pensions and supplementary benefits in Canada payable to and in respect of contributors.”

By the mid-70’s, concern for the long term viability of CPP was growing and by the mid-90’s that concern reached a crescendo with a low contribution rate and a growing, aging population. And the “rise of the retired Baby Boomers” had not even come near to reaching its peak. Changes had to be made or the fund would run out by 2015. CPP had become a “hot potato” of debate.

To that end, CPP has evolved into a “pay-as-you-go” plan and the government annually has to look at changes, both minor and significant as the world moves and adapts. How do we increase revenues into the system, increase benefits provided by the program and keep it in a state of sustainability over the long haul?

Combine that with a declining birth rate, an increasing number of baby boomers hitting those retirement ages, and a still growing economy, and you have a growing tsunami developing where the biggest danger to continued prosperity is a lack of knowledge in the workplace.

We need to find a way to change the attitudes of Canadians and keep them in the workplace longer.

For 2012 there are the usual changes, or should I say usual increases. The base percentage rate does not change, but the maximums income basis of that percentage for contributions have increased from $48,300 to $50,100. This is the government’s subtle way of instituting increases while telling the public the rates have not gone up.

But the bigger adjustment is the age adjustments. If you take CPP before age 65, the amount you can take will decrease by a larger percentage than before, and if you take it after age 65, the percentage will increase. As well, if you continue to work between the age of 65-70, you can continue to make contributions and your employer will be required to as well.

What does all this mean really to employers? Today, probably not a lot will change. There will be some increase in costs for matching contributions for that older part of the workforce. But that may well be offset by the value that group will continue to bring to your organization.

Although, it is just the first step in changing a mentality of the aforementioned “freedom 55” generation, it will help edge us to a workforce that stays longer. It will start to ease some of the pressure on succession planning as our experienced workforce begins to grow with more people choosing to continue to be active employees.

Certainly, there are going to be many who are choosing the path out of sheer necessity. That part of the workforce has been with us for a while now, just look at the stereo-typical Wal-Mart greeter, and you will see that. However, many more will continue to be on the “bubble” of retirement economics. Given a much more significant reason to not take early retirement, to continue to work and have the opportunity to contribute effectively to that retirement fund, and stay active, employers should see more opportunity to encourage that experienced workforce to stay.

This will also have to get into the mindset of employers and our financial teams. Often, budgets are in place with the expectations that we can continue to look for ways to reduce costs. This potential increase in an aging workforce still being active means other costs as well. So many other factors start to emerge.

There are a few factors that will be part of a domino effect on this growing part of our workforce– a widening of the generational gaps in the employee base, more people earning more vacation time through increased tenure, pressure on health and dental plans to meet changing demographics, potential in workers’ compensation costs to handle a potentially more fragile workforce and, of course, the hard costs of CPP itself. These factors will contribute to the complexity of running a business and create both cost and angst over change.

But, if we look at the concerns of the business owner in Canada, we will see that more pressing challenges of succession planning, loss of practical experience at all levels and shortages of skilled labour in all industries.

This push by the government to have people stay longer to ease the burden on CPP may also help ease some of these last frustrations of the business owner. And, if managed properly, can be significant opportunities for economic growth for many companies in Canada who are facing positive challenges outside of the financial burdens of increasing their business.

It will probably take five to ten years for this differing mindset to gel, where people coming into the workplace stop thinking “if I do this “right”, I can retire at 55 and even if I don’t, I can relax starting at 65”. It will take time for people to realize that they can continue to bring value to their employer longer and you will be able to have an expectation of being productive longer. “Old Age” will continue to be extended outward and those grey hairs will not signify lack of usefulness. Instead it will bring experience to make our companies more vibrant and effective.

Written by: Bill Leesman