Can the new Ontario pension plan help seniors dealing with debt?Aug 19, 2015
Last week, it was big news across the country when the Ontario government unveiled details around the Ontario Retirement Pension Plan (ORPP). This plan intends to supplement retirement savings for two-thirds of Ontarians, who do not have a workplace pension plan—half of whom don’t contribute to an RRSP, either. In all, 3.5 million people throughout the province are expected to contribute to the ORPP.
Based on numbers released by the provincial government, an employee earning $45,000 a year would receive an annual ORPP pension of $6,410 after 40 years, an employee earning $70,000 would receive $9,970 and someone making $90,000—the highest salary still eligible for the plan—would receive $12,815 annually after 40 years of service.
Based on those numbers, the ORPP would certainly contribute to the retirement savings of a 20-year-old who will be entering the workforce around 2019, when the pension plan takes full effect. But for someone who’s already nearing retirement, the payout won’t be nearly that large, although we don’t know exactly how large it will be yet.
And with seniors currently accounting for 30 per cent of bankruptcies in Ontario, the ORPP won’t change things overnight. Nationally, 42.5 per cent of seniors reported having debt in 2012, a number that had increased by 55 per cent since 1999. It will be interesting to see where seniors’ debt levels stand by the time ORPP withdrawals begin in 2022. The current low rates of return on GICs and fixed-income investments, combined with a shortage of sufficient pension income for seniors, make it difficult for many to deal with debt.
One concern is that some people might stop saving for retirement, since the combination of the ORPP with the Canada Pension Plan (CPP) and Old Age Security (OAS) could potentially provide the same standard of living in retirement, assuming lower living costs. But with housing prices soaring in cities like Toronto and Vancouver, can we really assume that living costs will be lower in retirement?
Household debt to disposable income remains a concern. In the 1990s, Canadians generally owed less than they earned, but in 2013, the national average was $1.63 of debt for every dollar of income. And with most of us expecting to earn less in retirement than while we’re working, it would be best to pay off debts first.
This could be of particular concern to baby boomers, the next generation in line for retirement. Private companies have been reducing or scaling back their own pension plans, often requiring employees to make up the difference. And with interest rates at historic lows and stock markets recently falling with the price of oil, there seems to be no safe place to park your retirement savings. Those who do own property could benefit from those soaring house prices, mind you—a survey last December found that 20 per cent would rely on the value of their homes to finance their retirement.
When it comes to pensions, Canadians nearing retirement have probably heard this story before. The CPP, which was introduced in 1967, was considered to be unsustainable for some time until reforms were introduced in 1998. Even today, some people aren’t counting on the CPP to be around when they retire—though that’s probably a radical position nowadays.
In any case, it’s probably best to look at the ORPP as an added retirement bonus, not a get-out-of-debt-free card.
Are you factoring in the ORPP to your post-retirement budget, or making other plans to reduce debt in retirement? Share your thoughts with BDO by joining the conversation on Twitter using #LetsTalkDebt