ORPP...Good thing? Too Paternal? Or Gone?

Or?

The ORPP or Ontario Retirement Pension Plan has been in the news a lot over the past few months.  Is it a good thing? Does it help people in a way they don’t want to be helped? Or will the change in federal government mean it will be replaced by something else or disappear like a puff of smoke?

Let’s look at the underlying reason for this plan.  There are fewer and fewer employers offering pensions, people are saving less combined with the small amount of income people get from existing programs like the CPP/QPP and OAS adds up to people not saving enough for retirement.

Or are they?  According to Malcolm Hamilton of the C.D. Howe Institute in his paper, Do Canadians Save Too Little? , the assumptions and numbers used as a basis for the ORPP are flawed and don’t address the “diversity of individual retirement goals”.   His paper does make you question what we are frequently told about savings and retirement.  What I take away from this paper is retirement goals are very personal and what may be perfectly adequate income for one person may not be for another.  If you have an investment advisor, have them do a financial plan for you to see if your goals and income lineup. 

For most of my working life, I have not had a pension and it’s only been in the last few years my employer introduced a Group RRSP/DPSP (Deferred Profit Sharing Plan) to supplement what I’ll get from the CPP (Canada Pension Plan) and my own personal RRSP.  I’m so used to not having a pension, I’m not sure how I feel about being forced into the ORPP where I don’t have the flexibility to do with the money what I want like I have with an RRSP.

With the election of a Liberal government that seems more open to piggybacking the changes Ontario wants on top of the CPP, will the ORPP even be necessary?

Hicks Morley , in their paper, 2015 FEDERAL ELECTION UPDATE: ORPP OR CPP – WHICH WILL IT BE? thinks it will take years to make changes to the CPP due to the time for the consultations and agreement needed by both the federal government and 2/3 of the provinces for any change.  The years prediction sounds reasonable since we can’t even get the provinces to drop tariffs on beer amongst each other.   If the Ontario government wants to keep their time line of starting to implement part of the plan by January 1, 2017, they will need something tactical.  It would be better if they just waited. It will be expensive to set up a complete infrastructure to support this new plan and then just throw it away if they go with a CPP solution long term or the continuing expense of operating it in parallel.

When the ORPP comes in, companies that have an existing pension plan won’t see much change as long as they meet certain conditions in order to be able to opt out of the ORPP.  For example, for a Defined Contribution or DC plan, where both employees and employers make contributions and the payout comes from a combination of these contributions and the investment return, the contributions must be 4% of base salary each or a total of 8%.

I have already heard companies are starting to adjust their existing pension plans to meet the conditions or convert existing Group RRSP/DPSP to pension plans.  No word yet from my employer on which direction they’ll be going, though if my DPSP is converted to a pension plan, the current contribution level is not enough to meet the conditions.

Small businesses aren’t too keen on the plan.  This would be an additional payroll tax for them and if you believe this article by the CFIB, the unemployment rate will rise by 0.5% and wages will be reduced.  I can’t vouch for the figures but it would make sense for wages to be reduced or a decrease in raises for a number of years until these taxes get absorbed.  Some employees may not be too keen as well for the additional payroll deduction either if their expenses are already using up most of their income.  Here’s a calculator to give you an idea of how much you or an employer would be paying (e.g. if your income was $40,000/year, you’d be paying an extra $693 in payroll deductions.)

The ORPP will help a lot of people not savings enough for retirement but would have preferred it wasn’t a “one size fits all solution” so it would target those most in need and that the Ontario government waited to piggy-back on the CPP and save us all a lot of money.  Now we just have to wait and see.

Here’s a few additional links if you want to do some more reading.

What the experts think of the Ontario Retirement Pension Plan – The Star
Jack Mintz: Kill Ontario’s pension plan – Financial Post
Bill 56, Ontario Retirement Pension Plan Act, 2015
Ontario pensions and retirement savings – Ontario Government
ORPP: who is enrolled - Ontario Government

James Whelan

moneymatters4life@gmail.com

Follow @monymattrs4life

Sickness, Injury and Death – Are you ready? Part 1

I apologize for not posting anything for months.  Let’s just call it an unplanned sabbatical.

During my last posting “New Year Resolution: Stop Over-Thinking Your Money!”, I did a book review that talked about some simple financial rules to follow.  

Rule#1 was “Disaster-proof your life” or getting straight to the point – “Sickness, Injury and Death – Are you ready?”  This post is the first in a series on financial protection for the unexpected that for most comes in the form of “insurance”.  If you’re like a lot of people, talking about insurance is about as exciting as watching paint peel.  It lacks the sexiness of investments and is not even as exciting as saving which at least you can measure how you’re doing and have an end goal.  Insurance has a totally different sort of objective.  It’s about protecting yourself “just in case” something happens but hoping nothing does.  Kind of the reverse of winning the lottery because if you win, you lose and we want to make the amount you lose smaller.

I’m going to discuss the different types of insurance including some observations plus at the same time doing a review of the current insurance for my wife and I.  The last time we did any changes was 2009 so we’re due for a review.  This is a large topic so I’ll need a few posts to cover it.  All of these posts will be from a Canadian point of view but for any of you in other countries it would be worth checking if you have   comparable insurance.

Let’s get started with Disability insurance.  This is insurance to replace your income if you become disabled.  A payment is made to an insurer for coverage (“the premium”) and then if you become disabled, you get a monthly payment to replace a portion of your income.  With this insurance, there is normally a “wait period” or “elimination period” until your first payment.  This type of insurance can come from individual insurance plans, group insurance plans, special purpose plans or government plans.  Let’s talk a bit about each one.

Government Plans.   Here is a summary of three government plans you might be covered under:

Canada Pension Plan (CPP) Disability Benefit.  This is coverage if you are disabled and unable to work for a long period of time.  For this benefit, you must meet the following 3 conditions. 

• have a severe and prolonged disability
• be under the age of 65
• meet the CPP contribution requirements.

There is an approximately four month period for the government to decide if you get coverage and the maximum monthly amount for 2013 was $1,212.90 or $14,554.80 annually.    It’s good this coverage exists but it doesn’t help the majority of people needing assistance with a lessor disability, there’s the 4 month gap in wages you’ll need to make up while you are waiting and most likely the total amount paid will be significantly less than your original pay.  It’s good to have additional coverage to cover the “buts”.  Benefits may also be available for your children if you’re receiving this benefit.   If you work in Quebec, there are similar benefits under the Quebec Pension Plan.

Employment Insurance Sickness Benefits.  This is coverage if you are “unable to work because of sickness, injury, or quarantine” and provides up to 15 weeks of coverage.  A summary of the conditions to be met are:

• Employed in insurable employment (i.e. you are paying EI)
• If not for the sickness, injury or quarantine you’d be able to work
• Your weekly earning are reduced by > 40%
• You have worked for a minimum number of hours before the claim

If you’re eligible, you should get your first payment within 28 days of your application but there is a 2 week waiting period for this benefit to start when you wouldn’t be paid.  As of January 1, 2014, the maximum weekly amount is $514 or $7,710 for the maximum 15 week period.  There are lots of rules and conditions for this coverage so I recommend going to the website link to read more.  For those of you covered by a group plan, most likely your coverage would be partially or totally covered through the short-term disability (STD) benefit.  

Workers Compensation Insurance.  This is coverage, if you are injured while at work. Each province and territory has its own Workers’ Compensation Board with slightly different rules and guidelines.  I could spend a whole posting just talking about this one type of insurance but for our discussion here I’ll try to summarize the key points.

• Compensation starts after the injury occurs and most boards don’t have a waiting period.
• The benefits received could be affected if you are getting disability benefits from CPP or QPP
• Benefits cover income loss, as you’d expect, but also things like health care benefits and compensation due to permanent impairment

Group Plans.   If your employer provides a group plan, you could have coverage for short-term (STD) and/or long-term disability (LTD) insurance.  My employer provides both.  Here is what my coverage looks like:

•  66.7% of earnings, up to a maximum benefit of $1,350/week for up to 17 weeks.  Waiting period is 0 days for hospitalization and accident related disability and 15 days for illness.
• 66.7% of first $3,000 of base salary, plus 45% of any excess amount beginning after 17 weeks of disability, to monthly maximum of $10,000.

So if I was getting paid $1000/week, after my accident I would get $667/week for both the short-term (0-17 weeks) and the long-term (after 17 weeks).  For the STD or LTD insurance, you may be paying for this through a deduction on your paycheque.  This isn’t necessarily a bad thing.  If your employer paid for this, it would be considered a taxable benefit and you’d have to pay tax on either the premium they pay for you or on the amount paid to you if you need to use this benefit.   Some other variations, you could see in your coverage:

• Integration with Employment Insurance (EI) benefits:

• The plan is comparable to Employment Insurance (EI) benefits so the employer gets a reduction in their EI premium since you won’t be applying for EI. 
• The plan covers the periods before and after the EI benefits and may or may not cover the EI benefit period if EI declines to pay you benefits.

• Different percentage paid out (e.g. 70%)
• Different periods of payment (e.g. 15, 17, or 26 weeks)
• Different waiting or elimination period (e.g. > 0 days for accident and hospitalization )
• Taxable status.    If the employer pays any portion of the premium, the entire benefit is taxable.
• See here for more on this. 

Individual or Special Plans.   Individual plans are offered by a lot of insurance companies and may be worth looking into if your employer doesn’t offer a group plan or you are self-employed.  You may also have coverage via other plans like auto insurance or creditor insurance.  A guide to disability insurance by the Canadian Life and Health Insurance Association provides a good overview of disability insurance and some useful worksheets to determine if you have enough coverage.

Okay.  I think this is enough for now.  We still have to talk about Critical Illness insurance but that can wait for another posting.   As for my own coverage, both my wife and I are covered by group plans and have a low amount of debt and no other special needs so we have enough for now.  I’d recommend trying the worksheet in the guide I mention above to assess your own coverage. 

James Whelan, moneymatters4life.blogspot