Investing for Retirement - Research Paper Example

Investing for Retirement 1. SUMMARY In the Family Finance section of Financial Post, there is an article entitled "Retirement Transition All About Expectations." This article is about a couple, Julius ,60, and Emma, 58, in Alberta, Canada who are both retirees, who's been worrying about how they can protect themselves financially if ever there would be a sudden change in the economy. According to Julius, "it might be difficult to make the transition from employment to retirement" (Allentuck, 2011). Exposure to inflation is their main threat being a retiree. Don Forbes, head of Associates/Armstrong & Quaile gave them an advice on how they are going to utilize their financial plans to protect themselves against any threats. Forbes gave the couple a five year plan scenario on the pension plan they availed, stating what they should do, and explains its corresponding effects in the long run (Allentuck, 2011). This article has been on the news because there are more other Julius and Emma who have been worrying the same thing once they are about to retire. Starting January 1, 2011, the Baby Boomers turned 65. These Baby Boomers are those generations in American history who were born between January 1, 1946 and December 31, 1964. This has been an issue for so many years and now it’s 2011, the Baby Boomers have reached their retirement age. People, especially in the U.S., were already in panic that for the next 19 years these Baby Boomers will push the national government into bankruptcy. This generation has been on a wrong timing since the economy until now is still on the verge of losing everything (“In 2011 the baby boomers,” 2010). I chose this article because Canada is not an exception in this crisis. It is significant for the Canadian families because just like Julius and Emma, most of the retirees now are having lots of questions about the reliability of the government and other company pension plans to fund their necessary needs and other expenses in the future. 2. SCOPE OF CANADA PENSION PLAN Canada Pension Plan (CCP) is one of the retirement income systems in Canada that has been mentioned in the article. The CPP is a national pension plan that was established by the government in 1966. This program is a monthly national defined benefit pension plan that is paid to contributors who are at least 65 years old or between 60 and 64 years old who met the earnings and contributions requirements (Monk & Sass, 2009). It is an independent financial institution wherein no political strings attached; its obligations are not government obligations as well as with its assets. The governance structure of this pension plan lies in the Canada Pension Plan Investment Board Act. It has a disclosure policy in which all quarterly and annual financial statements report and its public portfolio holdings must be disclosed to the public in the CPPIB website. Furthermore, the Canada Pension Plan Investment Board is an organization established to monitor and invest the funds held by the CPP. Independent from the government, the CPPIB was incorporated in 1997 as a federal Crown corporation by an Act of Parliament. In 1999, it made its first investment whose purpose is to maximize returns without undue risk of loss. Usually, the risks associated in applying a defined-benefit pension type of plan are funding risk and insolvency risk. In the first risk, members are concerned whether the employers can fulfill their promised benefits by assuring them adequate assets in the pension fund. On the report of Financial Services Commission of Ontario 2010, there had been an increase of underfunded plans by 79% in 2009 from 76% in 2008 out of 1,539 defined-benefit plans (cited in Davis, 2011, p. 6). The concern related on the latter risk goes on the employer's insolvency, in which the business assets of the employer would serve as the ultimate guarantee of the pension promises (Davis, 2011, p. 7). Sponsoring employers should avoid being insolvent as possibly as they can, otherwise the plan members will suffer reductions in their promised benefits. One internal funding mechanism can avoid the first risk to occur by funding pension benefit members when their current revenue becomes due. This is called "pay-as-you-go." On the other hand, the second risk can be avoided through an external funding mechanism. A third party would be involved by investing the contributions made by the sponsoring employers to fund promised benefits annually (Davis, 2011, p. 7). When the largest age cohort in the population is beginning to retire, there are concerns in whether the funds contributed to the CPP can sustain the necessary needs of the contributors once they retire. Linda Sims (2011), Director in Media Relations of CPPIB, answered these concerns through an editorial review that was published in local news, the New Westminster News Leader. She stated in the review, "Canada’s Chief Actuary published a report in November 2010 reaffirming that despite the projected substantial increase in benefits paid as a result of an aging population, the CPP is sustainable throughout the report’s 75-year review period, at current contribution and payout levels." She added, "It currently has assets of $140 billion, which are projected to grow to $275 billion within the next 10 years" (Sims, 2011). Aside from CPP, there are other retirement income systems in which Canadians can avail. One of which is the Old Age Security (OAS) program. To become eligible on its monthly pension, one must be 65 years old or older and have met certain residence requirements. For low income earners, they may qualify for additional benefits from the OAS: Guaranteed Income Supplement (GIS) for low-income OAS pensioners; and Allowances for spouses or common-law partners of OAS pensioners and survivors between 60 and 64 years old (Canada Pension Plan, 2010). Table 1 and Table 2 compare the rates and benefits of OAS and CPP (Please see Appendix A). Between 2011 and 2016, there are several changes which have been made to the CPP if a member is 1) an employee who is a contributor to the pension plan; 2) a self-employed person; 3) an employee who is a contributor receiving CPP retirement pension between 60 and 70 years old; and 4) an employer contributing CPP for his employees. These changes are (Canada Pension Plan, 2010): Increase rate of monthly CPP retirement pension if availed after age 65 from 2011 to 2013; Decrease rate of monthly CPP retirement pension if availed before age 65 from 2012 to 2016; Increase of the numbers of years of low or zero earnings that are excluded in the computation of the retirement pension in 2012 and 2014; Starting 2012, a member will receive retirement pension without any work interruption; and Effective starting 2013, should the employee receive CPP retirement pension under the age of 65, both employee and employer will contribute to the CPP to increase retirement benefits. However, if the employee is 65 to 70 years old, he can choose to make CPP contributions. 3. RESEARCH EVALUATION Information regarding this retirement income system can be retrieved from Service Canada Web site. It is a convenient access of the services and programs of the Government of Canada, thus, it is recommendable to everyone. Most of the information given are detailed: from benefits, to computations of the benefits, to the frequently asked questions, until the contact details to whom a person should ask for more details regarding other services and programs offered. The news articles were also helpful in my research to retrieve some feedbacks and other current issues regarding CPP. The case studies provide a wide range of analysis and evaluation regarding with the policies and laws involved, the solvency of the sponsoring employer, the risks associated with the pension plans, and the outcome of the contributor’s benefit plans. References Allentuck, A., (2011, February 25). Retirement transition all about expectations. Financial Post. Retrieved from http://www.canada.com/business/fp/money/Retirement+transition+about+expectations/4333996/story.html Canada Pension Plan. (2010). Service Canada. Retrieved from http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/retire.shtml Canada Pension Plan Payment Rate. (2011). Service Canada. Retrieved from http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/rates.shtml Davis, R. B. (2011). Is your defined-benefit pension guaranteed? Funding rules, insolvency law and pension insurance. Retrieved from http://www.irpp.org/pubs/IRPPstudy/IRPP_Study_no16.pdf In 2011 the baby boomers start to turn 65: 16 statistics about the coming retirement crisis that will drop your jaw, (2010, December 30). The American Dream. Retrieved from http://endoftheamericandream.com/archives/in-2011-the-baby- boomers-start-to-turn-65-16-statistics-about-the-coming-retirement-crisis-that-will-drop-your-jaw Monk, A. H. B., & Sass, S. A. (2009). Risk pooling and the market crash: lessons from Canada's pension plan. Center for Retirement Research at Boston College. Retrieved from http://crr.bc.edu/images/stories/Briefs/ib_9-12.pdf Old Age Security Benefit Payment Rates. (2011). Service Canada. Retrieved from http://www.servicecanada.gc.ca/eng/isp/oas/oasrates.shtml Sims, L. (2011, March 10). Future of Canada pension plan is secure [Review of an editorial Retirement Dreams Postponed]. New Westminster News Leader. Retrieved from http://www.bclocalnews.com/opinion/letters/117752203.html Appendix A Table 1 (Canada Pension Plan Payment Rates, 2010) Table 2 (Old Age Security Benefit Payment Rates, 2011) Read More