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Pensions

This overview explores the evolution of pensions, starting from pre-industrial families and their transition from manual to thought work. It highlights the changes in life expectancies, the original intent behind pension plans, and how income replacement ratios are influenced by factors such as payroll taxes, senior discounts, and life expenses. The concept of the Three-Legged Stool is introduced, outlining components of pensions such as corporate plans, personal savings, and government pensions (C/QPP and OAS). This comprehensive guide provides essential knowledge for anyone looking to understand the pension landscape.

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Pensions

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  1. Pensions Pre Industrial Revolution • Families • Manual vs. “Thought” work • Life expectancies

  2. Pensions • Social Change • The intent of the “original” pension plan • The income replacement ratio

  3. Income Replacement Ratio Lower income is needed because certain expenses disappear: • Payroll taxes (i.e CPP and EI) • Senior discounts • No more work expenses • No more mortgage payments • No more dependents (Hopefully!!!)

  4. Income Replacement Ratio Will vary by individual • travel • investments and other sources of income • new hobbies • health • courses • couch potatoes

  5. The Three Legged Stool • Corporate Pensions (next class) • Personal Savings (RRSPs and non tax-assisted savings) (much later in the course) • Government Pension (C/QPP, OAS)

  6. C/QPP Canada Pension Plan • Contributions made by ER and EE over working life of EE • Currently 5.2% of earnings above Year’s Basic Exemption (YBE) up to Yearly Maximum Pensionable Earnings (YMPE) • Benefit is 25% of Average Earnings up to YMPE Average

  7. C/QPP Canada Pension Plan • Depends on having made contributions to the plan • Taxable as income • Indexed (inflation protection) • Payable at age 65 or from age 60 with a reduction • pay-as-you-go funding

  8. Example - Contributions Current earnings $40,000 YMPE for 2001 = $38,400 YBE = $3,500 • Maximum ER contribution= .052 * [Min($38,400; $40,000)-$3,500] • Maximum EE contribution= .052 * [Min($38,400; $40,000)-$3,500]

  9. Example - Pension Final Average earnings over the last three years = $40,000 Average YMPE over the last three years = $36,050 • Maximum Pension = .25 * min($36,050; $40,000)

  10. OASOld Age Security • Paid from general revenues • Independent of work history • Flat amount - currently around $415 per month • “Clawed Back” for high income earners Government

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