April 2012

A new vision of retirement?

The budget tabled last Thursday by federal Finance Minister Jim Flaherty is going to change the face of retirement in Canada. But it would be an error to look no further into it than that. A brief analysis from a personal finance perspective.

We were expecting it, and it became official in the budget tabled by Finance Minister Jim Flaherty on March 29: starting in 2023, Canadians will have to be 67, not 65, before they become eligible for federal pension benefits. Furthermore, starting in July 2013, Canadians who elect to stay in the work force beyond the official retirement age – for up to five years – will be entitled to higher Old Age Security benefits: individuals who decide to retire at age 70 will see their annual benefit rise from $6,481 to $8,814.

How will that affect me?

If you were born before April 1958, you won’t be affected by the implementation of the new eligibility age of 67. For anyone born after that, though, the age of eligibility will gradually increase, depending on your year of birth, until it reaches 67 for people born after February 1, 1962. For example, if you were born in June of 1960, you will be eligible for the Old Age Security pension at age 66 years and two months. October 1961? 66 and 10 months. And so on.

If you are 50 or younger today, the two-year postponement also means that you’ll have to consider some new scenarios: either continue working for longer, or put more capital into your retirement savings, starting now, to cover your two-year loss of benefits.

Beyond retirement: government finance and the economy

Along with changing our idea of retirement, this budget contains a number of other measures that will also affect our personal finances. The government, on one hand, will be making some substantial cuts in its own spending but, on the other, has proposed some support measures for businesses.

Spending cuts

Finance Minister Flaherty is implementing a major program of budget cuts totalling $5.2 billion per year. He expects that this program will allow him to eliminate the budget deficit as of 2015-2016, which would make Canada one of only two G7 countries with a balanced budget at that time.

Source: Department of Finance Canada

The direct results of these cuts will obviously be felt most sharply by the thousands of federal public service employees who will lose their jobs, and one can only sympathize with them and their families. For the rest of the Canadian population, the repercussions may be felt through the government services provided or the fees charged for some of them.

Support for businesses

The government is proposing to encourage economic growth and job creation with a series of measures aimed at the funding of innovation and research (more than a billion dollars), and the support of small and medium-sized businesses. If you manage an SMB, note that the hiring credit for small business, which can be up to $1,000 per worker, has been extended for one year. As well, Employment Insurance premium increases will be capped until the EI operating account is balanced.

Other measures

Goodbye to the penny

The impact of another measure will be felt primarily in the public imagination: the government has decided that, as of this year, it will stop minting pennies, which in fact cost 1.6¢ each to produce. There will be no change in prices or the way retailers apply sales taxes, but after-tax amounts will be rounded up or down to the nearest nickel. This rounding will not apply to electronic transactions.

Less fuss at customs

If you cross the border regularly, note that the value of goods that you can bring back into Canada is being increased to $200 for trips of 24 to 48 hours, $800 for trips of two to seven days, and $800, as well, for trips longer than seven days. Are you a wine lover? Sorry, the rules for alcohol or tobacco remain unchanged.s

A limit on tax benefits from life insurance?

Finally, among the notable measures in the Flaherty budget, here’s one that hasn’t received much public attention, although no doubt it will in the months to come, since it could affect thousands of people who use a life insurance policy as part of their tax strategy. The Minister is proposing to revise the exemption criteria – a proposal that could have an impact on any number of financial plans.

In short, a budget that is likely to change the vision of retirement for all Canadians… and change the financial situation for many of them! If you think you are one of them, this may be a good time to sit down with your financial services professional and update your financial plan.

For more details
Department of Finance Canada website