F***ing Canadian Pensions.

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Personal Savings or "F**k, I'd better start saving..."

So you're not one of those folks with a fancy shmancy "employer pension". No problem, you'll just start saving right? A decent DB pension has been estimated to be worth about $1 million in the bank. You better get on that whole "saving" thing immediately.

There are a few tools that can help, but it is not an easy route.

First things first. Disclaimer : I am not a financial expert. I'm a policy wonk. If you need help learning more about investments and how to save/make money, you should probably consult a financial planner. Go to a bank/credit union or talk to someone who is insured in case of liability...which I am not. Don't sue me please.

Alright, that's out of the way, so what are the tools available for personal savings for pensions?

Registered Retirement Savings Plan (RRSP) - Probably the best known of all savings vehicles in Canada. Contributions are tax deductible and so is the growth within the fund. So if you invest the money in your RRSP, you don't pay taxes on that money and on the earnings. You do, however, have to pay taxes once you start taking that money out. And you do have to take that money out. You can do it early (and pay more tax) or when you hit 71 you have to take the money and put it into a     Registered Retirement Income Fund (RRIF) which has a minimum amount of money you have to take out of your savings per year (it starts at about 7% in your early 70s then reaches %20 of your savings per year when you reach 95).  There's also a maximum that changes every year according to the Income Tax Act. This year the max is  $24,930.  On a side note, RRSPs are REALLY under used. In Canada people use about 5% of the room available for saving. Yeeouch.

Tax-Free Savings Accounts (TFSA) - These new fangled things     popped up a couple of years ago and they can be really useful. Now, there are political issues that I'll get into another day (apparently not paying taxes has budgetary consequences, who knew?) but at the moment let's just focus on what they are and what you can do with them. A TFSA is a savings  account...which is tax free (heh.) It has a limit of $5500 a year (the 2015 budget will expand it to $10k). You can take it out anytime you want (but if you take money out, you can't put it back in without some penalties). You can also set up automatic deposits from your bank account. Even small amounts add up. Say you get paid bi-weekly and you put $50 from each cheque into a TFSA. After only a single year, without interest, you'll have $1200. That's like, 40 two-fours of beer! (or some other better investment...)

Which is better? Well, it really depends. Talk to a financial advisor to find out if RRSPs or TFSAs are better for you (or if you should use both!) Ha, how's that for a cop-out?

How much should you save? That's a good question. Let me start by askng you a question : how much do you spend? How much money do you expect to spend in your retirement? Some experts estimate about 10-15% of your salary should go to your savings, especially when you're young. See there's this magical thing called "compound interest". It's interest on interest. The more you save, the more interest you make, the more interest you get on that interest. Dollars you put aside when you're young make you a bunch more money over decades than the money you put aside 5 years before retirement.

What's the moral of the story? If you don't have a pension, you have options but you need to save your money. Some employers have group RRSPs which are kind of cool because your money is pooled with others and it can do a bit better (that bulk buying thing coming into play again). If your employer offers to match your contributions, F**KING DO IT.

Just save your money.

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Employer Pensions. If you have one, I'm jealous.

Alright, so we've gone through the public sources of pensions in Canada. Now onto the "third pillar". This usually covers personal savings and employer pensions. For the moment, let's look at employer pensions.

If you have one of these, congrats. About 2 in 9 Canadians have an employer pension plan. Ouchy. Some offer other types of savings schemes (group RRSPs and such), but none are as good as even the most basic pension.

Before I get into details, I have to be clear that pension plans don't necessarily fall easily into one category or another. They are negotiated (usually) and so they can have all sorts of different elements to them (which adds to confusion). For the moment let's say there are two basic types of employer pensions : defined benefit (DB) and defined contribution (DC). About 1 in 9 Canadians have DBs and another 1 in 9 have DCs. 

A DB is the one you think of when someone says they have a pension. It's the classic pension. Employers and plan members (employees) make regular contributions. You'll have a rough idea of what you'll be getting every year, for the rest of your life. That amount is usually based on some formula that your representatives have negotiated, but it basically takes into account your salary and years of service. More years of service, higher salary, better pension. Most of the time this amount also includes something called indexation. It's essentially protection against inflation. A $10k salary in 1970 isn't worth the same as a $10k salary in 2015, you know? Lastly, your employer is usually on the hook if there's a shortfall in these types of plans as well.  The risk is on them (longevity risk, investment risks, etc...I'll explain another day). It's also pooled, which makes it more efficient. Think of it like the Costco of pension plans. You're buying in bulk, so you're saving money.

A DC plan is ...well it's a crap shoot really. Like a DB plan, employers and employees put in their negotiated contribution but that's about where the similarities end. In this plan, there are no guarantees. You don't know what the amount your pension is going to pay out in advance. It completely depends on things like market returns and interest rates. Also, if the plan does poorly and there are shortfalls, the risk is entirely on the shoulders of the individuals. It's an individual account. No pooled savings. No Costco card. When you retire, whatever you've managed to gain through your contributions, your employer's and investment earnings is what you retire with. When you retire you take that pot and put it somewhere to hopefully give you a regular steady income. Used to be that people would then buy an annuity (long story short : you pay an insurance company to pay you for the rest of your life). Unfortunately, in the current market, annuities are really expensive and you don't get the same bang for your buck. So...yeah, DC plans sort of suck.

In sum : Defined Benefit (DB) means the benefit you get is defined. You know what you're getting. Defined contribution (DC) means the contributions are defined, but that's it - there are no guarantees.

Final note : A DC plan sucks, but it's better than nothing.

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The F***ing Basics : Public Canadian Pensions

The Canadian pension system is complicated. Really stupidly complicated. So where to start? The basics. 

You can divide the Canadian pension system into three categories. And you have to, because your pension will be made up of all of these things : 

1. Old Age Security / Guaranteed Income Supplement

2. Canada Pension Plan 

3. Personal Savings / Employer plans 

That’s all well and good…but what the hell does that mean? 

This post will focus on the "public" side of your pension, those first two pillars.

What the hell are they exactly?

Old Age Security (aka OAS) : A monthly benefit you can get when you’re 65 (or 67 in a few years…thanks Harper). On average you get about $500 a month (maximum is $6500 annually). Shiny. Pretty much everyone gets it. It's universal, based on a residency test, it cuts through issues of gender pay equity  (that women make less than men). If you're a progressive (like me) you probably like it. (it's subject to a clawback when you make more than $71 000 a year...)

Guaranteed Income Supplement (aka GIS) : A bit more complicated. It's available to low-income Canadians. The maximum for a single senior is about $8900.

Canada Pension Plan : You probably noticed this comes off your cheque. It's not an income tax. I will repeat. IT IS NOT AN INCOME TAX. I don't care how many partisan folks tell you this, it's just not. It's pooled savings and investments. Workers and employers make a mandatory contribution of 4.95% of their earnings (to a max of $53 600). The idea is that once you retire, CPP will replace a quarter of the "average industrial wage". If you contribute the max, your whole working life, you'll get $12 000 a year. Unfortunately, the average is more along the lines of $6300 a year. 

So all together, between the CPP and OAS, at a maximum contribution, you're looking at about an average of $12 000 of public income when you retire. I don't know about you, but living on $12 000 is a frightening prospect. I mean, it's great that something is there, but holy hell, you'd better have some other source of revenue if you expect to have a decent replacement of your income.