Questions have been lingering about the Ontario Retirement Pension Plan (ORPP) ever since Kathleen Wynne made the new pension plan one of her campaign promises. The reason for this legislation is that it’s believed that Ontarians are not saving enough for retirement and in turn reducing their future retirement standards of living. Although, conflicting studies are debate whether this is true or not. Rather than continue that debate here, we will instead discuss the details of the ORPP and how it will affect you.
ORPP contributions will be similar to other government pension plans, as contributions will be deducted directly from your pay. Employers will also have to contribute an equal share to the ORPP. The total deducted amount will not exceed 3.8%, or 1.9% each for employee and employer. This amount will be deducted from all income, and will range from a yet-to-be-specified minimum to a $90,000 maximum. Furthermore, this “deduction bracket” will be adjusted by periodically inflation adjustments.
For example, if you were earning pre-tax $50,000 a year and $1,923.08 bi-weekly, then you would be paying $950 a year or $36.54 bi-weekly towards the ORPP (assumes 1.9% deductions and that the contributed amount does not change). Note that your employer would also be contributing the same amount. If we further assumed that you were 35 years old, that ORPP returns were 5% (after inflation) and you want to retire at 65, then this fund would equal a total of $121,637.93 at retirement and would pay out $8,630.47 annually until age 80.
To begin receiving the pension, you must be between the ages of 60-70 and the amount of the pension payments will be greater if you delay withdrawals to an older age.
The amount of the ORPP payments will be indexed to inflation like the Canadian Pension Plan. There would also be spousal survival benefits if an ORPP holder passed away.
Individuals that have similar pension plans at work would be exempt from the ORPP. This clause in the bill is still mildly vague, as it only states that this will be “similar to the Canadian Pension Plan,” and does not include further detail. Another big question is how this plan will be applied to self-employed individuals, but we can assume this remains yet-to-be-decided.
The impact of the ORPP will be debated to great length in the future. Some dislike the forced implementation of this act and others appreciate the security for their retirement. Likely, many workers will not be impacted, as they already have similar pension plans and others can simply reduce their RRSP contributions to retain the same income. Another concern is whether or not businesses will hire fewer employees or reduce overall pay, as they would have to pay an extra 1.9% premium on wages.
Expect to hear more about the ORPP in the future and as always, if you have any questions please contact me at firstname.lastname@example.org and please sign-up to our newsletter.