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  • Oct 13th, 2018 10:52 am
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Deal Fanatic
Nov 24, 2013
5109 posts
1717 upvotes
Kingston, ON
If you max contributions for 39 years in the 47 year contributory period:

-$13,610 max CPP
-Current YMPE $55,900
-Max CPP = ~24% of current YMPE (25% of last 5 years’ avg YMPE, similar to how many DB formulas work)

So, indeed, if you earned YMPE every year, your return is comparable to a DB accrual of ~0.62% per year times 39 years, though the full math will vary depending on the length of your working career and your age of retirement. But that’s on a pension with 4.95%/4.95% contribution rates. “2% per year of service” DB pensions are actually ~1.35% regular benefit and ~0.65% bridge benefit up to the YMPE. They also have contribution rates pushing double digits on either side (~18%+ combined). So DB plans are double the contribution for double the pension. In other words, CPP is proportionate to most DB plans, with the caveat of age 65 for an unreduced pension vs 60 or even 55.
Member
User avatar
Jan 15, 2017
463 posts
204 upvotes
nevyn1234 wrote:
Oct 9th, 2018 8:05 pm
And if you live to 95?

It's a hedge, against both long life and inflation. It is also a pretty reliable fixed return which allows you to take on more investment risk in your own savings.
By the time I collect it, I will have paid into CPP for about 45 years. I think I will have averaged about $1800/yr in premiums, or $81,000, and may collect about $220K by age 80.

My wife has a $100K whole life policy on which, by age 65, she will have paid about $12K in total premiums. Not even sure if she'll be fully paid up by then.

If an insurance policy, which uses similar actuarial tables, can pay out 8x the premiums paid, while CPP pays out 2.5x (or 1.25x if we consider employer contributions), it's hard to argue that CPP looks anything like a good deal...at least to age 80. If I had put the equivalent amount into an index fund (i.e. average $1,800/yr for 45 years earning 5%), I would have something like $300K. At 8% I would have $700K (9x total premiums paid).

Tell your kids to start saving today!
Deal Expert
Aug 2, 2001
15022 posts
5289 upvotes
LoANeal wrote:
Oct 9th, 2018 9:08 am
People make bad decisions it shouldn't be my problem they do. I planned and saved when I was working minimum wage crap jobs for years. And with TFSA's now existing it's even easier. I, nor anyone else, should be burdened with the fact someone else was bad at planning or thinking ahead.
The problem with this is that those who would save nothing would be heavy users of our social safety net, which may cost you much more.
Jr. Member
Nov 28, 2017
162 posts
148 upvotes
taxrage wrote:
Oct 9th, 2018 9:24 pm
By the time I collect it, I will have paid into CPP for about 45 years. I think I will have averaged about $1800/yr in premiums, or $81,000, and may collect about $220K by age 80.

My wife has a $100K whole life policy on which, by age 65, she will have paid about $12K in total premiums. Not even sure if she'll be fully paid up by then.

If an insurance policy, which uses similar actuarial tables, can pay out 8x the premiums paid, while CPP pays out 2.5x (or 1.25x if we consider employer contributions), it's hard to argue that CPP looks anything like a good deal...at least to age 80. If I had put the equivalent amount into an index fund (i.e. average $1,800/yr for 45 years earning 5%), I would have something like $300K. At 8% I would have $700K (9x total premiums paid).

Tell your kids to start saving today!
Insurance is basically doing the inverse, thus if off of the same actuarial table you'd expect the insurance deal to be better the worse the pension was and vice versa.

One is hedging long life, the other early death. The insurance becomes a worse deal the longer she lives (even if premiums stop), as it is often not inflation protected, and even if it is, it increases the time the paid money could compound.

CPP becomes a better deal the longer you live.

Im not sure why you are fixated on 80 as a fair calculation age, that probably undershoots life expectancy by several years. And the CPP payout will move with inflation.
Deal Fanatic
May 9, 2007
5739 posts
745 upvotes
Vancouver Island, BC
In addition to the above discussion about standard pensions, recognize that CPP also provides income security through disability pensions. This is particularly important for workers today as many workers have limited access to long term disability plans through employment. And if disability occurs when a person is in a period of unemployment, regardless of how short, there is no employment LTD.
Earthlings, you're evicted.
You are not getting the damage deposit back.

God
Member
User avatar
Dec 24, 2007
329 posts
223 upvotes
BC
What a load of nonsense trying to compare the CPP to other DBs by focusing strictly on the returns. This is like Trump saying how NAFTA was bad because Canada imposes a 300% tariff on US dairy products. It plays real well to the uninformed base but there is more to it than that but who cares if it is not the whole truth. So just like the 300% tariffs, there is more to CPP and DBs than just maximizing returns. With DBs, the investment risk is on the employer to pay off those high returns promised and many companies are finding that they cannot sustain it and opting out for DCs. The CPP is not and and never meant to be a RRSP so people should just stop raging on about how they could be better off if they had invested elsewhere and get x% return with some index fund and blah, blah, blah. Focusing so much from your own perspective and having all the advantages of having the excess funds to invest and maybe the knowledge and discipline to manage your own finances, you think the Government should do the same thing. Unfortunately, there are lots of people in Canada that don't have those advantages (don't have the savings discipline or the knowledge) and the fund is there to as a means of forced savings (not max savings) that is available on their retirement. Also the fund cannot afford to be blown up by some unforeseen financial calamity like the 2008 stock market meltdown as there are people who are relying on the fund to pay out year after year. It cannot be taking on the same risk level you can take in your portfolio as you are not relying on it as an income source until retirement. For years the CPP fund invested mainly in government bonds for safety to generate its income and only recently as 1999 has it diversified to other assets. Keeping managed risks low means lower returns, so don't be looking for index fund returns - more like GIC returns is what you'll get.

The government could make CPP optional but you know what that would mean. It would be like health care in the US where people opt out of spending money on medical insurance and when they get into medical trouble they go to Emergency in public hospitals for their health needs and making everything more expensive. The government would rather have forced savings so seniors have some pension then have them blow all their money and then have to rely on welfare when they are seniors with no savings.
Deal Fanatic
Feb 1, 2006
9425 posts
537 upvotes
WetCoastGuy wrote:
Oct 10th, 2018 12:18 am
The government would rather have forced savings so seniors have some pension then have them blow all their money and then have to rely on welfare when they are seniors with no savings.
Another way to put this would be to say that people are too stupid to save themselves, so the government better do it for them. Don't worry, we're the government, and we're here to help.
Newbie
Aug 29, 2018
9 posts
7 upvotes
Toronto
WetCoastGuy wrote:
Oct 10th, 2018 12:18 am
What a load of nonsense trying to compare the CPP to other DBs by focusing strictly on the returns. This is like Trump saying how NAFTA was bad because Canada imposes a 300% tariff on US dairy products. It plays real well to the uninformed base but there is more to it than that but who cares if it is not the whole truth. So just like the 300% tariffs, there is more to CPP and DBs than just maximizing returns. With DBs, the investment risk is on the employer to pay off those high returns promised and many companies are finding that they cannot sustain it and opting out for DCs. The CPP is not and and never meant to be a RRSP so people should just stop raging on about how they could be better off if they had invested elsewhere and get x% return with some index fund and blah, blah, blah. Focusing so much from your own perspective and having all the advantages of having the excess funds to invest and maybe the knowledge and discipline to manage your own finances, you think the Government should do the same thing. Unfortunately, there are lots of people in Canada that don't have those advantages (don't have the savings discipline or the knowledge) and the fund is there to as a means of forced savings (not max savings) that is available on their retirement. Also the fund cannot afford to be blown up by some unforeseen financial calamity like the 2008 stock market meltdown as there are people who are relying on the fund to pay out year after year. It cannot be taking on the same risk level you can take in your portfolio as you are not relying on it as an income source until retirement. For years the CPP fund invested mainly in government bonds for safety to generate its income and only recently as 1999 has it diversified to other assets. Keeping managed risks low means lower returns, so don't be looking for index fund returns - more like GIC returns is what you'll get.

The government could make CPP optional but you know what that would mean. It would be like health care in the US where people opt out of spending money on medical insurance and when they get into medical trouble they go to Emergency in public hospitals for their health needs and making everything more expensive. The government would rather have forced savings so seniors have some pension then have them blow all their money and then have to rely on welfare when they are seniors with no savings.
Great post and spot on. This is and always has been my opinion of CPP.
Deal Addict
Jan 15, 2017
1660 posts
1134 upvotes
LoANeal wrote:
Oct 9th, 2018 8:52 am
Ya CPP is pretty much just theft it's so crappy. And when you die you cannot give it to your heirs either so it's just consumed by the government like tax dollars. Would be nice to be able to have my CPP to spend or save as I desire.
It’s not “your” CPP. CPP is simply another social program that is paid by tax payers via contributions by those who are employed. Those who don’t work rely on OAS and GIS.
Sr. Member
Feb 21, 2010
647 posts
143 upvotes
Scarborough
This return includes employer premiums as well? Also do not forget CPP does not refund employers when you move jobs etc., CPP just pockets all that.

I remember reading that for ppl born in 40s their IRR was 30% compounded annually, gradually dropping. For folks born in 70s and 80s, our IRR is 1-1.5%.

Bullseye wrote:
Oct 9th, 2018 7:10 pm
This article does a decent analysis

https://retirehappy.ca/is-cpp-a-good-deal/

Summary - it used to be a better deal, it's now 2%-3.5% return. Not great, but at least we won't have as much social costs to pay down the road for all of the fools who don't save anything, or the unfortunate who can't, for whatever reason.
Jr. Member
Nov 28, 2017
162 posts
148 upvotes
romeocanada wrote:
Oct 10th, 2018 11:28 am
This return includes employer premiums as well? Also do not forget CPP does not refund employers when you move jobs etc., CPP just pockets all that.

I remember reading that for ppl born in 40s their IRR was 30% compounded annually, gradually dropping. For folks born in 70s and 80s, our IRR is 1-1.5%.
Yes, it includes employer returns. And what do you mean by refunding employers? Why would they do that? It isn't the employers' money, it is a benefit they fund for the employee.
Deal Fanatic
Nov 24, 2013
5109 posts
1717 upvotes
Kingston, ON
LoANeal wrote:
Oct 9th, 2018 8:52 am
Ya CPP is pretty much just theft it's so crappy. And when you die you cannot give it to your heirs either so it's just consumed by the government like tax dollars. Would be nice to be able to have my CPP to spend or save as I desire.
skeet50 wrote:
Oct 10th, 2018 8:44 am
It’s not “your” CPP. CPP is simply another social program that is paid by tax payers via contributions by those who are employed. Those who don’t work rely on OAS and GIS.
Actually neither of these statements are accurate. CPP contributions are not tax revenue, and the government doesn't have access to the funds to consume. The CPPIB manages the contributions received in one big (not individualized) fund, and contributors entitlement to these funds is determined by the plan rules. As others have mentioned, it's not just retirement pension. There's survivors' pensions for spouses and dependents, and disability pensions for contributors. There's also the (minimal, but it's there) death benefit.

CPP is funded by contributors and disbursed actuarially, like an indexed life annuity with survivorship, in proportion to contributions. Tax doesn't play into that at all. OAS & GIS are funded by taxpayers, and what you get is not proportionate to what tax was paid in.
Sr. Member
Mar 13, 2018
964 posts
483 upvotes
skeet50 wrote:
Oct 10th, 2018 8:44 am
It’s not “your” CPP. CPP is simply another social program that is paid by tax payers via contributions by those who are employed. Those who don’t work rely on OAS and GIS.
Uhhh No

Cpp is not a social program funded by govt. It's funded by members and employers and pension is paid to members only with amount determined by contribution

It's not tax payer funded
Deal Addict
Feb 19, 2017
1222 posts
645 upvotes
Mike15 wrote:
Oct 10th, 2018 12:40 pm
Actually neither of these statements are accurate. CPP contributions are not tax revenue, and the government doesn't have access to the funds to consume. The CPPIB manages the contributions received in one big (not individualized) fund, and contributors entitlement to these funds is determined by the plan rules. As others have mentioned, it's not just retirement pension. There's survivors' pensions for spouses and dependents, and disability pensions for contributors. There's also the (minimal, but it's there) death benefit.

CPP is funded by contributors and disbursed actuarially, like an indexed life annuity with survivorship, in proportion to contributions. Tax doesn't play into that at all. OAS & GIS are funded by taxpayers, and what you get is not proportionate to what tax was paid in.
I would mention I said "like a tax" not an actual tax. But if I die before 65, I'm single and have no children you know what happens to my money? Absolutely gone. I cannot give it to my nephew, or niece, or brother, I just lose out. Hence why it's like a tax. It's money taken from me that I have absolutely no say over. Ya know why I want my CPP back? 1. I can earn a way higher rate of return and 2. I can donate give, and spend as I freaking want.
RFD is love. RFD is life. I wish I had an RFDer for a wife.
Member
User avatar
Jan 15, 2017
463 posts
204 upvotes
nevyn1234 wrote:
Oct 9th, 2018 11:55 pm
Im not sure why you are fixated on 80 as a fair calculation age, that probably undershoots life expectancy by several years. And the CPP payout will move with inflation.
Avg life expectancy for a male in Canada is ~81 now.

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