Personal Finance

# CPP vs. DB Pensions

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• Oct 13th, 2018 10:52 am
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Mar 9, 2012
1755 posts
Kitchener
Archanfel wrote:
Oct 8th, 2018 11:31 pm
Has anybody done any calculation comparing CPP to a typical DB pension?

It seems to me that CPP which pays 0.6% of the income/year served with 5% contribution rate sucks. Am I missing something?
They're not really that much different, though with a DB there might be more money to be had for any beneficiary if there is a death and a quicker break-even.
Problem with CPP is that for years people were underpaying into it, and so we have to play catch-up. As it stands, the majority of male contributors don't get back all the money they put into it. Females have a slight benefit.

However, I have a DB (OMERS) as well, and it's not much different than CPP. As with CPP, the contribution rates were too low for many years (before I was working with an OMERS company), including 0% for some years, so we're also playing catch-up. Payments (and calculation) are also changing. As with CPP, people paying into OMERS now are not likely to get back what they paid into it, as they're covering the previous shortfall.

For full OMERS pension, assuming 65 retirement (which many will fall into) and full CPP, here is a quick breakdown (and I am using \$50,000)

OMERS: 35 years x 1.325% (2% minus bridge (0.675%)) = 46.375% x \$50,000 = \$23,187.50 per year.
Contributions are 35 years x 9% x \$50,000 = \$157,500 (OMERS employer contributes the same, so \$315,000 total). That is 13.58 years break-even point, and assumes that OMERS never earned interest.

CPP: 40 years x 0.625% = 25% x \$50,000 = \$12,500 per year.
Contributions are 40 years x 4.95% x \$46,500 (\$50,000 minus \$3,500 exemption) = \$92,070 (so \$184,140 with employer contributions). That is 14.73 years break-even, and assumes that CPP never earned interest.

Of course, CPP is making changes, and OMERS is likely doing the same thing (as with an DB). So whether one if really better than the other, one will only find out when they're ready to retire.
Well, I am not a crook.
Jan 15, 2017
1791 posts
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.
As we discovered when Paul Martin used the surpluses in the EI fund and the Public Services Pension Plan, all it takes it legislative change for government to have access to CPP funds. Units response to the Public Services Pension Plan, the Supreme Court noted that,

“The high court upheld previous lower court rulings and found the pension accounts were not separate funds with assets but “rather accounting ledgers used to track pension payments” and to estimate the government’s future pension obligations in its financial statements or the Public Accounts.“

We a argue that contributions are not taxes, but that just raises the question when is a tax a tax. My use of the term taxpayer was in reference to workers who are in fact taxpayers. Workers would have been a more appropriate term.

CPP is still a social program, just like EI, OAS, GIS, and welfare are social programs.
Sr. Member
Feb 21, 2010
696 posts
Scarborough
Took the survey and I will add 0.8 years to my life by doing rigorous exercise one hour a day going forward. Wish I had not read this
nevyn1234 wrote:
Oct 10th, 2018 2:17 pm
Now go to an insurance calculator and plug in your age. Life expectancy gets dragged down based on a number of things that could happen at any stage of life, so the overall number is a child born now. It also makes for a biased data set so an average isn't the best anyway

Point being, if you are already middle age, than unless you already have a major chronic illness, a troubling family history or are a smoker or heavy drinker, you're probably closer to 85. And even then, that expectancy is getting dragged down by the chances of an accidental early death (in which case no retirement savings are super relevant to you). The older you get without a major health issue, the more you will see that number creep higher.

And if the rest of your retirement savings plans are calculated on only make 80-81, you could find CPP very important later on for the same reasons.

Take a look at this

It will give you a generic life expectancy, but also gives a slider to get a sense of the likelihood you outlive that expectancy. You could have a mid eighties expectancy, and still a > 1/4 chance of living past 90.
Deal Fanatic
Nov 24, 2013
5160 posts
Kingston, ON
skeet50 wrote:
Oct 10th, 2018 7:36 pm
As we discovered when Paul Martin used the surpluses in the EI fund and the Public Services Pension Plan, all it takes it legislative change for government to have access to CPP funds. Units response to the Public Services Pension Plan, the Supreme Court noted that,

“The high court upheld previous lower court rulings and found the pension accounts were not separate funds with assets but “rather accounting ledgers used to track pension payments” and to estimate the government’s future pension obligations in its financial statements or the Public Accounts.“

We a argue that contributions are not taxes, but that just raises the question when is a tax a tax. My use of the term taxpayer was in reference to workers who are in fact taxpayers. Workers would have been a more appropriate term.

CPP is still a social program, just like EI, OAS, GIS, and welfare are social programs.
Your two examples actually are entirely different, as EI revenue and EI expense are included in the federal government’s budgetary balance, and the very quote you provided notes that the Public Service pension surplus that was raided “were not separate funds with assets” but rather accounting entries similar to Social Security Trust Fund in the US.

“The contributions, along with interest and other charges, were dumped into the government’s Consolidated Revenue Fund. When it came to time to pay pensioners, the payments were taken from that revenue fund.”
http://www.carp.ca/2012/12/20/public-se ... eme-court/

CPPIB is a different arrangement. It’s a Crown Corp, so contributions and payments never hit government books. It has over \$360B in actual assets (real estate, private equity, bonds, stocks). It was set up this way by the same government that scooped EI surplus; the same one that scooped the Public Service Pension surplus when it revised the Public Service Pension into a similar investment fund with actual assets. While there’s nothing that specifically precludes a government passing legislation and receiving Royal Assent from Her Majesty the Queen in Right of Canada (via GG) that could change this arrangement, that’s a political bomb very unlikely to be touched. It definitely can’t be raided willy-nilly, and bears no resemblance to how EI surpluses can be used to “balance” budgets (like the soft method the Harper government used in its waning years by keeping EI contribution rates artificially high).
[OP]
Deal Fanatic
Apr 11, 2008
5539 posts
Wow, lots of nice replies. Thanks guys and gals.
Mike15 wrote:
Oct 9th, 2018 8:11 pm
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.
I didn't realize that the company would actually contribute that much. 18% is a lot to get merely 1.35%. The part I don't understand is who is getting all the money if not the employee or the employer. 18% compound with a conservative 6% (S&P returned 8.4% after inflation or 6.34% ending in 1930) return over 40 years would be 30 times the income. At 4% withdraw rate (considered to be able to last forever), that would be 120% of the income whereas a DB would only paying 1.35% * 40 = 54%. Somebody ate over half of the money. If we believe that CPP is not being raided by the government, somebody is doing it.

No wonder companies are moving to DC plans which they typically contribute only 4-6%.
WetCoastGuy wrote:
Oct 10th, 2018 12:18 am

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.
Except CPP is not being advertised as a social program. It's suppose to be a DB plan benefiting people who contribute into it. Therefore, it faces a lot less opposition vs. welfare. It sounds like the CPP expansion would be a massive money grab from hard working taxpayers. I understand it saves welfare, but I always find it odd that people would use one social program to justify another. It seems removing OAS and GIS would do a much better job.
nevyn1234 wrote:
Oct 9th, 2018 11:55 pm
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.
That's a good point. Inflation protection is a major advantage of CPP since not all DB plans have it. How much is it worth though? I heard that you can buy inflation protection for private annuity as well. Is there a calculator/formula for how much it would cost?
Mar 13, 2018
1375 posts
Archanfel wrote:
Oct 11th, 2018 4:52 am
Wow, lots of nice replies. Thanks guys and gals.

I didn't realize that the company would actually contribute that much. 18% is a lot to get merely 1.35%. The part I don't understand is who is getting all the money if not the employee or the employer. 18% compound with a conservative 6% (S&P returned 8.4% after inflation or 6.34% ending in 1930) return over 40 years would be 30 times the income. At 4% withdraw rate (considered to be able to last forever), that would be 120% of the income whereas a DB would only paying 1.35% * 40 = 54%. Somebody ate over half of the money. If we believe that CPP is not being raided by the government, somebody is doing it.

No wonder companies are moving to DC plans which they typically contribute only 4-6%.
Most big companies I've worked for (including current) does 11% DC and employee don't have to contribute

As for return, no sane pension plan or retirement plan for DC would be as absurd as allocating over half to equities.
Mar 13, 2018
1375 posts
skeet50 wrote:
Oct 10th, 2018 7:36 pm
As we discovered when Paul Martin used the surpluses in the EI fund and the Public Services Pension Plan, all it takes it legislative change for government to have access to CPP funds. Units response to the Public Services Pension Plan, the Supreme Court noted that,

“The high court upheld previous lower court rulings and found the pension accounts were not separate funds with assets but “rather accounting ledgers used to track pension payments” and to estimate the government’s future pension obligations in its financial statements or the Public Accounts.“

We a argue that contributions are not taxes, but that just raises the question when is a tax a tax. My use of the term taxpayer was in reference to workers who are in fact taxpayers. Workers would have been a more appropriate term.

CPP is still a social program, just like EI, OAS, GIS, and welfare are social programs.
It's simple, it's not a tax as per your definition. You can say it maybe a tax in future if legislation changes. Just like legislation could change to seize assets of individuals and company profits
Sr. Member
Dec 4, 2016
905 posts
Gboard2 wrote:
Oct 11th, 2018 7:50 am
Most big companies I've worked for (including current) does 11% DC and employee don't have to contribute

As for return, no sane pension plan or retirement plan for DC would be as absurd as allocating over half to equities.
11% DC seems pretty generous. I spoke to a few people who had worked at other places, and 11% total (6% employer 5% employee would be considered a decent DC plan. DC plans are decided by employees and usually run by third party companies. Personally I'm 100% equity in my DC plan. Actually I'm 100% equity in my RRSP, as I consider mortgage pre-payment as fixed income part of my portfolio.
Sr. Member
Dec 4, 2016
905 posts
Bullseye wrote:
Oct 10th, 2018 4:00 pm
This is the main argument of the right wing in politics, they rightly accuse liberals of assuming the general population is too stupid to take care of themselves, so the state better do it for them. Not just CPP, but all aspects of their lives. Better leave it to the nanny state, who knows better.

I am very centrist, but this type of thinking makes me very uneasy.
Seniors have very high voter turnouts, so it's politically not possible to let old people who didn't bother to save for retirement starve. Since the general tax revenue will always have to pay for those who didn't plan for retirement, it's only fair to force everyone to save during their working years.
Mar 13, 2018
1375 posts
BlueSolstice wrote:
Oct 11th, 2018 9:03 am
11% DC seems pretty generous. I spoke to a few people who had worked at other places, and 11% total (6% employer 5% employee would be considered a decent DC plan. DC plans are decided by employees and usually run by third party companies. Personally I'm 100% equity in my DC plan. Actually I'm 100% equity in my RRSP, as I consider mortgage pre-payment as fixed income part of my portfolio.
It depends on industry, I'm in consulting and it's the norm for us.

My friends in investment banking is even higher ..15% contribution to DC, in addition can add stock matching up to certain amount annually (so can I) to the DC account as well

100% equities? That's speculation level of risk even most aggressive funds don't don't do that unless you're quite young. That's like going all in on one stock in equity portion. But that's what cpp is for if you crash out when you need to start drawing from your pension/rrsp!

Pension funds seems to be only way to get into private equities nowadays as funds buyup a lot of the cash flow producing assets not accessible to regular investors
Sr. Member
Dec 4, 2016
905 posts
Gboard2 wrote:
Oct 11th, 2018 9:46 am
It depends on industry, I'm in consulting and it's the norm for us.

My friends in investment banking is even higher ..15% contribution to DC, in addition can add stock matching up to certain amount annually (so can I) to the DC account as well

100% equities? That's speculation level of risk even most aggressive funds don't don't do that unless you're quite young. That's like going all in on one stock in equity portion. But that's what cpp is for if you crash out when you need to start drawing from your pension/rrsp!

Pension funds seems to be only way to get into private equities nowadays as funds buyup a lot of the cash flow producing assets not accessible to regular investors
15% DC contribute plus stock matching, that means the 18% RRSP room gets used up pretty quickly. I certain would be forced to contribute if not contributing means giving up free money from my employer. For high paying professions, it probably makes sense. For those closer to median income, having some RRSP room built up over the years and just getting a higher salary would be beneficial if one want to reduce net income when a child arrives.
Deal Fanatic
Nov 24, 2013
5160 posts
Kingston, ON
Archanfel wrote:
Oct 11th, 2018 4:52 am
The part I don't understand is who is getting all the money if not the employee or the employer. 18% compound with a conservative 6% (S&P returned 8.4% after inflation or 6.34% ending in 1930) return over 40 years would be 30 times the income. At 4% withdraw rate (considered to be able to last forever), that would be 120% of the income whereas a DB would only paying 1.35% * 40 = 54%. Somebody ate over half of the money. If we believe that CPP is not being raided by the government, somebody is doing it.
CPP's current structure of having an Investment Board and carrying a diversified basket of assets (it's not the 100% equities that you're basing your comparison on) has only existed in its current form for 20 years. Before that, CPP was pay-as-you-go. On top of that, contribution rates used to be much lower.

It's been 9.9% since 2003; before that contribution rates were really too low to fund the income benefit that Canadians were accruing.

Anyway, the short story is the funds haven't been raided by anyone; they're in the plan.

CPP has about \$360B in assets under management, about half of which are net contributions and about half of which is investment returns,

This is part of why the upcoming changes will increase CPP benefits by up to 32% (25% income replacement -> 33% income replacement) despite contribution rates only going up 20% (9.9% Combined to 11.9% Combined),

CPP is actuarially sound for ~70+ years, so they're going to be able to leverage the funds in the plan to increase benefits to future pensioners while minimizing their increase in contribution. Low fixed-income yields over the last decade and an aging population with fewer workers per retiree should nominally be pushing things the other way and making it harder for CPP to be sustainable, but the investment returns are making it possible to not only maintain benefits for a long time horizon, but actually increase them for the next generation (with a higher contribution rate but an even higher future benefit).
Member
Nov 28, 2017
261 posts
Archanfel wrote:
Oct 11th, 2018 4:52 am
Wow, lots of nice replies. Thanks guys and gals.

I didn't realize that the company would actually contribute that much. 18% is a lot to get merely 1.35%. The part I don't understand is who is getting all the money if not the employee or the employer. 18% compound with a conservative 6% (S&P returned 8.4% after inflation or 6.34% ending in 1930) return over 40 years would be 30 times the income. At 4% withdraw rate (considered to be able to last forever), that would be 120% of the income whereas a DB would only paying 1.35% * 40 = 54%. Somebody ate over half of the money. If we believe that CPP is not being raided by the government, somebody is doing it.

No wonder companies are moving to DC plans which they typically contribute only 4-6%.

Except CPP is not being advertised as a social program. It's suppose to be a DB plan benefiting people who contribute into it. Therefore, it faces a lot less opposition vs. welfare. It sounds like the CPP expansion would be a massive money grab from hard working taxpayers. I understand it saves welfare, but I always find it odd that people would use one social program to justify another. It seems removing OAS and GIS would do a much better job.

That's a good point. Inflation protection is a major advantage of CPP since not all DB plans have it. How much is it worth though? I heard that you can buy inflation protection for private annuity as well. Is there a calculator/formula for how much it would cost?
Many DB pensions do have inflation protection, although they are moving more to a year by year assessment than a locked in increase annually. That gives them flexibility if they run into funding issues.

Most of the replies are not super specific to your question.

Comparing CPP to a DB pension? CPP IS a DB pension.

The truth is, there is not much sense comparing CPP to other things, because it is not optional. DB pensions are actually designed to integrate with CPP (they take it into account). People without a DB plan can do their retirement income planning knowing that they have CPP (and potentially OAS/GIS) as a baseline.

That is why I don't obsess about personal rate of return on it. A person with a totally private portfolio (if CPP were optional) might target an overall annualized return goal (say 7% for the sake of argument), but that doesn't mean they have that target for every asset class they hold. Unless they want a heck of a roller coaster ride, they will likely have some quite low returning stable investments mixed with some more volatile growth ones. And the mix will generally get more conservative the closer they are to retirement.

So CPP vs other non DB investment? Its not one versus the other, it is a combination which allows the saver to take on a bit more risk in the rest of their savings.

CPP vs other DB pension? There really isn't a vs. They integrate and you look at the value proposition of the total package.

As to annuities, yes you can get one with some form of indexing attached. No, I don't know how much extra that would cost offhand. My rule of thumb if making that decision would be it is more important the longer you expect to be collecting.
[OP]
Deal Fanatic
Apr 11, 2008
5539 posts
nevyn1234 wrote:
Oct 11th, 2018 10:27 am
Many DB pensions do have inflation protection, although they are moving more to a year by year assessment than a locked in increase annually. That gives them flexibility if they run into funding issues.

Most of the replies are not super specific to your question.

Comparing CPP to a DB pension? CPP IS a DB pension.

The truth is, there is not much sense comparing CPP to other things, because it is not optional. DB pensions are actually designed to integrate with CPP (they take it into account). People without a DB plan can do their retirement income planning knowing that they have CPP (and potentially OAS/GIS) as a baseline.

That is why I don't obsess about personal rate of return on it. A person with a totally private portfolio (if CPP were optional) might target an overall annualized return goal (say 7% for the sake of argument), but that doesn't mean they have that target for every asset class they hold. Unless they want a heck of a roller coaster ride, they will likely have some quite low returning stable investments mixed with some more volatile growth ones. And the mix will generally get more conservative the closer they are to retirement.

So CPP vs other non DB investment? Its not one versus the other, it is a combination which allows the saver to take on a bit more risk in the rest of their savings.

CPP vs other DB pension? There really isn't a vs. They integrate and you look at the value proposition of the total package.

As to annuities, yes you can get one with some form of indexing attached. No, I don't know how much extra that would cost offhand. My rule of thumb if making that decision would be it is more important the longer you expect to be collecting.
My original question was that whether CPP sucks comparing to other DB plan and if so why. Based on the reply, it seems that all DB plan sucks (for the employer if not for the employee) and CPP sucks a bit more. I can understand the the lower risks carries a cost, but it seems to be a massive cost (i.e. really high MERs). The question then becomes where did all the money go. It seems that the CPPIB has total power to play favoritism and screw up. Anybody got punished for getting the initial contribution rate wrong? If their investment returns kept on being above the 2% return they expected, who would reap the benefits? It seems that all the decisions are being made by politicians to buy votes.

I am not really comparing CPP to RRSP since an individual does not have the investment horizon to take on risks, especially near retirement as you pointed out. However, CPP does. That's the whole point of having a collective pension, yet CPP seems to fail to materialize that advantage or at least not giving that advantage to retirees. Surprisingly, private DB plans seem to have the same problems.

It doesn't sound like DB pensions integrate with CPP per se. If the company went bankrupt or if CPPIB went bankrupt, the other part would not be impacted. They are separate plans, just adds up to 2%. Above the YMPE, the DB plan would be completely separate. Therefore, comparisons can be done.

CPP is kind of optional. We do have the option to toss all the politicians out and abolish it. Or at least kill the extension. Yet we do not seem to have enough information to make that decision.
Member
Nov 28, 2017
261 posts
Archanfel wrote:
Oct 11th, 2018 10:58 am
My original question was that whether CPP sucks comparing to other DB plan and if so why. Based on the reply, it seems that all DB plan sucks (for the employer if not for the employee) and CPP sucks a bit more. I can understand the the lower risks carries a cost, but it seems to be a massive cost (i.e. really high MERs). The question then becomes where did all the money go. It seems that the CPPIB has total power to play favoritism and screw up. Anybody got punished for getting the initial contribution rate wrong? If their investment returns kept on being above the 2% return they expected, who would reap the benefits? It seems that all the decisions are being made by politicians to buy votes.

I am not really comparing CPP to RRSP since an individual does not have the investment horizon to take on risks, especially near retirement as you pointed out. However, CPP does. That's the whole point of having a collective pension, yet CPP seems to fail to materialize that advantage or at least not giving that advantage to retirees. Surprisingly, private DB plans seem to have the same problems.

It doesn't sound like DB pensions integrate with CPP per se. If the company went bankrupt or if CPPIB went bankrupt, the other part would not be impacted. They are separate plans, just adds up to 2%. Above the YMPE, the DB plan would be completely separate. Therefore, comparisons can be done.

CPP is kind of optional. We do have the option to toss all the politicians out and abolish it. Or at least kill the extension. Yet we do not seem to have enough information to make that decision.
Ok, you are all over the place here.

Most pensions don't have high MERs. CPP is higher than many DB plans, but still not exactly massive.

CPP doesn't have a 2% investment return. It is more like 8%.

So why is a savers' "rate of return" so low. First, you are looking at a person's arbitrary assumption or average on how long they will live in order to calculate that rate of return. Second, the primary goal of the CPP is not to provide an amazing "rate of return", but to stabilize risks and provide for a baseline income that can be counted on. As such, they are quite conservative in how they administer contribution vs benefit rates in order to make sure the plan stays funded.

I mean, I'm sure people like you would be up in arms if the CPP benefits of retirees suddenly had to be backstopped by the federal budget, giving you an additional tax burden.

If, over time, they find themselves dramatically over-funded with continual good returns, then we could see drops in contribution rate and/or increases in benefit rate or both.

As for comparing to other DB pensions, what is the point of the comparison? What is the question you are asking. You can't pick between one or the other, so what is it you seek to compare?

As for CPP being optional because you can "vote people out", lol, good luck with that.

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