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  • Oct 13th, 2018 10:52 am
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Dec 27, 2009
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Ottawa, ON
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.
I don't know anybody in private sector with jobs that have that generous of a policy. Where do you work?
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Nov 28, 2017
261 posts
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Archanfel wrote:
Oct 11th, 2018 4:52 am
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%.
Your fundamental problem seems to still be that you are looking at this like a personal plan and trying to directly compare money in vs money out.

The first problem with that, of course, would be that the money out is annuitized so rate of return is highly variable.

The second is it leads you to assuming that if the fund has good returns, but the "personal rate of return" is bad, someone is skimming money.

CPP was originally funded like a going concern. Current contributions funding prior earned benefits. That was risky and unsustainable. It was a particularly bad looming problem because of demographics, with a large boomer generation headed to retirement.

So it was changed in 1997, and the changes both raised the contribution rate (without raising benefits), and created the CPPIB, so that contributions in excess of benefits paid were invested to help fund future benefits. That solved the long term sustainability issue for CPP, but also left the current generation getting a worse deal than prior ones, and potentially (if investments returns stay strong over time and demographic trends normalized), future ones. So where did the money go? To the past and to the future, because essentially in transition you had contributions both funding current benefits, and leftover contributions + investment gains funding future ones.

Want someone to blame for that? Blame the politicians who knew this was an impending problem for well over a decade before 1997 and did not change it because it could be politically unpopular. Putting off the changes made them more harsh. But even those getting the worst deal out of this are getting mitigated risks that overall help their retirement financial planning.

But I would not obsess too much on it. There are some things that have to be done for the health of the country, and that fundamentally can't be done in a way that is absolutely fair and a good deal to everyone.
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Jan 15, 2017
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WetCoastGuy wrote:
Oct 10th, 2018 5:39 pm
Winking Face - Just couldn't resist when you used "rage" in your username.

Anyways, I do not disagree with your comment that the returns are crappy but in the context of what CPP is designed for, it is what it is. Low risk - low returns. Designed for the masses who are unfortunately financially illiterate or unfortunate in life circumstances but must also be sustainable since many are relying on it for the senior years.
Yes, I would keep it but would like to see the benefits improved.

Social Security pays $2,788/month vs just under $1,100/month for CPP. Granted, SS premiums are higher and more income is subject to it.
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Jan 20, 2016
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Chickinvic wrote:
Oct 11th, 2018 11:49 am
I don't know anybody in private sector with jobs that have that generous of a policy. Where do you work?
Banks like TD are private companies and they do have (or had) quite generous pension programs, However it seems to deteriorate last years...

On topic , CPP is doing very good financially, just because everyone have quite low % participation in it, you could not really live on cpp payments. You have to have your own rrsp or rely on gis/oas.

In my case because I'd have max 25y contribution (I landed at 40, that's it) , cpp would be limited to about 500 monthly. Despite 100k+ salary. So have to plan wisely, as rrsp is my friend now in accumulation phase, but it'd be an enemy in distribution, due to clamping gis and oas....
Make the Trudeau drama teacher again!
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Dec 4, 2016
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taxrage wrote:
Oct 11th, 2018 1:19 pm
Yes, I would keep it but would like to see the benefits improved.

Social Security pays $2,788/month vs just under $1,100/month for CPP. Granted, SS premiums are higher and more income is subject to it.
Social security is not as solvent as CPP. It's much closer to a pay as you go system. Around 2034, general revenue would have to start supporting SS.
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Nov 24, 2013
5162 posts
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Another bit of info on the "where does the money go?" topic, CPP Disability and CPP Survivor Benefits are a HUGE part of the program. It's roughly 80/10/10 split between retirement pension and the insurance components.
Figure 2: CPP – Percentage of expenditures by benefit type in fiscal year 2016 to 2017
Image
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taxrage wrote:
Oct 11th, 2018 1:19 pm
Yes, I would keep it but would like to see the benefits improved.

Social Security pays $2,788/month vs just under $1,100/month for CPP. Granted, SS premiums are higher and more income is subject to it.
Social Security is the US's CPP and OAS and GIS. And to get that max amount, you're contributing to a cap that's more than double CPP's, and at a higher rate (6.2%/6.2% vs. 4.95%/4.95%).

Image

And, as mentioned, Social Security is effectively pay as you go, funded in the form of IOUs from the US treasury from past contributions. Unless serious reform happens soon, they'll have to cut benefits by 2034,
https://www.cnn.com/2018/06/05/politics ... index.html
They've already raised retirement age to 67 (fully phased in by 2022), https://www.fool.com/retirement/2018/01 ... y-ben.aspx
and they'll still run out of funds in about 15 years.

Do not envy US Social Security as a Canadian. You're better off here.
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Dec 24, 2007
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Mike15 wrote:
Oct 11th, 2018 3:15 pm
run out of funds in about 15 years.

Do not envy US Social Security as a Canadian. You're better off here.
Don't mean to sidetrack this to the political arena but Social Security will probably not even last 10 years with the Trump/Republican tax cuts. Whether it is willful blindness or plain ignorance but for the working class Republican voters who think Trump/Republican party is doing a fantastic job have screwed themselves. Where do they think the money will come from to cover the biggest budget deficit ever to a tune of 1 trillion dollars over the next ten years? The "voodoo economics" that Corporations will generate lots of jobs and increase wages to make up for the tax hole was a farce as they used the money to mainly buy back their stock, So, no additional tax revenue means "entitlements" like Social Security and Medicare will have to be slashed. That's the Republican plan that their base don't get. Lower taxes and small government really means: taxes are lowered for the rich elite class and social benefits must be cut for the masses. They are suckered into forgetting that they are also a "moocher".
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Sep 9, 2014
469 posts
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Vancouver
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.
Most DB plans in BC (where I am) are now 2% total, nothing to do with the YMPE.

So sure contribution rate is double but you get more than double in return. So CPP is a much worse deal.
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Sep 9, 2014
469 posts
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Vancouver
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.
Your post is nonsense. You are confusing your political opinion with actual facts. You can absolutely compare CPP to DB pension plans! They are the same, exept one is financed by the government while the other is from your employer.

If DB plans can give you higher return, there is no excuse for CPP not to be able to. And it has nothing to do with whether we think we should force everyone to save or not.

As for OP asking where the money (or a regular 18% contribution DB plan) go, I had the same question not too long ago. I was looking at how much I'd get by investing myself and buying an annuity. And it seemed a lot better indeed! But the kicker is your DB plan will give you years x 2% of your 5 years highest average. So it does give you a higher return than you think. If you were to invest yourself, it'd hard to beat because your income increases over 25-30 years.
[OP]
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Apr 11, 2008
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nevyn1234 wrote:
Oct 11th, 2018 12:41 pm
Your fundamental problem seems to still be that you are looking at this like a personal plan and trying to directly compare money in vs money out.

The first problem with that, of course, would be that the money out is annuitized so rate of return is highly variable.

The second is it leads you to assuming that if the fund has good returns, but the "personal rate of return" is bad, someone is skimming money.

CPP was originally funded like a going concern. Current contributions funding prior earned benefits. That was risky and unsustainable. It was a particularly bad looming problem because of demographics, with a large boomer generation headed to retirement.

So it was changed in 1997, and the changes both raised the contribution rate (without raising benefits), and created the CPPIB, so that contributions in excess of benefits paid were invested to help fund future benefits. That solved the long term sustainability issue for CPP, but also left the current generation getting a worse deal than prior ones, and potentially (if investments returns stay strong over time and demographic trends normalized), future ones. So where did the money go? To the past and to the future, because essentially in transition you had contributions both funding current benefits, and leftover contributions + investment gains funding future ones.

Want someone to blame for that? Blame the politicians who knew this was an impending problem for well over a decade before 1997 and did not change it because it could be politically unpopular. Putting off the changes made them more harsh. But even those getting the worst deal out of this are getting mitigated risks that overall help their retirement financial planning.

But I would not obsess too much on it. There are some things that have to be done for the health of the country, and that fundamentally can't be done in a way that is absolutely fair and a good deal to everyone.
I don't disagree. That's why I originally put this in the political forum because it's not really a pure personal finance thing. However, the CPP is sold as a personal plan, rather than a welfare. "Health of the country" sounds very communist to me.

My bigger question is however why private DB plans are not much better.
[OP]
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asa1973 wrote:
Oct 11th, 2018 1:28 pm
Banks like TD are private companies and they do have (or had) quite generous pension programs, However it seems to deteriorate last years...

On topic , CPP is doing very good financially, just because everyone have quite low % participation in it, you could not really live on cpp payments. You have to have your own rrsp or rely on gis/oas.

In my case because I'd have max 25y contribution (I landed at 40, that's it) , cpp would be limited to about 500 monthly. Despite 100k+ salary. So have to plan wisely, as rrsp is my friend now in accumulation phase, but it'd be an enemy in distribution, due to clamping gis and oas....
I thought TD had DB plan. I heard they are moving to DC next year. If they are really going to do 15%, then maybe it's an upgrade over their DB plan which is already pretty good (I heard no individual contribution below YMPE and 5% above that?)

CPP does have the advantage of inflation indexing and does not take up RRSP room (I think?). At 2%, most people on DB plans would have little RRSP room.
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Jan 2, 2015
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Archanfel wrote:
Oct 12th, 2018 7:25 am
However, the CPP is sold as a personal plan, rather than a welfare. "Health of the country" sounds very communist to me.
Many countries have created funds for their citizens and residents to provide income when they retire (or in some cases become disabled). Typically this requires payments throughout the citizen's working life in order to qualify for benefits later on. A basic state pension is a "contribution based" benefit, and depends on an individual's contribution history. For examples, see National Insurance in the UK, or Social Security in the United States of America.
The following countries are communist: United Kingdom, Barbados, United States, Canada, Germany, Greece... All of these countries, along with most western countries, have a similar pension scheme.
Archanfel wrote:
Oct 12th, 2018 7:28 am
(I heard no individual contribution below YMPE and 5% above that?)
Federal government DB pensions do this. I don't believe private companies with DB plans do this.
CPP does have the advantage of inflation indexing and does not take up RRSP room (I think?). At 2%, most people on DB plans would have little RRSP room.
That is true; CPP does not take away from your RRSP contribution room.
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Nov 24, 2013
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BryanBreguet wrote:
Oct 12th, 2018 4:51 am
Most DB plans in BC (where I am) are now 2% total, nothing to do with the YMPE.

So sure contribution rate is double but you get more than double in return. So CPP is a much worse deal.
You may want to double check the fine print. Most "2% per year" DB plans are "2% total," of which the "bridge benefit" is a big component.

BC Teachers: 1.3% Retirement Benefit, 0.7% Bridge Benefit until this year. For service 2018 or later they're switching to a 1.85% Basic Lifetime Pension, but that's a recent change.
https://tpp.pensionsbc.ca/how-we-calculate-your-pension

BC Public Service pension made the same changes Apr 1, 2018, but again it's 1.85%, not 2%,
https://pspp.pensionsbc.ca/plan-change-details

It'll be great if they can sustain this higher lifetime benefit that's not reduced at 65, but this development is recent. This is the kind of change a well-funded pension plan can make, so it sounds like contributors will be reaping some benefit from the success of those particular DB plans. As I noted earlier, CPP contributors are also going to see an increase in future benefits for contributions 2019 and later (33% benefit increase for 20% higher contributions).
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Nov 28, 2017
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Archanfel wrote:
Oct 12th, 2018 7:25 am
I don't disagree. That's why I originally put this in the political forum because it's not really a pure personal finance thing. However, the CPP is sold as a personal plan, rather than a welfare. "Health of the country" sounds very communist to me.

My bigger question is however why private DB plans are not much better.
In that context "health of the country" has very little to do with communism. Whatever you think about how income and wealth should generally be shared, an economic shock triggered by the failure of CPP when Boomer retirements hit a tipping point would have negatively impacted everyone (not just people no longer getting CPP). And if instead it was backstopped by the budget (likely) the resulting deficits and/or tax increases to make up that shortfall would have created economic problems of their own.

Further, its not like there was a giant wealth takeaway to keep the things afloat. CPP became a slightly worse deal than it had been, while still having some level of return and providing important security to future generations. The people most screwed by CPP still get something out of it, they just feel they could get more on their own elsewhere.
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Sep 9, 2014
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Mike15 wrote:
Oct 12th, 2018 10:22 am
You may want to double check the fine print. Most "2% per year" DB plans are "2% total," of which the "bridge benefit" is a big component.

BC Teachers: 1.3% Retirement Benefit, 0.7% Bridge Benefit until this year. For service 2018 or later they're switching to a 1.85% Basic Lifetime Pension, but that's a recent change.
https://tpp.pensionsbc.ca/how-we-calculate-your-pension

BC Public Service pension made the same changes Apr 1, 2018, but again it's 1.85%, not 2%,
https://pspp.pensionsbc.ca/plan-change-details

It'll be great if they can sustain this higher lifetime benefit that's not reduced at 65, but this development is recent. This is the kind of change a well-funded pension plan can make, so it sounds like contributors will be reaping some benefit from the success of those particular DB plans. As I noted earlier, CPP contributors are also going to see an increase in future benefits for contributions 2019 and later (33% benefit increase for 20% higher contributions).
Thanks for the condescending remark but no, it's 2% (or close to it) and that's it. They all made the transition over the last few years and eliminated the bridge. You said it yourself in your own links... so I'm confused by your comment. And some of the plans, like the college pension one, are at 2% total. https://college.pensionsbc.ca/how-we-ca ... ur-pension

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