Personal Finance

Skill testing CPP question

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  • Dec 7th, 2014 7:36 am
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[OP]
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Dec 12, 2012
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Courtenay

Skill testing CPP question

If a person will be turning 45 in December 2014, and his CPP statement of contributions indicates that he could receive the maximum CPP retirement pension of $1,038.33 "if he were age 65 today", what will his actual retirement pension be at age 65 (in 2014 dollars) if he makes no further CPP contributions after 2014?

Please explain your answer.

I will give the answer in one week, assuming nobody comes up with the correct answer before then.
11 replies
Penalty Box
Aug 11, 2005
4175 posts
1426 upvotes
the present value of whatever $1,038.33 indexed to inflation is.
Penalty Box
Aug 11, 2005
4175 posts
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It will be 0 because the echo boomers will not be wealthy enough to support the pensions of the baby boomers.
Deal Addict
Oct 13, 2009
1785 posts
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Ottawa
Dogger1953 wrote: If a person will be turning 45 in December 2014, and his CPP statement of contributions indicates that he could receive the maximum CPP retirement pension of $1,038.33 "if he were age 65 today", what will his actual retirement pension be at age 65 (in 2014 dollars) if he makes no further CPP contributions after 2014?

Please explain your answer.

I will give the answer in one week, assuming nobody comes up with the correct answer before then.
Below runs on the assumption that months paid into CPP since turning 18 have all been maximum contribution levels.

At age 65 you would have had 564 months of contribution months, you can drop your lowest 17% (today), but because you will have forgone 240 months of contributions you can only drop 95 (17%) of those 240. So you will have 324 assumed fully paid in months and 145 zero paid months. 145/324 = 44.75% of your maximum CPP payments if you stop contributing or 464.65$ per month

How is that guess?
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Feb 28, 2010
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I think you did your calculation backward, coming up with a reduction, not the amount of max he'd get, and the numerator/denominator aren't the right bits. You probably wanted 324/(324+145)=324/469=69.08%, which would give $717.31. I don't know if my CPP calculator is trustworthy after I updated with current rates, but it comes out at around $725-$730, depending on what (if any) 1986 contribution is there.

I assume that this hypothetical man will not become eligible for the Child-Rearing dropout provisions (I think guys can qualify in certain cases)?

Or this might be a trick question somehow, rather than just a way to point out how stupid the CPP site is with its wording and predictions... :)
[OP]
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Dec 12, 2012
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Courtenay
Luckyinfil wrote: the present value of whatever $1,038.33 indexed to inflation is.
I want you to ignore inflation, and it won't be $1,038.33.
[OP]
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Dec 12, 2012
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Courtenay
Luckyinfil wrote: It will be 0 because the echo boomers will not be wealthy enough to support the pensions of the baby boomers.
Possible, but not what I'm looking for.
[OP]
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Dec 12, 2012
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chriscabob wrote: Below runs on the assumption that months paid into CPP since turning 18 have all been maximum contribution levels.

At age 65 you would have had 564 months of contribution months, you can drop your lowest 17% (today), but because you will have forgone 240 months of contributions you can only drop 95 (17%) of those 240. So you will have 324 assumed fully paid in months and 145 zero paid months. 145/324 = 44.75% of your maximum CPP payments if you stop contributing or 464.65$ per month

How is that guess?
chriscabob - You had most of the basics figured out, but see NorthernRaven's correction to your calculation. The only other error is that you can drop out 96 months (not 95) at age 65, so the correct maximum amount that this 45 year-old can receive at age 65 is $718,84.

Now let's see if anybody can figure out the minimum that he could receive, based on a 2014 SOC that says $1,038.33
[OP]
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Dec 12, 2012
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Courtenay
Dogger1953 wrote: If a person will be turning 45 in December 2014, and his CPP statement of contributions indicates that he could receive the maximum CPP retirement pension of $1,038.33 "if he were age 65 today", what will his actual retirement pension be at age 65 (in 2014 dollars) if he makes no further CPP contributions after 2014?

Please explain your answer.

I will give the answer in one week, assuming nobody comes up with the correct answer before then.
The correct answer is that his CPP retirement pension at age 65 could be as much as $718.84 or as little as $612.35. This is because a SOC estimate of $1,038.33 at age 45 could be based on as many as 27 years of max earnings or as few as 23 years of max contributions (after the 17% dropout). These earnings are then averaged over 39 years at age 65.
Deal Fanatic
Feb 1, 2006
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Muskoka
So the CPP statement 'prediction' is entirely worthless? Or it just assumes further contributions?
[OP]
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Dec 12, 2012
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Bullseye wrote: So the CPP statement 'prediction' is entirely worthless? Or it just assumes further contributions?
Bullseye - Bullseye! The CPP statement (SOC) "pretends" that you are 65 years old on the date that it's printed, which has the same effect as projecting your current lifetime average earnings through until age 65. It has some value if you fully understand what that means, but it can be very misleading if you don't.
Deal Fanatic
Feb 1, 2006
9618 posts
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Muskoka
Thanks, Dogger, appreciate your useful and interesting posts here.

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