# An interesting read on pensions



## Daniel A. (Mar 20, 2011)

http://www.vancouversun.com/busines...e+tough+decisions+pensions/7485389/story.html


----------



## sags (May 15, 2010)

A report is just out on the CPP fund.

There is currently 170 Billion in the fund. It increased almost 5 Billion in the past 3 months from contributions and returns on investment.

The fund consists of..........contributions...........return on capital........the fund balance.

Contributions will cover all costs for benefits for the next 9 years, and then some of the return on capital will have to be used. At current return levels, the fund should rise to 350 Billion by then.

The CPP is an outstanding example of how a DB pension fund can be successfully financed. 

One has to wonder though, if benefits couldn't be increased, as the Baby Boomer generation will begin dying off even before any returns on investment are needed...........never mind actually touching any of the 350 Billion in the fund.

http://business.financialpost.com/2...n-global-deal-hunt-after-3-1b-quarterly-gain/


----------



## bgc_fan (Apr 5, 2009)

sags said:


> One has to wonder though, if benefits couldn't be increased, as the Baby Boomer generation will begin dying off even before any returns on investment are needed...........never mind actually touching any of the 350 Billion in the fund.
> http://business.financialpost.com/2...n-global-deal-hunt-after-3-1b-quarterly-gain/


I doubt it. If it ever comes to that situation, I imagine the government would use any perceived surplus to pay down the federal debt like they did with the PS pension plan. Alternatively, they may reduce the premiums. More than likely, nothing would chance.


----------



## GoldStone (Mar 6, 2011)

bgc_fan said:


> If it ever comes to that situation, I imagine the government would use any perceived surplus to pay down the federal debt like they did with the PS pension plan.


Federal government cannot unilaterally do that. CPP is a joint federal-provincial program. Changes to the CPP require the approval of at least 2/3 of Canadian provinces representing at least 2/3 of the country's population.


----------



## GoldStone (Mar 6, 2011)

sags said:


> One has to wonder though, if benefits couldn't be increased, as the Baby Boomer generation will begin dying off even before any returns on investment are needed...........never mind actually touching any of the 350 Billion in the fund.


350 Billion is a large number, but in and by itself it doesn't tell us anything about CPP funding status.

Wikipedia article says this:



> The CPP is funded on a "steady-state" basis, with its current contribution rate set so that it will remain constant for the next 75 years, by accumulating a reserve fund sufficient to stabilize the asset/expenditure and funding ratios over time. Such a system is a hybrid between a fully funded one and a "pay-as-you-go" plan. *In other words, assets held in the CPP fund are by themselves insufficient to pay for all future benefits accrued to date* but sufficient to prevent contributions from rising any further.


(my bold)

http://en.wikipedia.org/wiki/Canada_Pension_Plan


----------



## bgc_fan (Apr 5, 2009)

GoldStone said:


> Federal government cannot unilaterally do that. CPP is a joint federal-provincial program. Changes to the CPP require the approval of at least 2/3 of Canadian provinces representing at least 2/3 of the country's population.


So there is nothing really there to prevent the two levels of government to split any surplus, in the sense that we could do something about it. Since Quebec opt-ed out of the program, does the Quebec population count in that? That would be a bit perverse.


----------



## GoldStone (Mar 6, 2011)

1. There is no surplus to split because CPP is not a fully funded program.

2. Federal government plus 2/3 of Canadian provinces representing at least 2/3 of the country's population is a HUGE hurdle to clear.

3. Quebec doesn't count. They are not part of CPP.

_(enough with conspiracy theories. we have enough real problems to deal with. we don't need imaginary ones.)_


----------



## andrewf (Mar 1, 2010)

Yes... the CPP has no surplus. The point of the reserve is to allow a smoothing of contribution rates and benefits. Otherwise, when the boomers retired and the dependency ratio fell (ie, 2 workers per retiree vs 5), contribution rates would rise as much as workers would tolerate and the rest of the shortfall would have to made up in benefit cuts. So instead, the contribution and benefit rates are set so that CPP won't run out of money for the next 75 years, given some actuarial and return assumptions. Periodically the CPP reviews how things are working out and determine whether they need to change benefit or contribution rates to keep the fund sustainable over the next 75 years. 

There is no chance the CPP would be raided to cover deficits. Robbing the pension of a majority of Canadians is something that would make Canadians rise up with pitchforks and torches.


----------



## MoneyGal (Apr 24, 2009)

GoldStone said:


> 1. There is no surplus to split because CPP is not a fully funded program.
> 
> 2. *Federal government plus 2/3 of Canadian provinces representing at least 2/3 of the country's population is a HUGE hurdle to clear.*
> 
> ...


It is more difficult to amend the CPP funding formula than it is to amend the Canadian constitution.


----------



## sags (May 15, 2010)

So, despite the assertions by some young people that the Baby Boomers will drain the CPP fund, they actually have built up a reserve fund sufficient that in the future people will receive the same benefit levels as the boomers?

I guess we did something right.


----------



## Jaberwock (Aug 22, 2012)

Has anybody calculated what return would be needed in a private investment to match the value of the payout from the CPP?


----------



## doctrine (Sep 30, 2011)

Current CPP contributions max out at $192 a month. If you invested $192 a month for 40 years (from age 25 to age 65 when you collect), and received a real return of 7%, you would have $474,000 at age 65 in real dollars. With a 4% payout, you could receive $1580 a month for life and likely not lose capital. Current maximum CPP payout is $986 a month. Therefore, the actual return required to meet CPP can be calculated but would likely work out to around 5% real return.


----------



## Daniel A. (Mar 20, 2011)

In my 39 years of contributing I paid 35,403.10 into the plan all but two years were maximum.

Retired now and will wait till 64 before applying for CPP at that time I will be able too drop eight years of no contributions as I retired at 56 . 
Rates only started going up in the late nineties an example is that in the first 30 years contributing I paid less than 18,000.00 into the plan then in the last nine years paid as much as the previous 30 years.


----------



## MoneyGal (Apr 24, 2009)

doctrine said:


> Current CPP contributions max out at $192 a month. If you invested $192 a month for 40 years (from age 25 to age 65 when you collect), and received a real return of 7%, you would have $474,000 at age 65 in real dollars. With a 4% payout, you could receive $1580 a month* for life *and likely not lose capital. Current maximum CPP payout is $986 a month. Therefore, the actual return required to meet CPP can be calculated but would likely work out to around 5% real return.


So, how long is a life? (How long is a piece of string?)


----------



## sags (May 15, 2010)

Do the numbers posted reflect the employer contributions as well?

Some will live well beyond the life expectancy........and some will also die sooner.

Some will pass away without collecting anything from the CPP, except the scant $2500 death benefit.

That doesn't seem like a fair system.

I suspect the government knows well the CPP will have a burgeoning fund in the future, and are using "unfunded" as an excuse not to pay out more benefits, so they can access the surplus in the future.

They took the EI fund surplus already.

True they need Provincial support..........but how hard is that going to be to get with all the Provinces desperate for cash.


----------



## Daniel A. (Mar 20, 2011)

No my numbers only show my contribution, the company would have put in the same amount for their side so 70,806.00 for the total. 
Clearly I won't need to collect for many years to have a great benefit.

I would like to point out that all the years of paying maximum EI I never collected a penny.


----------



## sags (May 15, 2010)

I am in a similar situation, contributing to the CPP since it began in the 1960s. 

Of course back then, I only earned $1.30 an hour, so the maximum contributions weren't a whole lot in today's dollars.

I could collect more than I contributed, but from the numbers provided on today's contribution rate, the situation could turn around with people contributing more than they could expect to receive.

When I retired I was earning 30 times my early wages..........so in today's dollars, a person earning $20 per hour to start would have to be earning $600 per hour at retirement to be the same.

I think that is unlikely, given that my wages steadily improved year over year, there were times of high inflation and we had cost of living adjustments, and the way earnings are stagnant today and probably will be for the short term future at least.


----------



## Jaberwock (Aug 22, 2012)

I put together a few numbers, taking account of both employer and employee contributions.

If you assume that the contribution rates and payouts remain on the same basis, indexed to inflation, based on 40 years of contributions and a 3% pa inflation rate you will receive $38,596 per year at age 65.

You and your employer will have contributed a total of $347,449. If that had been invested at a 6% rate of return you would have $713,143 in savings

If you continued to invest at 6%, with inflation at 3%, drawing out the same amount as the CPP pays annually would leave you with no money at age 90.

If you get a 5% ROI you would run out of money at age 81.

Given that life expectancy in Canada is about 81 years, it would seem that the CPP is equivalent to a fund with about 5% ROI.


----------



## sags (May 15, 2010)

As per the FP article..........

_The fund’s five-year annualized investment rate of return edged up to 2.5% at the end of the quarter, while the 10-year rate of return rose to 6.7%.

CPPIB still has about nine years before benefits paid exceed contributions and it will need investments to help pay pensions._

They got 6.7% for the past 10 years, including the recession years.

Pretty good investing...............and the massive size of the fund should continue to offer them outstanding opportunities in the future.


----------



## cardhu (May 26, 2009)

Jaberwock said:


> Has anybody calculated what return would be needed in a private investment to match the value of the payout from the CPP?


A little less than 2% real return ... (assuming 40 years of investment, from age 25 to 65, and a life expectancy of 95) ... pretty easy to beat, but its really an apples and oranges comparison ... 
•	the CPP payout is guaranteed, private investment is not
•	the CPP payout will continue as long as you live ... private investment might not
•	the CPP payout is a die-broke model ... aside from limited survivor benefits, it ends when you end ... private investment could have significant value remaining if you die before its all used up.

An expanded CPP has public policy appeal in that it would take better care of those who, for whatever reason, do not take care of themselves ... but for people with the discipline and aptitude to do it themselves without screwing up, an expanded CPP offers little. 



Daniel A said:


> in the first 30 years contributing I paid less than 18,000.00 into the plan then in the last nine years paid as much as the previous 30 years.


Simple inflation accounts for a big chunk of that …contribution rates did increase, but not by that much. 



Daniel A said:


> ...70,806.00 for the total.
> Clearly I won't need to collect for many years to have a great benefit.


This ignores inflation ... if you measure those contributions in 2012 dollars, the combined total may (will) look somewhat different. 



sags said:


> When I retired I was earning 30 times my early wages..........so in today's dollars, a person earning $20 per hour to start would have to be earning $600 per hour at retirement to be the same.


They’d only need to be earning $600 per hour if they experience the same double-digit inflation that you did ... that’s not very likely ... in real terms, your final salary was likely nowhere near 30 times your early wages ... perhaps more like 5 times? ... that’s not beyond the realm of possibility, going forward.


----------



## dubmac (Jan 9, 2011)

http://www.vancouversun.com/business/pensions/index.html - some great spredsheets on annuities etc, 
interesting link above...especially the retirement planner - http://www.vancouversun.com/business/tools/retirementplanner/index.html

if anyone need more resources for prediciting the costs involved in retirement.


----------

