# Time for CPP benefit increases.



## sags (May 15, 2010)

In the early days of the CPP, there was a segment of the population who gained more benefits than they had contributed, but many of those benefit recipients are now gone and the claims have been paid out.

With the accrued size of the fund much higher than anticipated, higher returns on the fund than anticipated, and increased contribution rates.........maybe it is time to have the fund appraised for higher benefits.

Currently the fund is spending less than the contributions from members. In the future it is anticipated the fund will have to start paying out all the contributions plus some of the returns on the fund. Many more years later, it is anticipated the fund will have to start paying out all of the contributions, plus the returns on the fund, plus some of the fund.

The actuarial reports years ago, said the fund was financially sound for 75 years into the future.

As the fund has grown.........the annual returns have grown.........and we must currently be well above the 75 year mark today.

How many years into the future should the CPP be secure.............before higher benefits should be paid out instead of hoarding the cash ?

80 years.......90 years......100 years....into the future ?

Future beneficiaries won't be born for a few years yet.

It may be time to do a full actuarial report and to consider raising the current benefit structure.


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## naysmitj (Sep 16, 2014)

Nice try, but I don't see them giving back any more than they have to. Lots of ways to justify keeping as much money as possible locked up in their coffers.


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## carverman (Nov 8, 2010)

sags said:


> In the early days of the CPP, there was a segment of the population who gained more benefits than they had contributed, but many of those benefit recipients are now gone and the claims have been paid out.
> 
> It may be time to do a full actuarial report and to consider raising the current benefit structure.


While some of the earlier years contributions CPP recipients may be gone and no longer collecting, it appears that there is a trend for most now to collect their CPP at a reduced rate for a longer period of time, even while still working. 

The current CPP strategy is that everyone who paid into it should wait until 65, or even a couple years later to collect it..at a higher benefit. 

I took mine early, wanting to collect what I paid into it over my working years, so now after 8 years of collecting it, I have collected what I paid into it and much more. Sure, I could have waited to 65 before collecting it with the understanding CPP would pay me more per month..
but in the end, not knowing what your lifespan will be...perhaps taking it earlier at a reduced rate may be a better strategy for some, and CPP should change the earlier retirement calculations to payout a bit more for those taking it out earlier. 

Some rough math:
Collecting at age 60 reduced pension at $500 per month x 12 month = $6k/yr x 8yrs = $48K to this point in time.

If I had waited to age 65, and collected more say $1000 per month x 12 = $12K/yr x 3yrs = $36K to this point in time.
I think at least for me, that my retirement strategy was in my favour, at least up to now...but may work against
me in the future.


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## andrewf (Mar 1, 2010)

Sags, let's put things in context. The employer & employee contribution is 9.9%. About 6% is to pay for the benefits the employee will receive. The rest ~4% is to make up for previous undercontribution and mismanagement. I don't think any near term good performance should be consumed by current retirees. Sorry. I still have to pay into this thing for another 35 - 40 years.


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## sags (May 15, 2010)

My wife and I already paid into the fund for 40 years before retirement, so benefits are now being paid to those who contributed for the maximum time.

We are in our mid to late 60s, so the people who didn't fully contribute are getting older and dwindling in number.

How many years into the future, should past contributions and investment growth, be allocated to future generations ?

It seems the conversation has switched from...

We have to pay for those who didn't fully pay into the fund.........to we have to pay for those in the future.


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## My Own Advisor (Sep 24, 2012)

"Currently the fund is spending less than the contributions from members. In the future it is anticipated the fund will have to start paying out all the contributions plus some of the returns on the fund."

I see this as an issue...

Most Boomers have yet to retire, correct? Only the first "wave" has retired, like my parents, in their mid-60s.


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## sags (May 15, 2010)

I guess the CPPIB answer the question on their website.

They project contributions will cover benefits until 2022.

In 2023, the fund will have to use a small amount of the "investment income" plus contributions, to pay the benefits.

Despite allocating some of the investment income to pay benefits, the fund is projected to continue to rise to almost 800 Billion dollars by 2040.........and continue to rise beyond that date.

By 2040 all of the early beneficiaries and many baby boomers will be gone.

My wife and I are baby boomers and we would be approaching 100 years of age in 2040.

As the fund continues to grow....the investment returns will continue to grow....... even if they fail to meet their benchmark for returns.

As stated on the front page of the website.........._"the assurance that the Fund will continue to contribute to Canadians’ retirement income for generations to come."_

I believe in providing security for future generations, but current retirees should also share in the fund's success.

http://www.cppib.com/en/our-performance/cpp-sustainability.html


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## My Own Advisor (Sep 24, 2012)

Thanks for the link sags. Hopefully not a prolonged bear market with uber-low interest rates like today after 2023!


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## 6811 (Jan 1, 2013)

sags said:


> I believe in providing security for future generations, but current retirees should also share in the fund's success.
> 
> http://www.cppib.com/en/our-performance/cpp-sustainability.html


I believe as you do sags, but realistically (pessimistically?) I expect that it won't happen and that this will be a pot for a future government to dip into for it's own uses.


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## sags (May 15, 2010)

More than likely.....there will be bear and bull markets......interest rates will rise and fall....the CPPIB will continue to invest wisely.....and the fund will continue rise.

My question is simply...........how much is enough to protect for the future..........and should some of the returns go back to the people.

One concern is that retirees will be paid less than they should have.........and the pot will build to the point it is tempting for governments to help themselves to it.

Yes, they need Provincial approval..........but cash strapped Provincial governments probably wouldn't object.


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## RBull (Jan 20, 2013)

From the CPP Sustainability PDF


> Introduction
> The Chief Actuary of Canada conducts a financial review of the Canada Pension Plan (CPP) every three years. In his latest triennial review released in December 2013, the Chief Actuary reaffirmed that the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report.
> CPP Investment Board (CPPIB) invests the assets of the Canada Pension Plan not required to pay current benefits. Our mandate is to help sustain the pensions of over 18 million CPP contributors and beneficiaries through the disciplined global investment of CPP assets.
> Overview
> ...


Sags, this seems to be a pet peeve of yours. I am not quite as eager as you to take a bigger piece of the CPP pie at the potential expense of current and future employees. I agree a full actuarial review might offer some more information but what is there now seems pretty straightforward. Another consideration is that premiums could be lowered to keep more money in the hands of businesses and employees vs paying out more to recipients.

This is one of very few success financial success stories than involves a a government of any kind in Canada. That might have something to do with funding being directly from business and employees, however the investment committee, and the Chief actuary obviously deserve credit. Its rare for a benefit to be in such good shape and I am wary to do anything that could jeopardize that.

The younger generations are already being saddled with ridiculous amounts of public debt with demographics going against them. My gut feel is it's too early to start raiding the cookie jar on CPP. Perhaps my ideas would be different if I were actually collecting CPP......For full disclosure I no longer contribute nor am I receiving benefits - likely to start in another 9 years.


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## birdman (Feb 12, 2013)

I don't mind any surplus and perhaps it could be used to help reduce our national debt of $600 billion plus the huge provincial debts? What age group(s) were the culprit here (probably ours as we are in our latter 60`s).


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## HaroldCrump (Jun 10, 2009)

Regardless of actuarial assumptions and fund performance, this is a political issue and it aint happening.

Any increase in CPP benefits for current crop of retirees will be seen as a massive handout to rich retirees, and there will be a heavy backlash against it.
In fact, an increase in OAS would be more palatable than a CPP increase because at least OAS can be clawed back, and it is tied to physical presence unlike CPP.
Neither is happening, regardless.

Only a political party or candidate wishing to commit political suicide would dare even bring this up.


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## carverman (Nov 8, 2010)

sags said:


> Despite allocating some of the investment income to pay benefits, the fund is projected to continue to rise to almost 800 Billion dollars by 2040.........and continue to rise beyond that date.
> 
> By 2040 all of the early beneficiaries and many baby boomers will be gone.
> 
> My wife and I are baby boomers and we would be approaching 100 years of age in 2040.


You are expecting to live to 100? If I lived to 2046, I would be 100 as well, but with my current state of health, I will be lucky to make it to 80....and since I took out the CPP early, and using only the base amounts of $500 (taking it at age 60) vs $1000 if I had waited to 65, IF I make it to 80...I will be losing about $60k in benefits (not taking into account the meager CoLA increase they give each year)..what is that now? about 0.9% depending on some index they are use? 



> As the fund continues to grow....the investment returns will continue to grow....... even if they fail to meet their benchmark for returns.
> 
> As stated on the front page of the website.........._"the assurance that the Fund will continue to contribute to Canadians’ retirement income for generations to come."_
> 
> I believe in providing security for future generations, but current retirees should also share in the fund's success.


I was more interested in getting back what I paid in..(cancer survivor) so I wasn't thinking long term 8 yrs ago, the fact that I am still here..typing ..well that is a good thing, I suppose. 
At least I got back what I paid in over my working years...now I'm collecting from the fund and it's either from growth or a few workers paying CPP supporting me.


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## Pluto (Sep 12, 2013)

carverman said:


> While some of the earlier years contributions CPP recipients may be gone and no longer collecting, it appears that there is a trend for most now to collect their CPP at a reduced rate for a longer period of time, even while still working.
> 
> The current CPP strategy is that everyone who paid into it should wait until 65, or even a couple years later to collect it..at a higher benefit.
> 
> ...


The future partly depends on what you did with the 48k. If you were buying quality dividend paying stocks, with some growth, with the 48k, you may never fall behind.


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## fraser (May 15, 2010)

It was not very long ago that I was hearing the refrain ' take CPP as early as possible because you cannot count on it being there when you retire.'

How quickly things change.

Thanks in large part to a very savvy Finance Minster, Paul Martin, and to a PM, Jean Cretien, who backed him up, CPP is now very healthy. Few politicians would have had the good sense and the guts to respond to a CPP crisis in the manner that they did. We owe them a big thank you. Just compare the health of the CPP to to health of the US social security program if you doubt this.

Let's keep keep it healthy for the time being. Leave the payments as they are until numbers, not emotion, dictate otherwise. Besides, our children will not have the pensions or wealth that we have. Leave it for them....along with all of our accumulated national debt.


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## andrewf (Mar 1, 2010)

Sags, you were undercontributing the CPP until the late 90s when the government reformed the CPP. I don't think any hypothetical outperformance in the CPPIB should be given to current retirees. Keep in mind that the outperformance is still hypothetical. The returns the CPPIB has earned recently only meet what is required to make current benefits sustainable. The CPPIB has not been outperforming its 4% real/6% nominal return target.


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## sags (May 15, 2010)

Demographics can't support both sides of the same debate.

It is projected that fewer workers will support retirees in the future. Fewer workers means fewer retirees in the future collecting from the CPP.

Considering that while the baby boomers are collecting their benefits.........and past the time when they are all gone, the fund is projected to continue to rise throughout it all............to a 900 Billion dollar fund in 2040, current retirees may be collecting less than they should.

That would leave a staggering amount of money...........for those fewer worker/retirees that are projected.

As the fund grows.........so do the investment returns grow accordingly. 

It would be a huge transfer of wealth from those who built the fund for the past 60 years and those who have little invested into it.

I don't advocate to raise benefits immediately...........but a full actuarial report that answers the question of raising current benefits would be useful.

As far as I know, the CPPIB has declined to answer the question, as they deem increased benefits to be a political issue.


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## sags (May 15, 2010)

I doubt that I have "underpaid" for my CPP benefits, as I paid in the employee/employer maximum from Day 1 of the fund......for 40 years.

The contributions appear lower in 1967, but remember they are based on an average Canadian income in 1967.

The contributions have been continually invested, with compounding returns for 40 years.......and will continue to be invested while I am collecting the benefit.

At $8000 per year benefit (early CPP)..........I will have to live for a very long time to collect my money back.


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## andrewf (Mar 1, 2010)

CPP contribution rates started at 1.8% when the program was introduced in the 1960s, and was no more than 6% until 1997 when the government put reforms in place to make CPP sustainable, including raising contributions to 9.9%. So, yes, you were undercontributing. Not your fault, but realize that you are not being shortchanged. I am. I will be paying the higher rate for my entire working life and receive no more benefits than you. So please don't try to take even more from me. Thanks.


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## sags (May 15, 2010)

The rate of contribution over time is only one side of the equation.

The other sides are the number of retirees withdrawing from the fund, and the return on investments over the same time period.

Perhaps a better way to calculate it is...... how much would a person have had to invest in the TSX since 1967....to collect $8000 a year from age 60 today?

From what I can gather.........the TSX went from about 1000 points to 15,000 points over that time period.

If there is an assumption of a 4% return on capital........with a die broke calculation, how much savings would a person need ?

4% of $150,000 = $6,000 per year + $2,000 from declining principal = $8000.......probably much less than $150,000.

I believe the contributions and returns on investment would have been well above that figure.

http://www.tradingeconomics.com/canada/stock-market


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## andrewf (Mar 1, 2010)

I don't know why you think you have a better handle on appropriateness of CPP contribution and benefit rates than the chief actuary. Other than that you want a bigger pension.


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## sags (May 15, 2010)

frase said:


> I don't mind any surplus and perhaps it could be used to help reduce our national debt of $600 billion plus the huge provincial debts? What age group(s) were the culprit here (probably ours as we are in our latter 60`s).


That is really a tax and spending issue..........not that I disagree with you about the mess we are leaving behind us.

What you describe though, is what I think people should be concerned about.

A big, fat surplus in the CPP fund..........will be awfully tempting for future governments to keep their hands off.

As Provincial governments become more indebted.........they will be more inclined to agree with raiding the CPP fund to pay off their own debt.

Raiding pension plan surpluses.............is nothing new.


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## NorthernRaven (Aug 4, 2010)

andrewf said:


> CPP contribution rates started at 1.8% when the program was introduced in the 1960s, and was no more than 6% until 1997 when the government put reforms in place to make CPP sustainable, including raising contributions to 9.9%. So, yes, you were undercontributing. Not your fault, but realize that you are not being shortchanged. I am. I will be paying the higher rate for my entire working life and receive no more benefits than you. So please don't try to take even more from me. Thanks.


It probably isn't quite a simple as this, since sags' age cohort may have a shorter life expectancy than yours will, so the lifetime payout for his might be less than for yours. StatsCan shows that life expectancy at age 65 increased by two years (18.1 to 20.2) from 1992-2009. While some of this may be medical technology that will also be available to extend sags life [may he live long and prosper...], it isn't out of the question that scientific marvels might push your younger group out another, say 5 years and increase payout costs. Not that contributions may not have been too low in the past, but there's a whole complex brew of demography, mortality and investment returns that go into squeezing out a simplistic single contribution rate.


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## sags (May 15, 2010)

andrewf said:


> I don't know why you think you have a better handle on appropriateness of CPP contribution and benefit rates than the chief actuary. Other than that you want a bigger pension.


Actually, I would like to see an actuarial report on the effect of increased benefits and if retirees are and will be receiving an appropriate level of benefits, given the growing fund.


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## NorthernRaven (Aug 4, 2010)

I just did a really quick back-of-the-envelope calculation for a worker making maximum CPP contributions starting in 1970, and experiencing the returns on long-term bonds. I used 1970 and bonds because there is a spreadsheet available of returns (real and nominal) for various asset classes, and long-bonds goes back to 1970 (close to the 1966 CPP start date). The average real return from 1970-2013 was 6% (TSX was 6.3%), but I actually ran cumulative contributions against that year's returns. You'd probably have to assume an alternate world where RRSP room is available to compensate for CPP contribution credits. So, if you work starting at age 25 for 40 years from 1970-2009, you'd have a max CPP pension then. Dollars equivalent to CPP contributions seeing the return pattern from long bonds (tax-sheltered, somehow) would seem to accumulate to around $280K by 2009. Probably less, given investment costs/fees/drag.

The closest thing to CPP that is easily priced out would seem to be a joint annuity (from registered funds), indexed at 2%. To get a $1000 monthly income from such an annuity at 65 right now would seem to cost around $250K, but since CPP is 60% for survivors an equivalent bespoke annuity would probably be less. And survivor benefits added to their own CPP can't go over the max, I think, so the survivor benefit becomes less valuable the more CPP the survivor has on their own, which also makes it hard to price out generically. A male 2% 65 annuity would probably be closer to $200K.

So there's probably some people who might have come out ahead doing their own thing with their CPP contributions, perhaps single folks (since CPP bakes some survivor costs in), or really good investors. On the other hand, how many people can *actually* get market or better returns (rather than the number that *think* they can). And certainly in the old days, high fees and the lack of things like index ETFs would have meant that much more of the potential returns would have wound up in the hands of financial firms, not the individual. And the "forced savings" element probably means there's another chunk of people at the margins who will be better off, and there's a public good in that.


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## sags (May 15, 2010)

The CPPIB have achieved much higher returns, since they were allowed to invest beyond government bonds.

For the past 10 years performance........As of March 31, 2014

219.1 Billion dollars in fund........a gain of 16.5% for the year.

The net gain after expenses for the past 5 years...........11.7 % (despite the steep losses in the 2009 recession)

The accumulated gain for the past 5 years..........95.1 Billion (despite the steep losses in the 2009 recession)

The net gain after expenses for the past 10 years...........7.1 % (despite the steep losses in the 2009 recession)

"*Over the past 10 years, the CPP Fund has more than tripled from $70 billion to $219.1 billion at the end of this fiscal year. *CPP Investment Board (CPPIB) has matured into a *global investment organization *now managing one of the 10 largest retirement funds in the world."

Only twice in decades, has the CPP failed to "exceed" it's 4.1% four year benchmark. 

What is wrong with a well researched plan........that when the fund rises to X level..........it would be time to increase benefits ?

Or do the benefits remain at the same level forever (except for small cost of living increases), regardless of how much is in the fund ?


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## sags (May 15, 2010)

Northern Raven.........thanks for your information. It does start to give some ballpark figures and context.

One question..........did you calculate compounding returns in your calculation ?

I think prior to the CPPIB, the CPP was required to be invested in government bonds.........so those returns should be accurate until the CPPIB changed the investment strategy, with the resulting magnified investment returns.


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## NorthernRaven (Aug 4, 2010)

sags said:


> Northern Raven.........thanks for your information. It does start to give some ballpark figures and context.
> 
> One question..........did you calculate compounding returns in your calculation ?
> 
> I think prior to the CPPIB, the CPP was required to be invested in government bonds.........so those returns should be accurate until the CPPIB changed the investment strategy, with the resulting magnified investment returns.


Yup, I just took the previous year total, added in the CPP contributions (YMPE x contribution rate for that year, I think that should be close), and multiplied by that year's return rate, so compounding is built in. 

That long bond return series would be for the general Canadian long (10+year?) bonds, so would include corporate bonds and thus likely a higher return than a government-only investment strategy. Personally, I suspect that whatever the state of the fund and future predictions, current recipients probably don't have a lot to complain about. You've been the beneficiary of a forced, stable, risk-free investment strategy and benefit from pooling mortality credits, and would seem to be getting a fairly decent value annuity. I'm not sure if you have an eligible survivor for you CPP, but if not, and you are male, presumably you are giving a bit of a subsidy to married women households, and so might be on the lower end of the spectrum anyway.


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## NorthernRaven (Aug 4, 2010)

And actually, I think my contributions calculations are a bit too high, so the resulting hypothetical returns for non-CPP investment should probably be a bit lower. I've got the YMPE (yearly max pensionable earnings) and contribution rate values, and simplistically multiplied the two for annual max CPP contributions. But contributions are actually on the YMPE minus a basic exemption amount (YBE), currently frozen at $3500.

I found the historical YBE values and updated my spreadsheet, and that $280K figure comes down to $255K.


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## sags (May 15, 2010)

Does the calculation of total contributions and return on capital end on the date of retirement ?

Does the $255,000 number reflect the years of investment returns on the capital, while the retiree collects benefits ?

I would think anything above a 4 % return on the capital (to cover the cost of administration, indexing and partially cover fund benefit payments) would guarantee the person would never receive all their money back.

The current 4% benchmark for return on investment pretty conservative, given the steps the CPPIB have taken to reduce risk.

It can't be expected they will return 11% or 16% returns every year, as they have in the past few.......but a 6% return is probably closer to what they can expect than 4%.


Thanks for all the numbers provided, difficult as they are to sort out.


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## andrewf (Mar 1, 2010)

Sags, the return target is 4.1% in real terms, or in other words, 6.1% nominal.


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## fraser (May 15, 2010)

Keep in mind that CPP is not a pension plan in the traditional sense of the word. Ithas some built in social programs over and above a straight annuity program.


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## Daniel A. (Mar 20, 2011)

Northern Raven thanks for putting things in perspective .

Being one that paid from 1972- 2010 maximum contributions I've yet to decide when to start collecting.
I think to many people start collecting as soon as they can hence the average payout being less than 600.00 per month.

If I were to take mine now it would amount to around 700.00 per month, I'd be leaving over 300.00 per month on the table for life.
I'd rather work a little part-time while healthy and collect more later when I may not want any work. It sure does not take much in the way of work to make up the difference for CPP.


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## sags (May 15, 2010)

andrewf said:


> Sags, the return target is 4.1% in real terms, or in other words, 6.1% nominal.


Okay thanks........that makes the benefit schedule more sensible.

It would be nice if the CPP showed an individuals combination of contributions and investment returns over the years, rather than just the contributions. But more work.......higher cost.......unnecessary I guess.

Thanks to Northern Raven for putting some numbers to it all..........

I gather then..........

The general opinion is the CPP is well funded as it currently stands, but to increase benefits would require higher contributions.


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## NorthernRaven (Aug 4, 2010)

sags - you seem to be considering CPP as a giant segregated funds plan. Early on much of the annual contributions would have been saved, but as time went on more and more would have been paid out, and eventually things went into reverse, eating into reserves and rates would have had to continually increase to fund payouts. "Your" contributions haven't been sitting in an investment fund somewhere building up returns since 1966! 

From what I gather, the current benefits and contribution rates are designed to ensure solvency for a 75-year horizon, given a range of possible demographic, mortality and economic returns. If you increase benefits you reduce the cushion on the "worse than medium scenario" side of things.


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## sags (May 15, 2010)

There were years when contributions and investment returns weren't enough to pay the benefits, and reserve funds were used.

At the end of 2010, the Chief Actuary reported the unfunded liability of the CPP was 748 Billion dollars.

That sounds bad, and is sometimes inaccurately reported the CPP fund is in financial trouble, but the report also said higher contribution rates and investment returns would naturally reduce the liability to a paltry 6 Billion dollars in 75 years.

* Edit.....After reading my own post, I think I answered my own question.

In order to reduce the underfunding from 748 Billion to 6 Billion in 75 years, it will require the contributions to continue, and the capital in the fund to rise, thus increasing the returns on the capital.

Thus, increasing benefits would be counter productive to meet that goal.

http://behindthenumbers.ca/2011/08/09/about-those-unfunded-liabilities/


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## fraser (May 15, 2010)

The purpose is to whether unexpected economic storms and to accommodate increasing longevity.

My spouse gets a much better return on her CPP payments than I did. I am getting a much better return on my CPP dollars than younger people will. Our age combined with how old you were when the CPP rates increased substantially had a significant impact on our respective returns/payback.


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## sags (May 15, 2010)

Sorry Fraser........I edited the post on you.

It is complicated and I guess my first mistake was not realizing the CPP had unfunded liabilities of 748 Billion in 2010.

That changed the scenario a lot..........


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