# CPP



## mordko (Jan 23, 2016)

Real return on CPP contributions for someone born in 1972 or later is 1.7% (net of inflation). 

http://www.theglobeandmail.com/repo...rns-with-the-actual-benefits/article29926855/

Given that CPP is presented as it were "investment", should we be allowed to opt out of the scheme and invest the money ourselves?


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## humble_pie (Jun 7, 2009)

mordko said:


> Given that CPP is presented as it were "investment", should we be allowed to opt out of the scheme and invest the money ourselves?



shortest answer: No

short answer: any return that beats inflation is acceptable. The idea is to have something saved to pay for the old age of persons who could not or would not save on their own.


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## mordko (Jan 23, 2016)

Other countries are making pension policies more flexible. UK is a good example. For several years they have permitted to "opt out"; recent changes made pension policy even more flexible. 

Shoving more "tax&spend" pensions down peoples' throats is unlikely to be as popular as some politicians seem to think. The minimum they should do is come out clean on how the system works and stop pretending it's a good deal for people who work all their lives.


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## Jaberwock (Aug 22, 2012)

1.7% above inflation is a actually quite a good return for a guaranteed, defined benefit, inflation protected pension plan.


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## mordko (Jan 23, 2016)

- Nothing is ever "guaranteed", particularly when we are talking ~45 years and future governments. 
- Company DB pensions schemes are way more generous than this, so not sure how this is a good DB plan. 
- If one were to invest in S&P 500 in 1950 and collect in 2009, you'd get 7% above inflation. A bit more than 1.7%, don't you think? 

http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm

Having said this - if 1.7% is what you really really want - be my guest. Opt-out would be voluntary.


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## sags (May 15, 2010)

The CPP fund has exceeded their benchmark projections and stock markets in capital returns, but the capital has been retained in the fund and recipients (owners of the fund) have gained no benefit from the superior returns.

There should be an audit to determine if benefits should be increased, without the need to increase contributions.

Regular audits have concluded the fund is fully funded for 75 years and beyond, but doesn't address the question of higher benefits because they aren't mandated to do so.


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## andrewf (Mar 1, 2010)

mordko said:


> Real return on CPP contributions for someone born in 1972 or later is 1.7% (net of inflation).
> 
> http://www.theglobeandmail.com/repo...rns-with-the-actual-benefits/article29926855/
> 
> Given that CPP is presented as it were "investment", should we be allowed to opt out of the scheme and invest the money ourselves?


The return since 1972 is only so poor because we are paying for the sins of the boomers and their parents, who helped themselves to CPP without fully paying for it. ~40% of what you contribute is to pay for that earlier generosity. So, I suppose one could opt out of 60% of the contribution, but the other 40% should be mandatory (with no associated benefits), otherwise, who will pay for ma and pa's pension? 

The corollary of this fact is that returns of expanding the CPP (with phased-in benefit increases) would likely have a significantly better return (since we don't have to make up for past sins). After all CPPIB is targeting a 4% real return on its investments, and so far has been exceeding that target.


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## mordko (Jan 23, 2016)

You are also paying for those who don't work as much (e.g. you can take 8 year "holiday" at not loss in pension whatsoever). 

The point is that whenever a new system will be set up it would undoubtedly involve some kind of redistrubtion and intergenerational transfer - they ALWAYS do. And because it's run by the government, it's incredibly expensive to run. 

So, why does anyone want more of the same???


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## OnlyMyOpinion (Sep 1, 2013)

andrewf said:


> The return since 1972 is only so poor because we are paying for the sins of the boomers and their parents, who helped themselves to CPP without fully paying for it.


Not sure about that. 
If someone paid maximum CPP contributions with an employer from 1979-2015 they would have paid $88,475 into the plan. 
If they then began taking CPP in 2016 at age 60, they would be getting about $715/month. 
If on the other hand, they had 'paid themselves' and earned 3.7%/yr on those contributions, they would have about $146k with which to buy an annuity.
If they bought a registered, male, no guarantee annuity in 2016, they could get a max of $482/$100k or $704/mo.
So CPP will pay them $715/mo, or they could have saved, invested at 3.7% then bought an annuity that pays them $704/mo. 
I don't see that they are getting a disproportionate benefit from CPP. I don't see that anyone is subsidizing their benefit unfairly?


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## mordko (Jan 23, 2016)

People born prior to 1971 are getting a better value. It's the same with all public pensions, to sell the policy politicians sweeten the deal for the voters so that future generations get screwed.


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## OnlyMyOpinion (Sep 1, 2013)

mordko said:


> People born prior to 1971 are getting a better value.


 - better value to the point of being fair value anyway. But I do agree with you. Maybe with the good performance the CPPIB has been able to deliver, there is room to improve payouts to post-1971 folks in the future? But first we'd probably need to have a PM elected who is like only 45 yrs old. Oh, wait... we do


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## andrewf (Mar 1, 2010)

OnlyMyOpinion said:


> - better value to the point of being fair value anyway. But I do agree with you. Maybe with the good performance the CPPIB has been able to deliver, there is room to improve payouts to post-1971 folks in the future? But first we'd probably need to have a PM elected who is like only 45 yrs old. Oh, wait... we do





> For instance, A worker born in 1905 who retired (at age 65) in 1970, one of the first years Canadians received CPP benefits, would have *enjoyed a rate of return (adjusted for inflation) of 39.1 per cent*. A worker born in 1950 who retired in 2015, on the other hand, would have received a return of 3.6 per cent. The rates decline further – those born after 1971 will receive a CPP benefit of 2.1 per cent.


39% sounds reasonable to you?


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## OnlyMyOpinion (Sep 1, 2013)

andrewf said:


> 39% sounds reasonable to you?


I was just trying to point out that the comment "sins of the boomers" was a misrepresentation. That in the example I gave, the benefits paid out are proportionate with employee+employer contributions that have been made. 
Re/ 39%, born 1905 - I wasn't going to address my grandfather's benefits, he collected for 10 years and has been dead for 35 yrs.


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## sags (May 15, 2010)

39% return on 3 years of contributions wouldn't amount to much.


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## andrewf (Mar 1, 2010)

OnlyMyOpinion said:


> I was just trying to point out that the comment "sins of the boomers" was a misrepresentation. That in the example I gave, the benefits paid out are proportionate with employee+employer contributions that have been made.
> Re/ 39%, born 1905 - I wasn't going to address my grandfather's benefits, he collected for 10 years and has been dead for 35 yrs.


CPP was only put on a sustainable path in 1997, when boomers were at least half-way through their careers. So they benefit from undercontributing. Yes, their parents and grandparents benefited more, but Millenials are the first generation that will be paying full-freight for CPP.


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## OnlyMyOpinion (Sep 1, 2013)

andrewf said:


> ... boomers ... benefit from undercontributing...


That's ok, math is tough. I'll move on.


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## Daniel A. (Mar 20, 2011)

mordko said:


> People born prior to 1971 are getting a better value. It's the same with all public pensions, to sell the policy politicians sweeten the deal for the voters so that future generations get screwed.



I'm sure it has never been explained to you, part of living in this wonderful country that provided you with all the infrastructure, social benefits, health care, so far has cost you very little guessing your fairly young. 
As a boomer now retired I paid the maximum into CPP my entire working life starting in 1972, and like you are finding out we never had any say in the plan either. 
Once I retired I did go back over all my working years just to see what I paid in taxes each and every year, the total was around 700,000.00 provincial/federal. 
Never collected EI, never used the medical system beyond the odd doctor visit, the fact is I was supporting a lot of spending by government .

It is what it is and the cost of living in this country.

I believe as a boomer I've more than paid my share supporting things that will help your generation for the next 40 years.


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## fraser (May 15, 2010)

I know that I am getting a good deal from CPP because most of my contributions were made prior to the big change to 4.8ish contribution levels. My spouse is getting an even better deal because of the child rearing provisions. Her ROI is significantly higher than mine and her contributions significantly less. That is how it is. We can't change it and we are happy to take the money. Just keep in coming please.

CPP is not simply a pension plan though. It is also plays a part, and has some additional benefits, in our social safety net that is typically outside the purview of private pension plans.

The rates are currently higher than in the past because they were too low in the past and of course to account for increased longevity. We need CPP. If we did not have it we would paying much more out in GIS and other social programs.

But, it is extremely well funded/managed and we know with a very high degree of certainty that it will not go bust.


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## mordko (Jan 23, 2016)

Daniel A. said:


> I'm sure it has never been explained to you, part of living in this wonderful country that provided you with all the infrastructure, social benefits, health care, so far has cost you very little guessing your fairly young.
> As a boomer now retired I paid the maximum into CPP my entire working life starting in 1972, and like you are finding out we never had any say in the plan either.
> Once I retired I did go back over all my working years just to see what I paid in taxes each and every year, the total was around 700,000.00 provincial/federal.
> Never collected EI, never used the medical system beyond the odd doctor visit, the fact is I was supporting a lot of spending by government .
> ...


You are responding to a statement of fact. There is no need to take it personally.

This study is part of the overall debate on increasing CPP and introducing another version in Ontario.


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## hboy43 (May 10, 2009)

So I guess a bunch of people above think the authors of the study are lying or the methodology is very wrong. Or maybe great granny really did get 39% return on her money, and Joe 20 year old is set to get 1.7% or whatever the numbers are.

I don't know why this is news. I mean qualitatively anyone paying attention has known the reality for decades. The only thing new here is the quantitative aspect.

Governments play "why pay for today what you can put off until tomorrow". Is this really new to anyone? Congratulations young people, you are " tomorrow ". Or are you? Maybe you will find a way to fob it off down the road too.


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## mordko (Jan 23, 2016)

^^ +1. Except that the road ends, eventually. Someone will get stuck with the consequences. 

Our governments are built around the good old principle from Louis XV: "Après moi, le déluge". Gets them the votes 90% of the time.


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## Pluto (Sep 12, 2013)

andrewf said:


> The return since 1972 is only so poor because we are paying for the sins of the boomers and their parents, who helped themselves to CPP without fully paying for it. ~40% of what you contribute is to pay for that earlier generosity. So, I suppose one could opt out of 60% of the contribution, but the other 40% should be mandatory (with no associated benefits), otherwise, who will pay for ma and pa's pension?


Which boomers helped themselves to benefits without paying for it? CPP commenced in 1965 and at that time the average boomer was 14 years old. the oldest boomer would be less than 20. So it seems to me that they paid into the plan from the get go. the sin was the government didn't manage/invest the money effectively until the late 1990's. I think, not sure, at one point in the 1970's they were just loaning it to municipalities for a rate less than inflation. Anyway, don't blame the boomers: they have funded most of it.


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## mordko (Jan 23, 2016)

It does not matter whose fault it is. What does matter is that going forward people have a little bit of freedom (and responsibility) to decide how their money is invested.


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## Pluto (Sep 12, 2013)

^
the US had a similar "opt out" of Social security debate about 10 15 years ago. 
I suppose the concern about that is that most people do not have a clue about how to invest their savings and those who opt out and goof will end up being supported by the taxpayer anyway.


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## bgc_fan (Apr 5, 2009)

^
Similarly, when the first tech bubble was developing in during the early 2000s, you had all these people being paper millionaires. So, some would cash out the commuted value of their DB and try to make their money in the stock market. When it crashed, well, you had a number of people who suddenly didn't have a pension, or retirement nest egg.

You can say, well that's their fault, sure, but part of the push to expand CPP is based on the fact that people aren't saving/investing enough. No, using this forum as representative of the general public is not correct as this forum hardly represents the Canadian demographic.


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## mordko (Jan 23, 2016)

The system in the US is projected to be bankrupt in the very near future, so we know for a fact there will be major changes. 

In the UK there is a portion of state pension you can't "Opt out" of. The portion that is used for opting out that can't be cashed or used for buying shares in the street, it has to be part of a recognized pension scheme. This works well because one has "ownership" and it's very hard for future governments to use that for other purposes. 

CPP is used for intergenerational transfer and to redistribute $s with individuals having zero ownership. It's a pure government tax and spend system.


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## sags (May 15, 2010)

The US recently banned current retirees (in effect July 9, 2015) from taking the commuted values because of the losses people had sustained.

http://www.fa-mag.com/news/some-lump-sum-pension-buyouts-banned-22485.html

In Canada, GM was offering the commuted value to anyone who was retiring (not current retirees) at any age. They were forced by the government to stop offering the option to people 65 and older.

It appears governments are aware they have a looming problem and don't want to make it worse than it already is. Allowing people to opt out would make it worse.


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## mordko (Jan 23, 2016)

Sure, what's new? Governments don't like to relinquish what they got their paws on. People just can't be trusted to decide what is to be done with their money.


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## OnlyMyOpinion (Sep 1, 2013)

mordko said:


> ... CPP is used for intergenerational transfer and to redistribute $s with individuals having zero ownership. It's a pure government tax and spend system.


Please tell us you were kidding when you wrote this. To tell us otherwise would demonstrate ignorance of the way the Canada pension plan works.


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## Jaberwock (Aug 22, 2012)

Mordko:

When you retire you will likely have a range of income sources including:

OAS
CPP
RRSP (RRIF)
TFSA (which is a huge benefit to younger people, but not so much for baby boomers because of the low limits on contributions)
Non-registered investments

Your investments will include:

Fixed income (bonds, GIC's etc.)
Real estate (property, REITs)
Equities

If you follow regularly accepted advice, your portfolio will include a portion of guaranteed fixed income which is likely to be returning less than 2% after inflation. The CPP is guaranteed and inflation protected, consider it as a part of your fixed income allocation, and compare its returns against the returns you can get on "equivalent risk level" investments, rather than against the higher risk portion of your portfolio. On that basis CPP is not as bad a deal as you seem to imply.


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## mordko (Jan 23, 2016)

@Jaberwock:

- It is my understanding that long-term returns for bonds have been around 4.7% (gross) and over 2% in real terms. Every 0.1% is important when compounded over ~40 years. 
- It is not necessarily right for a young person to put a substantial portion of his savings into fixed income. Depending on his tolerance to risk, it may not be right for him to put anything into fixed income. There is talk of increasing CPP contributions, which would make this even worse.
- For anyone with a mortgage it makes no sense to put anything into a fixed income with a rate of return of 1.7% before paying off the mortgage.


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## Daniel A. (Mar 20, 2011)

mordko said:


> It does not matter whose fault it is. What does matter is that going forward people have a little bit of freedom (and responsibility) to decide how their money is invested.


It took many years to bring in the CPP at a time when the only thing available was OAS. It is funded by both the employer & employee, at a time when fewer people have pensions or savings it truly is a corner stone for most. The worst thing that could happen is giving people the option to opt out.
Even making changes to the CPP is a monumental task involving all the provinces, agreement is next to impossible.
It was structured to insure survival .


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## Jaberwock (Aug 22, 2012)

[/QUOTE]- It is my understanding that long-term returns for bonds have been around 4.7% (gross) and over 2% in real terms. Every 0.1% is important when compounded over ~40 years. 
- It is not necessarily right for a young person to put a substantial portion of his savings into fixed income. Depending on his tolerance to risk, it may not be right for him to put anything into fixed income. There is talk of increasing CPP contributions, which would make this even worse.
- For anyone with a mortgage it makes no sense to put anything into a fixed income with a rate of return of 1.7% before paying off the mortgage.[/QUOTE]

The 1.7% scenario is a worst case scenario representing someone who has paid an equal proportion of the maximum amount every year. For someone who has up to eight years of low or no CPP contributions, the return is 2.1%. That is 2.1% above inflation, which equates to a gross return of 4.1% based on today's ~ 2% inflation, but would have been well over 10% back in the eighties when inflation was much higher. Even at 1.7% net of inflation (3.7% gross) CPP still compares favourably with paying off your 3% mortgage.


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## andrewf (Mar 1, 2010)

mordko said:


> @Jaberwock:
> 
> - It is my understanding that long-term returns for bonds have been around 4.7% (gross) and over 2% in real terms. Every 0.1% is important when compounded over ~40 years.
> - It is not necessarily right for a young person to put a substantial portion of his savings into fixed income. Depending on his tolerance to risk, it may not be right for him to put anything into fixed income. There is talk of increasing CPP contributions, which would make this even worse.
> - For anyone with a mortgage it makes no sense to put anything into a fixed income with a rate of return of 1.7% before paying off the mortgage.


One thing you should keep in mind is that 40% of CPP contributions are essentially a tax to make up for past undercontribution. This is why doubling CPP benefits over time would only require a 60% increase in contributions. Once you exclude the impact of the tax (which could not just be opted out of without defaulting on pension promises), the return of CPP is a fair bit better.


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## mordko (Jan 23, 2016)

Jaberwock said:


> Even at 1.7% net of inflation (3.7% gross) CPP still compares favourably with paying off your 3% mortgage.


Not really. Mortgage has to be paid up. It's a 100% probability. Not only that, the rate will likely go up in the future. 

CPP has a risk attached to it. You are relying on a) sufficient growth on the pension fund and b) future governments paying up (rather than reducing the amount or delaying the start of payments due to increased longevity).

0.7% does not begin to compensate for the two risks.


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## mordko (Jan 23, 2016)

andrewf said:


> One thing you should keep in mind is that 40% of CPP contributions are essentially a tax to make up for past undercontribution. This is why doubling CPP benefits over time would only require a 60% increase in contributions. Once you exclude the impact of the tax (which could not just be opted out of without defaulting on pension promises), the return of CPP is a fair bit better.


Good deal then. Who is there to say that once they increase CPP payments, our children won't be stuck with another tax to compensate for something or other?


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