Earlier this week, the Minister of Finance stated that a substantial majority of premiers were amendable to a modest expansion of the Canadian Pension Plan.
Being active on the political end myself, most of the unionists that were at a public meeting on retirement income proclaimed their support to expand the Canadian Pension Plan. This positioning was undoubtedly due to their concerns that defined pension plans from sponsoring companies were only as good as the solvency of the company, while the Canada Pension Plan is effectively guaranteed by the Canadian government. Their arguments, generally summarized, is that the CPP benefit of (currently) $11,210/year is insufficient to live on.
An important point for people to remember is that the Canada Pension Plan, when instituted in the mid 1960′s, was never intended to be an income that people can live on. However, now there seems to be some sort of expectation that governments can fund people’s entire income requirements when they get older. Such expectations cannot be fulfilled without costs.
Already those costs have been reflected into the system. In the mid 90′s, there was a fundamental shift on CPP rates, increasing from 1.8% to 4.95% for both employees and employers. This allowed surpluses to develop and the management of a funded CPP that could compound asset growth and be able to better provide for the aging population.
Putting the CPP into raw numerical terms, if you earned a salary of $47,200 in 2010, you would contribute $2,163/year and your employer would contribute the same. CPP numbers are indexed to the consumer price index, so your contributions would go up over time (as well as your expected benefit when you start collecting CPP). If you work for roughly 35 years at this salary (you can exclude up to 15% of your lowest income-earning years for the purpose of the CPP calculation) you will receive a $11,210/year payment from the CPP until you die. Your spouse will also receive 60% of your CPP payment as a survivor benefit if you die earlier than he/she does.
Financially, this is a fairly raw deal. Pretending, starting at the age of 30, at that you would have put your 2x$2,163 contributions into an investment earning 5% a year. By the time you turn 65, you would have stored up about $414,600 on a pre-tax basis. While 5% interest on this amount alone would be about twice the maximum benefit ($11,210/year), even assuming you earned no return on the capital, you would still have about 37 years before exhausting your asset reserve. The advantages over the CPP are quite obvious.
Another way of looking at this is that you would need to repeat the same procedure at 3.62% return over 35 years in order to be able to create a $11,210 income for perpetuity. The easiest brain-dead way of doing this is investing in government of Canada 30-year bonds, currently yielding around 3.8%.
Anybody having the discipline of investing in very safe return securities should be able to replicate something better than CPP with the capital they would otherwise have contributed to CPP.
So with the proposed “modest expansion” of the CPP, I am guessing the government will propose a 25% increase in maximum CPP benefits, which would likely come with a 25% price tag increase in CPP premiums.
Maybe for people that are not financially sophisticated at all this would be a good option. However, for anybody with the aforementioned discipline, it is a bad deal. I would not consider this “robbery” or “taxation”, however – one of the benefits of having a relatively low payoff at the CPP retirement age is that the fund is solvent, which is more than can be said for USA Social Security, which is a complete financial write-off.
In the USA, for example, a person earning $47,300 a year and retiring at age 65 (note this comes with a penalty provision since their normal benefits begin at age 67) will earn roughly 50% more a year than somebody in Canada. Their premiums are 6.2% of the salary, about 25% higher, paid by the employee and employer, up to a maximum of $106,800. USA Social Security is funded by a trust fund, which the benefit provisions are purely paid for by current workers and does not have a build-up of assets. As a result, social security is very likely to either reduce benefits (by extending the age requirement, or clawing back high-income earners), raise premiums, or a combination of both. Canada is unlikely to do this.