In your example, there is a 36% penalty for withdrawing at age 60 which may be influencing the results. Also CPP is payable till death which could be well past 90, however it does appear that the CPP should be paying out more than it does based on the performance of its investments since managed by the CPP pension board.
Bottom line, CPP is a group pension plan, that was initially designed to provide a pension of up to 25% of your average lifetime wage up to the YMPE. A death benefit was added. Then a disability benefit was added by the government, which would provide benefits to the contributor's children in addition to themselves. It was also changed over the years to move to a self-sustaining model. The US Social Security is not self-sustaining and is becoming a huge challenge for them. Every benefit increase in CPP increases the cost of the plan for the contributors significantly. More people complained that CPP was not paying them enough money. Much as you said in your video, many people - if given a choice to save for the future or spend now - will spend now. So, in order to help ensure that future people were not such a significant drain on government resources, the maximum benefit is being increased from 25% to 33% of YMPE. This new, increased benefit, will cost more to the group plan. That means basic premium increases for all, then - following our income tax model, the premiums go up the most for those with the highest income - hence CPP2 is only paid by those whose income is in excess of the YMPE. Bottom line, this is a GROUP pension plan - not an individual pension plan. The monthly premiums are based upon the actuarial costs of the benefits desired vs risk. Contributors who die early and collect little to no benefits is actually calculated into the cost of the plan and helps to keep premiums lower. Your example was not apples to apples because it did not account for risk. The plan needs to be able to pay the benefits in any foreseen or unforeseen economic climate. You are attempting to use an single individual to equate to a group plan. You also selected the best case for your example - worker whose wage exceeded the YMPE every year for at least 39 years, remains in good health and lives beyond the mean. Yet one of your complaints was dying early after collecting little/no benefits. This is an edge case trying to be used as "the norm". CPP benefits also includes the other edge case: The individual with young children who after three or four years of work, develops a long term disability which prevents them from working for the remainder of their life. How does your "apples to apples" individual savings plan work for this scenario? I do like your content, please keep creating. This topic provokes discussion and ideas sharing. Thank you.
There is very little risk with CPP, hence less return. Would trust a corporation with your pension or less risk with government? Finally how many people actually save themselves? CPP is a good investment.
First, people just wouldn't save the money. Others would invest stupidly and money would be gone. I have an OMERS pension, and frankly its survivor benefits for singles suck as well! For both it just all part of the actuarial calculations that allow for the payouts to be what they are....want better survivor benefits-higher premiums or lower overall payouts is the trade off. But yeah this is part of why I took CPP early as soon as I retired at 60...that sense you want to get "something" from all those contributions--the expert calculations be dammed.
This all assumes that people would invest that amount since they were 18. I think studies have shown that Canadians aren't as comfortable investing as they should be and most would have just spent that amount. At least the cpp forces people to save
My thoughts for a true apple to apple comparison you would take the age 60 amount and then purchase an annuity index to inflation from age 60-90 with a survivor benefit. Then you have a better comparison whereby the recipient is not taking on any investment risk or longevity risk moving forward. I'm not sure what $367K ish would buy you in the annuity world. I state $367K because I believe your calculation is taking full year of interest in the year of contribution where you would actually only receive interest for the full year on half the contribution for that year plus interest on the opening year balance for full year. I did that calculation and it's not a significant difference (about 10,500 less) but still worth noting.
Sorry, but I believe this is really not a relevant analysis as you have neglected to consider several major features in your calculations: One, CPP allows for eight drop-out years. You do not actually have to contribute for up to 8 years to receive full CPP. This very often occurs between the years of 18-25 when folks are still in school or earning a low wage (and, frankly, typically unable to contribute to a possible CPP replacement strategy during those years too). Two, before you take CPP, the CPP benefit grows with wage growth not inflation. Wage growth has typically led inflation by about 1%. An 18 year old starting their journey today is going to get more CPP at age 60. Three, you have neglected fees. Most Canadians are invested in mutual funds charging 2% in annual fees and most DCs are held with insurance companies charging at least 1% fees per annum (even for "lifepath" type funds). So, on average we can say fees will eat up about 1.5% of returns. Your 6% is really 4.5%. Four, CPP pays you more the longer you wait to claim it. Yet, you have chosen age 60 to start CPP knowing, in your analysis, that the person will live to 90 (per the spreadsheet). Given this, taking CPP at 60 leads to the worst mathematical outcome. The optimal time to take CPP if you know you will live to 90 is age 70 where CPP pays you 42% more every year. Five, you have neglected the potential for tax drag on the accumulation of the funds versus CPP. If the person in question is already maxing out their RRSP and TFSA, then these additional CPP replacement funds can only go into a non-registered account and there will be at least some annual tax drag on these investments. Other benefits of CPP not considered in the video: CPP is a hedge against inflation. Periods of high inflation generally do not bode well for equities, bonds, or cash meaning that while both your investments and their purchasing power sink, your CPP payments will retain their value and purchasing power. CPP is a hedge against longevity risk. Mathematically, the risk of depleting your portfolio of stocks and bonds increases the longer you live. As an annuity, CPP is paid to you no matter how long you live. CPP is a hedge against sequence of returns risk. While many people think they can do better than CPP in their own investments, it's important to note that CPP provides a minimum and known level of income through all market conditions and at no risk. CPP will do well in the scenarios where investments typically do not do well.
I think his point was that we could do a better job than the CPP program. I doubt the program is going anywhere but if we were ever given an option to opt out and forced to "invest" as he says, we would be better off.
Very informative. Transforming the CPP into a sort of Defined Benefit Contribution Plan (like a LIRA) would be a great idea. That way the assets would belong to the person, and the residual after death would belong to the estate for distribution to the beneficiaries. The current system where the pension dies with the person (and a reduced amount of 0 -60% goes to a surviving spouse) lacks fairness.
Or at least provide the option to be in or out. Being out should still force you to put the money into a LIRA where you can't touch it until you retire.
In your example, there is a 36% penalty for withdrawing at age 60 which may be influencing the results. Also CPP is payable till death which could be well past 90, however it does appear that the CPP should be paying out more than it does based on the performance of its investments since managed by the CPP pension board.
Bottom line, CPP is a group pension plan, that was initially designed to provide a pension of up to 25% of your average lifetime wage up to the YMPE. A death benefit was added. Then a disability benefit was added by the government, which would provide benefits to the contributor's children in addition to themselves. It was also changed over the years to move to a self-sustaining model. The US Social Security is not self-sustaining and is becoming a huge challenge for them. Every benefit increase in CPP increases the cost of the plan for the contributors significantly. More people complained that CPP was not paying them enough money. Much as you said in your video, many people - if given a choice to save for the future or spend now - will spend now. So, in order to help ensure that future people were not such a significant drain on government resources, the maximum benefit is being increased from 25% to 33% of YMPE. This new, increased benefit, will cost more to the group plan. That means basic premium increases for all, then - following our income tax model, the premiums go up the most for those with the highest income - hence CPP2 is only paid by those whose income is in excess of the YMPE. Bottom line, this is a GROUP pension plan - not an individual pension plan. The monthly premiums are based upon the actuarial costs of the benefits desired vs risk. Contributors who die early and collect little to no benefits is actually calculated into the cost of the plan and helps to keep premiums lower.
Your example was not apples to apples because it did not account for risk. The plan needs to be able to pay the benefits in any foreseen or unforeseen economic climate. You are attempting to use an single individual to equate to a group plan. You also selected the best case for your example - worker whose wage exceeded the YMPE every year for at least 39 years, remains in good health and lives beyond the mean. Yet one of your complaints was dying early after collecting little/no benefits. This is an edge case trying to be used as "the norm".
CPP benefits also includes the other edge case: The individual with young children who after three or four years of work, develops a long term disability which prevents them from working for the remainder of their life. How does your "apples to apples" individual savings plan work for this scenario?
I do like your content, please keep creating. This topic provokes discussion and ideas sharing. Thank you.
Very well said.
There is very little risk with CPP, hence less return.
Would trust a corporation with your pension or less risk with government?
Finally how many people actually save themselves?
CPP is a good investment.
Thanks Marc, appreciate these types of videos.
How is anyway supposed to survive. Or even get buried if you pass. You wont have anything for your family to bury you.
First, people just wouldn't save the money. Others would invest stupidly and money would be gone. I have an OMERS pension, and frankly its survivor benefits for singles suck as well! For both it just all part of the actuarial calculations that allow for the payouts to be what they are....want better survivor benefits-higher premiums or lower overall payouts is the trade off. But yeah this is part of why I took CPP early as soon as I retired at 60...that sense you want to get "something" from all those contributions--the expert calculations be dammed.
This all assumes that people would invest that amount since they were 18. I think studies have shown that Canadians aren't as comfortable investing as they should be and most would have just spent that amount. At least the cpp forces people to save
It's as if you don't actually understand how pension plans work.
My thoughts for a true apple to apple comparison you would take the age 60 amount and then purchase an annuity index to inflation from age 60-90 with a survivor benefit. Then you have a better comparison whereby the recipient is not taking on any investment risk or longevity risk moving forward. I'm not sure what $367K ish would buy you in the annuity world. I state $367K because I believe your calculation is taking full year of interest in the year of contribution where you would actually only receive interest for the full year on half the contribution for that year plus interest on the opening year balance for full year. I did that calculation and it's not a significant difference (about 10,500 less) but still worth noting.
And how many more government employees would be needed to run such a program.
Sorry, but I believe this is really not a relevant analysis as you have neglected to consider several major features in your calculations:
One, CPP allows for eight drop-out years. You do not actually have to contribute for up to 8 years to receive full CPP. This very often occurs between the years of 18-25 when folks are still in school or earning a low wage (and, frankly, typically unable to contribute to a possible CPP replacement strategy during those years too).
Two, before you take CPP, the CPP benefit grows with wage growth not inflation. Wage growth has typically led inflation by about 1%. An 18 year old starting their journey today is going to get more CPP at age 60.
Three, you have neglected fees. Most Canadians are invested in mutual funds charging 2% in annual fees and most DCs are held with insurance companies charging at least 1% fees per annum (even for "lifepath" type funds). So, on average we can say fees will eat up about 1.5% of returns. Your 6% is really 4.5%.
Four, CPP pays you more the longer you wait to claim it. Yet, you have chosen age 60 to start CPP knowing, in your analysis, that the person will live to 90 (per the spreadsheet). Given this, taking CPP at 60 leads to the worst mathematical outcome. The optimal time to take CPP if you know you will live to 90 is age 70 where CPP pays you 42% more every year.
Five, you have neglected the potential for tax drag on the accumulation of the funds versus CPP. If the person in question is already maxing out their RRSP and TFSA, then these additional CPP replacement funds can only go into a non-registered account and there will be at least some annual tax drag on these investments.
Other benefits of CPP not considered in the video:
CPP is a hedge against inflation. Periods of high inflation generally do not bode well for equities, bonds, or cash meaning that while both your investments and their purchasing power sink, your CPP payments will retain their value and purchasing power.
CPP is a hedge against longevity risk. Mathematically, the risk of depleting your portfolio of stocks and bonds increases the longer you live. As an annuity, CPP is paid to you no matter how long you live.
CPP is a hedge against sequence of returns risk. While many people think they can do better than CPP in their own investments, it's important to note that CPP provides a minimum and known level of income through all market conditions and at no risk. CPP will do well in the scenarios where investments typically do not do well.
This is great, however, contributing to CPP is mandatory for employees, there is no way out of that. What do you do in that case?
I think his point was that we could do a better job than the CPP program. I doubt the program is going anywhere but if we were ever given an option to opt out and forced to "invest" as he says, we would be better off.
Excellent informative retirement financial data 👍
Excellent video.
Very informative. Transforming the CPP into a sort of Defined Benefit Contribution Plan (like a LIRA) would be a great idea. That way the assets would belong to the person, and the residual after death would belong to the estate for distribution to the beneficiaries. The current system where the pension dies with the person (and a reduced amount of 0 -60% goes to a surviving spouse) lacks fairness.
A LIRA is the worst of all worlds as it has both minimums and maximums for yearly withdraws.
sign petition to stop CPP
Never going to happen
Or at least provide the option to be in or out. Being out should still force you to put the money into a LIRA where you can't touch it until you retire.
Just don't work and you don't pay into it.
@2:41 Penion should be Pension