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Do We Need To Beef Up Our CPP?

Because it has become increasingly difficult for individuals to build their own security single-handed, government must now step in and help them lay the foundation stones.” – Franklin Roosevelt

You may be worried about your retirement finances – or feeling pretty good about them.  Regardless of your personal situation, you know from ongoing media coverage that many workers are concerned about being adequately financially prepared for retirement.

Same themes, over and over again

Employer defined benefit pension plans have become a rarity.  People haven’t been saving enough personally and are carrying too much debt.

They aren’t confident about how to invest.  They are worried about the future.

The news stories seldom provide any insight or ideas for possible solutions.  However, a recent Globe and Mail article featured CIBC CEO Gerry McCaughey’s ideas on CPP reform.

He states that Canadians should be allowed to make voluntary contributions over and above what they already pay through payroll deductions.

Related: Why Baby Boomers Aren’t Prepared For Retirement

This would ensure a forced savings – with no withdrawals allowed – in order to get a secure, predictable lifetime payout on retirement.

Voluntary contributions?

We already have voluntary savings plans in place – RRSPs, TFSAs – that the majority of Canadians are not fully utilizing.

24% of eligible tax filers contributed to an RRSP in 2011 with a median contribution of only $2,830.

The numbers are equally dismal for TFSA use, with only 23% owning a plan in 2010.

Related: Using Tax Free Savings Accounts In Retirement

The problem with optional plans is – well, they’re optional.

Those people in low and medium income brackets are the least likely to participate in any of these retirement plans, and they are the ones who have the least financial security.

For some of those with plans their savings are insufficient for retirement income and are unlikely to last for twenty or thirty (or more) years.

A legitimate pyramid scheme

A pyramid scheme is a financial arrangement in which a small number of early members receive payment from a larger number of later members.

The schemes collapse, because they can’t recruit enough new members at the bottom to make payments to the old members at the top.  They are unsustainable.

Related: Learn From Baby Boomer Mistakes

CPP originally was set up as a “pay-as-you-go” approach, meaning that the current workers’ contributions that are going in are used to pay the retired workers’ benefits that are paid out.

The goal was to provide a safety net for a few years and is funded by equal contributions from workers and their employers, out of everyone’s paychecks.

But the ratio of workers paying into the system has fallen in comparison to the number of retirees collecting benefits.

A lower birth rate means fewer workers paying in.  An increasing life span means people are taking longer and longer to kick the bucket.

A small number of old people were like the early pyramid members at the top, and a large number of workers were like the later members at the bottom.

This retirement approach worked because it was relatively inexpensive per worker.  It was also sustainable, because most people didn’t live to be that old.

Related: Are You Counting On An Inheritance?

But as people live longer and there are fewer workers, the top of the pyramid gets broader compared to the bottom.  This has never happened before and changes to the system will have to be made as it will eventually become much more expensive per worker.

CPP Reform: A new approach

Every pensioner feels entitled to his or her monthly payment and looks forward to it.  For many, it is their largest source of income.

Future recipients of that monthly payment feel just as entitled.

With the total contributions coming in shrinking in proportion to the total payments going out, we’ll need to either increase the contributions or reduce the benefits.  Neither of these options will be popular.

Related: Is Our Old Age Security Program Sustainable?

Optional CPP contributions may be the answer, especially if one were able to “top-up” their contributions (as allowed by some company pension plans) to make up for any times of unemployment or low income.

It would be more palatable to know it’s for your own benefit, rather than paying for the retired old geezer down the block.

Would you be willing to increase your CPP payroll deductions to secure a larger pension payout that would last for the rest of your life?

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16 Comments

  1. JeanLion on February 27, 2013 at 7:19 am

    One thing to suggest we save more, sure we should. Quite another thing to buy into the hogwash that our CPP is a “pyramid scheme” for goodness’ sake. You know better, you have even written about it. So have many others, it’s not a secret:
    http://www.theglobeandmail.com/globe-investor/investment-ideas/should-canada-raise-its-retirement-age/article1461947/

    The CPP is absolutely sustainable, despite ideological misinformation to the contrary. You have managed to have pretty reality-based commentary up to now, and it’s been useful. Please keep a clear head, stay useful.

    • Robert on February 27, 2013 at 8:32 am

      JeanLion,

      Your criticism of the article is a partial truth. In 2013 CPP has a rosy future and is nothing like a pyramid scheme. Dial back 20 years and this was anything but true.

      Our current politicians love to brag about how actuarially sound CPP is. But what if governments in the 2020’s or 2030’s for example decide to go with a different model? This is not theoretical; for most of the history of CPP an unsustainable model was followed.

      You have to remember that for an individual a plan like CPP involves 4 decades or more. At least 10 federal governments. Not a few world crises. What if medicine gets most of us to age 100?

      I think CPP is a good basket for only some of my eggs.

      • Joe on February 27, 2013 at 9:41 am

        Exactly, the first CPP recipients got 17 times what they put in and, until the 1990s, the ratio was still ridiculously unsustainable until the upped contribution rates. Now people pay 10% of their first 50k in earnings (when one includes the employer contribution which is a very real compensation cost).

        Until the 90s it wasn’t just a pyramid scheme, it was a Ponzi scheme. Now it’s back to being a pyramid scheme with an increasingly inverted shape. I predict when they start dumping assets in 2021 (or so) to pay pensions is when more people will realize “Maybe this isn’t a good system?”

        Pro-CPP advocates should look at who created the first social security system (pre-Nazi Germany) and the strains such socialist policies put upon the country to expand to fund that pyramid scheme. We all know how that turned out.

        • Roy Murray on February 27, 2013 at 10:13 am

          OK Joe, what do you have to say about this?

          “In November 2010, the Chief Actuary of Canada reaffirmed through his triennial review that the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report, based on actuarially accepted assumptions.”

          Do you have anything to back up your wild statements about ponzi and pyramid schemes?

          • Robert on February 27, 2013 at 10:34 am

            Roy, personally I believe the plan is well managed at this moment. Are you not even a little bit suspicious of the dependability of someone predicting 75 years in the future?

            “actuarially accepted assumptions” – think about that loaded phrase. These are precisely the assumptions that rule the life insurance and pension world. Have you noticed that neither life insurance company profits nor the majority of pension plans have even started to recover from the 2008 financial crisis, although almost every other industry has?



          • Joe on February 28, 2013 at 6:02 pm

            If you believe my statement about the original recipients getting paid 17 times what they put in AND (until the 90s) retirees getting paid out of current contributions then I don’t see why you’d label my statement as “wild” because that meets the criteria for a Ponzi scheme. I don’t think I’m particularly wild; you’re the person kooky enough to believe government stats.

            As for a pyramid scheme, think about this. Who starts working earlier in life: the rich, middle class, or poor? The answer is the poor, they pay into CPP for more years.

            Is CPP a regressive or progressive tax? Regressive (caps out at the threshold for a lower-middle class worker, after which nothing is paid).

            Who lives the shortest lives? (Lower, middle, or upper income terciles?) The answer is the poor.

            So the poor pay into CPP longer, bear a disproportionate taxation burden relative to income, AND they collect it for the least amount of time because they die younger.

            I don’t blame you for defending a pyramid scheme you likely benefit from, but you’re full of it.



        • Roy Murray on February 28, 2013 at 10:20 pm

          Joe, I may be ‘full of it’ but I repeat my original request to you. Please back up your ponzi and pyramid statements and actually prove that they’re not wild.

  2. Rena on February 27, 2013 at 7:30 am

    The only ones who would be willing to top are the ones who are already worried about the future….they are the ones who should and probably are contributing to their RRSP and TFSA’s.
    Why give the govt your money, and then what happens if you die? They would keep your top up! Better to utilize RRSP’s and TFSA’s. Its in place and easy to use, with more control by the contributor.

    • Boomer on February 27, 2013 at 4:11 pm

      @Rena: I fear that the ones who would top up are, like you say, already contributing to RRSPs and TFSAs, and the ones who would benefit the most – i.e. lower income earners – wouldn’t be able to afford it.

      The CPP is currently well managed (likely a lot better than most people’s investments) and I assume that should you die early, survivors benefits would still be intact.

  3. Bet Crooks on February 27, 2013 at 8:32 am

    I’d contribute more and encourage others to do it too. If you have to manage your retirement savings yourself you have to be fairly well educated about finances. The entire financial system is set up to try to make themselves a profit: not to make *you* a profit. They get their fees (management fees; trailer fees; commissions; trading fees) regardless of whether you make money or not.

    If we invested via the existing CPP we’re actually buying into a product that is focussed ONLY on making a good return to pay out a good pension. The people running the CPP do not make fees or commissions they are staff. They won’t try to talk you into investing in something that makes them a profit at your expense. And they’ve done a reasonably good job at earning a decent return on the money they are investing.

    Aside from buying an annuity, there is no way I know of that a person can buy a defined benefit pension plan. This would be an opportunity with far more potential than just an RRSP.

    It’s also much simpler than buying RRSP products, switching to a RRIF, buying RRIF products. For those without the skills to invest or without the interest, they could just pay in, and when they turned the mandatory age (65 or 67 or whatever) they could apply and start getting monthly cheques. Far more simple. Far less scope for mistakes.

    Where do I sign up?!

    • Boomer on February 27, 2013 at 4:05 pm

      @Bet Crooks: I totally agree with you. We’ve all seen that, left to their own devises, the majority of the population has either not saved enough for their future and/or mismanaged their investments to the point that they are now fearful of “outliving their money”. The financial service industry has reaped the most benefit.

      I favour a retirement plan like my parents – lifetime pension income for expenses, and accumulated savings for extras.

      I’d be standing in line with you, Bet.

  4. Roy Murray on February 27, 2013 at 8:43 am

    The CPP has shown itself to be a model of sustainability, a resounding success and is very well run. The current trend for employers to abandon defined benefit plans makes beefing up the CPP more vital than ever. Defined contribution plans imply no accountability – your retirement income is whatever the plan can scrape together with no guarantee of any money at all.
    There is a vested interest in financial planners encouraging defined contribution plans along with a lower role for CPP. People will be forced to use their services.
    That’s why the government should be encouraged to beef up CPP and place some guarantees of income for defined contribution plans.

  5. Boomer on February 27, 2013 at 3:58 pm

    @JeanLeon
    @Robert
    @Joe
    @Roy Murray

    Thank you all for your comments and opinions.

    CPP is working for now because the labour force is much larger than the number of pensioners and excess contributions have been invested. But that’s not always going to be the case.

    Think about it. The large boomer demographic is just starting to enter retirement. There are many who are in their early to mid fifties and still several years away. At no other time in history has there been two (and possibly three) generations in retirement at the same time.

    As for the 75 year sustainability promise – since it’s impossible to predict the future, projections are based on current circumstances and some general assumptions e.g. inflation at 2-3%, life span of 85-90 years, an increasing labour pool, and the like. Any changes mean ongoing revisions to ensure sustainability and governments have always been big on promises and slow with action. Believe it if it makes you feel better, but I for one would be more likely to plan to ensure my own future.

    • Greg on March 1, 2013 at 2:25 pm

      Looks like I’m late to the party, maybe nobody is paying attention now, but…

      The CPP is sustainable on the backs of GenX’s and younger. Early baby boomers (born in the late 1940’s) can expect to get back twice the value they put into the CPP. Those born in 1960 break even. Those born in 1980 and later can expect to get back only 2/3s of the value they put in, the rest going to pay for the excess value collected by the boomers.

      It is actually very conservative to claim that the CPP is sustainable for 75 years. By 2060 pretty much everybody collecting more than they put in will be gone, and sustaining a system that only pays out 2/3s of what goes in is a no-brainer. It would take a lot of government messing to not have a big surplus.

      • Robert on March 1, 2013 at 2:49 pm

        You have just detailed how several major shifts in governmental policy have been made over the decades. How do you know that changes will stop, or that future changes will all move in the direction we currently want them to go?

        • Greg on March 1, 2013 at 5:02 pm

          There was really only 1 major shift in the CPP in the late ’90s when it was going broke by not collecting enough to pay the benefits and investing in provincial bonds at uncompetitive rates instead of the markets in general.

          I guess it is possible that a future government could start investing the CPP in vote buying schemes to stay in power, but I think that would backfire. As long as the CPP is invested in the markets by an independent body as it is today and surpluses aren’t withdrawn for general government spending, benefits will increase or contributions will decrease.

          I’m not sure what you mean by “the direction we currently want them to go”. Personally I would like to see contributions adjusted so everybody gets a benefit corresponding to their contribution. But that is pretty far fetched, we’ve only major changes that disproportionately affect those that aren’t old enough to vote in the past.

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