Skip to content

Where Does My CPP Money Go After It Gets Deducted From My Paycheque?

If you’re like many Canadians, you don’t spend a lot of time thinking about this whole pension thing we have going on.

You know/hope it will be there when you turn 65.

You know that a decent chunk gets taken off of your cheque each month (along with a bunch of other acronyms and taxes).

Finally, you know that life has a million new experiences to enjoy – and digging into the legalese surrounding a pension plan isn’t exactly at the top of your priority list.

However, I’d argue it’s worth knowing a little more about how that Canada Pension Plan (CPP) deduction will one day magically appear in your bank account, as well as about the folks that handle the hundreds of billions of dollars that millions of Canadians have saved to support their golden years.

How Much Does the Canadian Pension Plan Deduct?

All working Canadians outside of Quebec (whose residents have their own pension plan) contribute to the CPP. The simple idea is that we should contribute during our working years, get professionals to invest that money for us as we go to work every day, then when we hit 65 we should get a pension cheque (or direct deposit) that replaces roughly 25% of the average Canadian’s pre-retirement income.

The way CPP is set up, for every dollar you contribute to the plan, your employer also contributes a dollar. At any time, you can request a Statement of Contributions from Service Canada, and they will provide you with not only the overall amount that you have contributed to CPP, but also what you could receive in CPP benefits once you turn 65.

Currently, both you and your employer (unless you’re self-employed – then you pay both “halves”) pay 4.95% of your first $55,900 earnings into CPP. After that earnings level, no more CPP should be deducted from your paycheque.

New CPP Contribution Rules

The Federal Government announced a couple of years ago that the new program will be phased in starting 2019. CPP contributions on that same tier of income would be increased from 9.9% (split between you and your employer) and gradually raised to 11.9% from 2019 to 2023. They then added a second CPP contribution tier of 8%, to be phased in from 2024 to 2025, that will again be split between employer and employee. This second tier will cover the equivalent of $55,900 to roughly $83,000 in today’s dollars.

The idea here was to guarantee Canadians less of a drop in standard of living when looking at retirement. As the increase is phased in over the next 45 years, Canadians will eventually see 33.33% of the average Canadian’s income versus only 25% today.

So, all that to say that if you make $50,000 per year in 2025, roughly $500 more than is currently contributed to your CPP will be deducted from your paycheque. If you make say $83,000, you will still pay 5.95% on your first tier (i.e. up to $56,000) and then from roughly $56,000 to $83,000 you’d pay an additional 4% (or $920).

Related: Why you should take CPP at age 70

In exchange for that sacrifice, you can look forward to a significantly increased payout in retirement. Today, the maximum you can garner from CPP is $13,610. If you were to apply the payout rules from 45 years into the future, you’d be looking at the equivalent of a yearly benefit of almost $18,000 in today’s dollars.

So, to Whom Are We Handing Our Hard-Earned Pension Dollars?

The Canada Pension Plan Investment Board (CPPIB) is the group of professionals that handle the investing of close to $370 Billion of Canadians’ future pensions. It started to invest in 1999 and is one of the ten largest pension funds on the planet. The cost of running the CPPIB is roughly 31.5 basis points, which means 0.31 cents of each $100.00 of invested money.

The CPPIB’s goal is to “maximize returns without undue risk of loss.” In other words, their goal is to take the cash that came off of your paycheque and to invest it in excellent companies, real estate deals, and other investments from around the world – so that your money grows over time without taking on too much risk. It’s important to note that the CPPIB is legally required to act in the best interests of contributors and beneficiaries. (Us!)

The Canadian government does not control the CPPIB. While the Board is accountable to government-made laws and policies, the government does NOT choose any of the investments that go into the fund. The model guarantees that the investments are made with the goal to grow our money, and not to fund government spending projects or other politically-motivated endeavours.

Where does CPPIB Invest?

I bet that you didn’t know that Canadians indirectly benefit from the types of investments CPPIB makes because those investments contribute to the sustainability of the CPP. Some of those investments include Canada’s big banks and leading renewable energy companies – but also large chunks of a bank in India, the world’s most valuable technology companies, and even Warren Buffett’s company: Berkshire Hathaway.

Add to that, the massive amount of real estate that the CPP is invested in, and you might start to feel like a pretty big deal!

The truth is that most Canadians probably have no idea that the money that comes off of their pay cheques goes to purchase everything from shopping malls to shares of major international banks and toll roads – but they get to enjoy the benefits of these investments.

The current investments that the CPPIB has placed our pension fund money into can be summed as:

  • Public Equities: 37.7%
  • Private Equities 20.9%
  • Fixed Income*: 18.1%
  • Real Assets**: 23.3%

*Fixed Income consists of government bonds, credit investments, cash, and absolute return strategies, less external debt issuance.
**Real Assets include toll roads, shopping malls and office buildings.

Overall, the CPP’s investment return goal (according to the Chief Actuary of Canada) is to make excellent investments that grow our money by 3.9%, plus the rate of general inflation (often referred to as a “real rate of return”). Over the last ten years, in a period of growth for most of the world, the CPPIB has managed a 10-year annualized net nominal returns of 9.1%.

Will the CPP Still Be There for Me?

Yes!

A lot of people see yearly government budget deficits and worry that they will not receive a CPP payout when their time comes but the CPP is on solid ground.

In 2016 the Chief Actuary in Canada (the smartest person in that uber-smart math class you avoided in university) stated that the plan was sustainable for at least the next 75 years based on current contribution rates and their conservative real rate of return projections.

It’s true that it’s impossible to account for all variables. In theory, stock returns could dip well below their historical norms for a protracted period, and Canadians could decide they don’t want to increase their contributions to make up for it.

That said, a lot of smart people that get paid to track this stuff are as certain as possible that the CPP will be there to support Canadians for many decades to come!

Print Friendly, PDF & Email

7 Comments

  1. Dale Roberts on January 2, 2019 at 7:53 am

    Great post Robb. I can access CPP in less than 4 years. Yikes. Of course the number say I should likely wait until 65 or beyond. We’ll make that decision when the time comes and we run the numbers, and no the income situation brings at the time. I have no idea how that might look from writing income to real estate to downsizing the home.

  2. Richard Rémillard on January 2, 2019 at 8:49 am

    What happens if you are already collecting CPP but then start working again as a salaried employee and both you and your new employer are taking off deductions for CPP from your paycheque? Thank you.

  3. Ian lewis on January 2, 2019 at 9:47 am

    I don’t think all the CPP contribution are invested. I think most of the money going in is used to make the payments to existing pensioners. Only Part is invested to ensure payments can continue when more people are retired and new contributions are not enough to make the payments.

  4. Potato on January 2, 2019 at 10:16 am

    Hi Kyle, it looks like you’re mixing today’s dollars and 2025 dollars for the increased limit portion of the CPP enhancements: “This second tier will cover the equivalent of $55,900 to roughly $83,000 in today’s dollars.”

    It’s a 14% increase, which the government’s announcement unhelpfully put in 2025 dollar terms in their backgrounder. So it will cover the portion of income between $55,900 and $63,726 in 2018 dollars.

    PS, for those looking to calculate their CPP with the new changes, I’ve updated the spreadsheet with 2019’s YMPE figure here.

  5. Ben on January 2, 2019 at 12:58 pm

    Thanks for posting! Rob Carrick recently wrote about the CPP enhancements, and included a link to a calculator (cppenhancement.ca). Based on the calculator, I expect an IRR of 7% on my increased contributions. Not bad for a ‘low risk’ investment!

    For comparability, I’m expecting 9% IRR on my full-time DB pension contributions, 5% on my part-time contributions, and 8% on my wife’s DB pension contributions based on the pension formulas.

    I wonder if you can comment on the risk of corporate DB pensions compared to CPP? Given the Sears fallout and the general shift by employers away from DB plans, it seems like a good idea to have some personal savings as well.

  6. Colin R on February 24, 2019 at 10:16 am

    Interesting article but not sure you adequately explain where all the contributions go? As you state I’ve never bothered to look at my account in any detail until I’m just about to retire – so after >40 yrs of max contributions totaling $1.45 M – w/out any interest. Such a sum in a pension account would generate approx $85k/yr not just $13ky/yr – so where does the rest of the $$$$ go?

    • Kevin on May 21, 2019 at 11:29 am

      You may be confused as to what your actual total CPP contributions were.

      If we were to use the basic formula of the 2018 year of max contribution of $2593.80, at lets say 40 years of making over $56,000 per year, your total contribution would be slightly over $100,000 in your lifetime. If you worked from the time you were 18-65, and maxed your contributions yearly (which is unlikely, but possible), you would be invested for less than $125,000. These are inflated numbers, as for 47 years you would not be paying the current (2018) maximum contribution of $2593.80.

      Considering their targeted returns are 3.9%, and that this fund has to be sustainable, I would say Canadians are – generally speaking – doing ok with CPP.

      The downfall is that you get out what you’ve put in, and a lifetime of low income earning won’t see anywhere near a maximum payout in retirement.

Leave a Comment