Is CPP a good deal?

Canada Pension Plan is one of the cornerstones of the Canadian retirement benefits.  Everyone that works must contribute to CPP and as a result everyone is eligible to receive a retirement benefit from CPP.

How much you get in benefit depends on how much you put into CPP.  For more details on how much you will get from CPP, check out one of my previous articles HOW MUCH WILL YOU GET FROM CANADA PENSION PLAN?

Lately there is lots of talk about enhancing CPP because of the serious retirement gap.  Is this really a good deal?  Let’s take a look at the current CPP system and see if Canadians are getting value for their contributions.

Going back 40 years

Let’s say Bill started working 40 years ago.  Back then he only contributed 1.8% of your pay to a maximum of $135.00.  From this point, every year his contribution amount would have gone up because of inflation adjustments and increases to the contribution rate.  Over the course of 40 years, he would have contributed $44,692.80.  Bill’s employer would have also matched his contributions.  Today, 40 years later, Bill would be eligible for a CPP retirement benefit of $1092.50 per month or $13,110 per year.  Is that good or bad?

If we look at it from the perspective of how much money would we need today as a lump sum to generate an annual income of $13,110 per year, we can estimate that we would need somewhere between $230,000 and $330,000.  Let’s say Bill could have taken his CPP contributions along with the employer contributions and invested it himself he would need to earn somewhere between 6.5% and 8.8% to achieve the $230,000 to $330,000.  If Bill did not have the employer contributions, it would be very difficult to replicate a pension of $1092.50 per month.

Related article:  How to calculate your CPP retirement pension?

Based on this math, CPP is a pretty good deal for employees.  Especially if you add in the fact that the pension is indexed and that CPP is not only a retirement pension but a disability plan as well as a life insurance benefit.

What about the next 39 years?

Today, employees contribute 4.95% of their income up to a maximum of $2,544.30 per year (2016).  This is figure is based on the yearly YMPE which is $54,900 for 2016.  The YMPE goes up a little each year as a result of being adjusted for inflation.

In addition to the employee contribution, the employer also contributes $2544.30 per year making the total annual contribution $5088.60.

Let’s say inflation runs at 1% per year for the next 39 years.  That means your contributions to CPP will increase every but so will the monthly CPP retirement benefit.  Based on these assumptions, your total contributions over the next 39 years would total $120,631.  Your monthly CPP retirement benefit will be projected to be $1599 per month or $19,188 per year.

If we use the same math as we did in Bill’s example, we would need somewhere between $320,000 and $480,000 to generate that income.  If we were able to take our CPP contributions along with the matching employer contributions and invest that money ourselves, we would only need 2% to 3.5% to grow it to the $320,000 to $480,000.  I know a lot of people would look at this and suggest they had a good shot at making more than 2% to 3.5%.

Because of higher contribution rate, the math of CPP is not as attractive as it was for the past 40 years. Regardless of the math, we can’t opt out of CPP anyway as it is a mandatory plan.  The math does suggest that moving forward CPP an OK deal.  You can argue the pros and cons either way.

More than just math

The best part of CPP is your employer is required to match your contribution.  If you were to invest only your portion, it would be very difficult to match the CPP retirement pension.  For self-employed people like me, we pay both the employer and the employee contributions and if I I were to invest that money I would not need a very high return to equal what I will get from CPP 40 years later.  One can argue that the CPP program is not great for self-employed people that pay both the employee and employer contributions.

Remember that CPP is a guaranteed lifetime pension.  You get a cheque for as long as you live.  And if you have a spouse, your spouse may get part or all of your CPP in the future.

Lastly, CPP is an indexed pension which is very hard for any of us to replicate on our own.  The math I have given here largely ignores that which means the numbers argue more in favour of the CPP program.

The bottom line

Like any workplace savings program, if the employer is going to make contributions on your behalf, then you can’t go wrong.

With regards to CPP, the employer‘s matching contribution make CPP a wonderful program and every employee should vote to enhance CPP.

Related article:  Don’t miss out on FREE money

The employers perspective is a little different.

Enhancing CPP means employer contributions will go up as well. This can have an effect on business.  I work primarily with companies and organizations that have pension plans or Group RRSP plans with some form of employer matching or contributions.  These companies are already doing their part helping employees with their retirement savings.  If the government enhances CPP, maybe they should give employers with a pension plan the option to opt out of increased CPP costs.  Or better yet, maybe the government should reward, encourage or help companies to put more Group RRSPs or pensions with employer matching.  My guess is many companies would prefer that over being mandated to enhanced CPP.

What do you think?

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

49 Responses to Is CPP a good deal?

  1. I just hope they will give self-employeed people the chance to opt out. We get burned by CPP already. We’ll get burned even worse by an enhanced CPP.

    • I have worked in public accounting for more than 30 years. On the surface you are correct but my experience is that most people want to increase their standard of living rather than but funds into RRSP’s. Yes they pay lip service to savings but it’s always next year. Better to have forced savings plans such as CPP. What I really look to in my retirement is to have several sources of income. I mean CPP, dividend income, rental income and RRSP income. If that combines to more than 100K you are not eligible for Old Age Security.

      • Fine but we should have the choice to be in our out and not being a forced “tax” off my paycheck. I can guarantee you I will be screwed by the govt when my time comes to get my CPP.

        I only trust myself to take care of myself.

        • Mike,

          Consider the CPP safety net as a part of OAS & GIS. Also it’s part of our society, like paying school taxes even when you don’t have kids.

          It’s like the health care system in Canada: it’s a safety net that you can supplement with out of province/country insurance.

          If your investment skills are as you seem to indicate, you can retire early, reduce your CPP “screwed” money and spend it all at a Casino one night.

        • Financial advisers have long used the scare tactics that CPP OAS/GIS will not be there. I heard the same thing in my 30’s. It is there for me and will be there for you. If the government pension system failed there would be a total economic collapse and your investments wouldn’t be worth squat anyways.

  2. Jim,

    Good article.

    For self-employed, CPP is a very poor investment.They can opt out by incorporating their business and then paying themselves dividends. I opted out of the CPP 15 years ago. (There were other options back them, as well.)

    Ed

  3. The money employers paid into the CPP is compensation. If employers didn’t have to contribute into CPP maybe they would offer higher salaries. This means that even though it is coming out of the employers pocket, it is the employee who actually pays for it.

    Just the same as the CPP is not a good deal if you are self employed, I argue that it is not a good deal even if is coming out of the employer’s pocket.

    • That’s pretty naive. Only for a very small proportion of employees would an employer automatically and in a timely manner offer extra pension benefits, especially with automatic inflation increases and no negotiation. And those lucky employees whose skills are in greater demand than supply change over time. So you might be one of the lucky few now, but next year, who knows? Talk to folks who were computer hardware engineers 15 years ago, programmers 8 years ago, and now oil patch workers. Even those who still have a job don’t have the leverage to negotiate raises for inflation.

  4. The biggest problem with the CPP was the poor set up initially. The first years of contributions were not nearly enough to support the plan. The contributions were then ramped up to pay for this.
    As a result we can later entrants to the plan paying for the benefits of the first group.
    This would be a major reason to keep a limited involvement of government in our pensions – they don’t know what they are doing. Are you listening Ontario ? Keep improvements to CPP to a modest amount.

  5. Due to extended life spans the feds are looking for a way to enhance the plan without adding to the current burden. A good start was allowing enhanced benefits by delaying CPP until 70.
    Currently contributing the maximum more than 39 years to CPP is lost to the individual.
    To provide enhanced benefits to those who contribute past the 39 years would be an easy enhancement.

  6. In my case, I am just your everyday worker and when I look back, I now consider CPP as a good investment. I was upset many years ago with the CPP deduction from my paycheque but now am glad it was as it forced me to save(pay myself first as per Wealthy Barber). At the age of 20 that money would have gone to beer and pizza, not my retirement fund. So I will not crunch the numbers because the number would probably be zero if not for forced savings. Now I am projected to get the annual cpp max payment. With the economy in a rollercoaster mode, the more monthly guaranteed income, the better I feel about my financial future.

    • Well said Arthur.

      I don’t know what percentage of people receive CPP/OAS and some GIS but I’m 100% sure that they would have zero CPP if employee/employer contributions had not been mandated during their working years.

      What would the cost be to taxpayers if they had not been forced to save and make the contributions…… more GIS!.

      I expect less than 5% of all people, yes including self employed people (and those who failed at it) would have steadfastly made the contributions to create their own pension plan. Arthur at age 20 was the norm and many people never financially matured.

    • I agree with Dave: the greatest attribute of the CPP is that it is mandatory because most people don’t have the discipline to stick with a retirement plan for decades.

  7. Hi Jim, I am one who, although I worked my 40 years full-time, did not make enough at my jobs to contribute the max CPP so therefore will not receive max CPP pension. I have, for a long time, advocated for an enhanced CPP plan that would allow me over the years to voluntarily contribute more to my own “CPP pot”, thereby boosting my monthly pension. I really am at a loss as to why this idea has fallen on deaf ears for so long. There has been a bit of chatter lately about such a possibility but I am now very close to retirement age so it will not benefit me but hopefully will benefit the younger ones. I did put by a little each month into RSP’s but even with trying to be diversified and balanced those “savings” were investments and they have had their ups and downs. CPP is guaranteed (so far). I am curious as to what your thoughts would be on the idea of being able to voluntarily contribute to CPP. Every little bit more that is guaranteed each month is a plus I think. Thanks Jim – love your website!

    • Deb,

      One advantage of such an option is that you benefit from the investment expertise of the CPP managers.

      But on the other hand, there are so many investment products available from any discount broker that you could supplement you retirement capital yourself at returns comparable to the CPP investment board.

      Look into Closed-End Funds that pay cash. The advantage of cash is that you can use it to re-invest at zero cost from most discount brokers or the management company, or spend or diversify. Also once you have the cash, fluctuations like we’ve witnessed in 2016 are not as devastating because you use the cash not the actual capital.

  8. I agree with Dave, Arthur and Claude. People do not save enough for retirement.
    Also, there are the additional benefits besides the retirement part, the benefits for the surviving spouse, the children of the deceased contributor or the disabled pensioner, the disability pension and the death benefit (as meager as it is, with planning, people could reduce the expense of the ‘final affairs’.) Plus there is the credit split and the pension sharing.

  9. No – I don’t think the CPP is a good deal mainly because the capital disappears when the person dies – even worse if you die before collecting anything you don’t even get the death benefit.

    Had the individual put aside the CPP deductions as per Jim’s example at least that sum would be in the estate.

    And as to making it mandatory and the excuse for that being that individuals do not have the discipline – well are we not dealing adults who are responsible for their actions? or are they really just aged teenagers with no self discipline? “oops I screwed up now take care of me? oh and its not my fault that I screwed up!” grow up people.

    • gcai

      I won’t debate you on whether the CPP is a good or bad deal, but you have your facts wrong about the death benefit.

      CPP death and survivor benefits are payable regardless whether the deceased was receiving CPP at the time of death, as long as he/she made sufficient contributions.

      • you can still get the cpp if a person has passed away but it has to be a spouse or child, what if they were not married but living with sister, I have to pay the taxes on the death benefit and any income tax he owes for last year , but who receives his cpp for his 30 years of working

    • gcai,

      2 questions:
      a. what is the average return of your own personally administered retirement capital?
      b. what if you outlive your retirement capital?

      I see the CPP & OAS as buffers against unpredictable events and they supplement my personal retirement income (not a pension plan funded by employers or taxpayers).

      When I die, my CPP & OAS plans also die. So does the income from my personal plan; only the capital goes to my estate.

      If the CPP & OAS continue eternally, who pays for it? If there’s a lump sum when you die, how much is it?

      The CPP & AOS plan are what they are for the masses.

    • Peter,

      The demise of the CPP rumour is at least 25 years old.

      I used to hear it from financial advisors who used the lie to force prospects to commit to give them money so they could get their commissions.

      CPP, OAS & GIS are safety nets. Unfortunately, too many people consider them enhanced lifestyle money at retirement and don’t do anything else, or not enough, for their retirement needs in their earning years.

  10. I doubt many working people take home much more than the CPP/OAS pays at 65. Consider a couple getting max cpp and oas, which is about $1092 and $570 each for a total of $3324/mo or 39,888/year. After taxes, about $39,000/year. Once retired, you don’t have CPP, EI, Mortagages, Child expenses, Retirement saving to payout. With just the government pensions, you may actually have MORE money at 65 than you did when working!

    • John,

      Single people max out at $1,662 according to your figures, if, if they contributed the maximum throughout their working years.

      This was not my case; but I didn’t have any debts when I retired and that was key factor in my financial survival.

      Bear in mind that CPP and OAS are indexed at some fictitious minimalist rate that is nowhere near inflation.

      At some point you will need to find a way to increase that income because its buying power is being seriously eroded by the real rate of inflation.

      • They are indexed at the statcan CPI rate, http://www.statcan.gc.ca/pub/11-402-x/2012000/chap/prices-prix/prices-prix02-eng.htm

        It does seem fictitious when compared to my local rate of inflation and consider that a retiree’s personal rate of inflation is likely very different than when working.

        Here are the %’s from the link above:
        Food 15.99
        Shelter 27.49
        Household operations, furnishings and equipment 11.55
        Clothing and footwear 5.31
        Transportation 20.60
        Health and personal care 4.95
        Recreation, education and reading 11.20
        Alcoholic beverages and tobacco products 2.91

        I like that 2.91%, if one smokes a pack a day and drinks a 6-pack that’s almost 40% of your CPP/OAS!!!

    • Until one dies – then income can be significantly cut. See the conversation lower in the column regarding survivor’s benefits.

  11. Thanks for the breakdown Jim. I just incorporated and was wondering if I should even bother looking into CPP. This article made that decision much easier. Looks like there is no point at all except for mandatory matching for employees – of which I don’t have right now.

    I’ll just take care of the retirement investing myself.

    • Stephen,

      Have you considered diversifying the investment expertise between yourself and the CPPIB?

      You could invest equally in the CPP as well as personally and then see if you match the CPPIB.

      Whatever your business enterprise, will you have time to devote to your investments? Should you concentrate your efforts on the business?

      I was self-employed for a while and I spent all my time on the business even if I was interested in investments.

  12. Given the retirement/pension insecurity many Canadians are about to face or will soon face Jim, I say on the whole as well as for many Canadians like me, CPP may be the only professionally-managed fiscally-healthy defined benefit pension plan still available to all working Canadians but most especially for those like me who worked in the non-union private sector, they are ever likely to receive for the life of their retirement that also happens to be fully indexed annually for inflation! Now the real question as you indicated Jim, is or will CPP payout levels be enough going forward or not and if not, is CPP in need of enhancement!? And after reading your go forward analysis of CPP Jim, my own answer is a resounding YES, but before contributions to CPP are increased from both employers/employees, I strongly think the government first needs to consider enhancing CPP payouts by finally making them tax-free.

    • Rob,

      CPP contributions are deducted from your paycheque; you don’t pay income tax at that time.

      Also, CPP income is offset by personal exemptions on your income tax report. It’s a wash, therefore tax free.

      I personally don’t think employers should pay into the CPP. I think individuals should be responsible for their own retirement plans and companies should use their money for expansion and operations; it could be voluntary like some companies contribute a percentage of an employee’s contribution to their own RRSP.

      The CPP is a safety net, similar in a way to EI, medical insurance premiums or out of province medical insurance premiums or car insurance premiums. If you never had a claim, you were out of pocket and you didn’t get a refund.

      When I was in my fifties, I realized that the CPP benefit was too small to live on. I then considered it as a buffer for exceptional expenses and excluded it from any of those calculations advisors use. If I didn’t have a need for emergency funds, I then would have a bonus that I could choose to splurge or bank.

      If you benefit from the CPP for 2 years or 20 years, your “premium” was either low or high and you aren’t eligible for a refund.

      • The tax credit on CPP deductions is at the lowest level of 15%, not fair when your marginal tax rate is much higher but that goes for all the tax credits.

      • Okay Claude, but according to the table here at http://www.taxtips.ca/nrcredits/tax-credits-2015-base.htm, personal exemptions other than the basic personal exemption I believe we all receive, must be qualified for and are wholly dependent on an individual’s own personal income tax profile/circumstances and I submit to you, may NOT be sufficient enough for everyone receiving CPP income at various amounts to be a “wash” of CPP taxes paid.

        • Tax on CPP is not a ‘wash’, it is fully taxed but for many couples over 65 the total federal tax credits of $36,720 will be sufficient to offset their entire income.

          • Thank you for confirming John H that tax paid on CPP may NOT always be a “wash” as Claude claimed and I suspected. So what are your thoughts John H on my idea to further enhance CPP benefits by making payouts tax free?

          • Tax free CPP will never happen and would not be fair as high income pensioners should pay some tax. I would like to see much higher tax credits for seniors and a reduction of that ridiculously high OAS clawback threshold. Right now it STARTS clawback at 72K and reduces OAS to 0 at 117k. IMO, Anyone with income over 60K does NOT NEED OAS.

  13. If a husband and wife are both receiving CPP and one dies does the other receive the full CPP that was allocated to the dead spouse as well as continue with her/his own allocation?

      • Cindy

        As an example. My brother was receiving 438 per mth from CPP which he had started at age 60. His wife died last year and her age 65 CPP would have been about 357.

        My brother received about 156 per month so he now receives about 594 per mth total. He received only 43% of hers.

        Each situation is different but the formula means if you are receiving your own CPP and you then get the survivor benefit …. it will definitely be less than 60% of the deceased’s age 65 pension amount.

        • Then this shows a sad state of affairs- a couple may be relying on both receiving CPP as the foundation to retirement, but upon the sad demise of one – the other is left with a significant reduction in income. Better that they had controlled their own funds.

          • Cindy,

            The CPP is a safety net, not a financial panacea.

            You said “Better that they had controlled their own funds.”; that is 100% right. Everybody can plan for that with a life insurance policy or by managing their own portfolio.

            Based on the comments on this blog, there must be a seriously misleading campaign somewhere that the CPP will give your the Life of Riley when retired even when your other half has deceased.

  14. Anecdotally, in my practice, many business people have successfully invested without the benefit of CPP. However, you must be religious about doing so and too many, sometimes just because of economic conditions or sickness and sometimes because of a lack self discipline or a bad choice of investments, have not had adequate funds at the intended time of retirement. One comment I remember is my “retirement at 55 is now retirement at 75.”

    Another advantage of the CPP is that conditions have improved for the elderly since 1966 when the plan was introduced. In 1966 60% approximately of seniors (mostly female) lived below the poverty line. Now it is less that 10%. Does anyone remember the stories of elderly ladies eating cat food? We now have a relatively well off population of seniors as most everyone has a basic income, if not large, and the CPP serves as a base amount if they have some savings.

    Even if you are not concerned about others, we all benefit as the better off and healthier elderly contribute to society instead of being a drain.

  15. CPP is not a good deal and you should be able to opt out.

    1. You don’t know how long you’re going to live so you might contribute the max for 40 years and then your estate get nothing if you die young.
    2. The returns on it arnt very good. If you invested only your half and not even your employers match you could have more money than this program pays you, just by earning the TSX average.

    Instead the government could allow you to contribute the money you were putting into it into your own RRSP or LIRA if you want to manage it yourself instead, and force your employer to match it like they do now.

  16. My biggest gripe with the CPP is its lack of flexibility.

    If I want to work really hard for a few years so I can retire earlier or take a longer sabbatical, CPP will penalise me by not counting these years – on the flip side, grinding consistently on a lower salary is rewarded.

    I came to Canada at age 27 after university. CPP starts counting at 18 and might recognise other countries’ retirement contribution plans, however as a full-time student those are mostly negligible compared to people who take up crafty professions such as plumbing or woodworking. If I want to retire at the earliest opportunity at age 60, it’s working for all the remaining years without any further break or getting the pension downgraded.

    That’s what I like about RRSPs and TFSAs: I can save until I’ve got enough, then retire or semi-retire, and if I want, go back to work to replenish those retirement savings some more. No age limits, no unstoppable payouts, no telling of how long and how hard to work, just saving and getting back what I saved with interest.

  17. The government just wants you to pay more to the nursing home you are going to end up in. Currently most pay 80% of their income which usually only covers 1/3 the cost of a government subsidized nursing home.

  18. Re the survivors benefit, let me enlighten you all.

    You only receive the survivor benefit until you start collecting from myour own CPP,
    They will top it up to the max, in my case I receive a survivor benefit of $ 10.00 only, . because I also worked for 40 years and contributed to my own CPP plan.
    What happened to all the contributions that my husband and his employer made???
    It’s a crime!!! .and not many people are aware of this!!

    • They go to provide pensions to people who live longer than their own contributions could possibly provide.

      I agree that the survivors benefit is disingenuous as all the literature/website/statements say *may* provide a benefit of 60%. The CPP should provide more detail in their literature and statements as to how the amount is arrived at. Sure they use “may” but it lacks the candour and openness people expect and should receive from – their- pension plan. The formula is goofy and the combined maximum rule is offensive and discriminatory to people like you and indeed anyone who having contributed receives their own CPP.

      • to further clarify…

        If Birgitta had never work and did not have her own CPP she would have received 60% of her deceased husbands’ CPP but because she worked and contributed she gets next to nothing of his. I say discrimination!

  19. Yes, ..IF..IF ..IF you are very financially disciplined and don’t allow life events and desires to deter your retirement plan you can do a lot better with the money.

    In 1977 “Doug” thought I will invest each year for 39 years, an amount equal to the maximum allowed employee and employer CPP contribution. Doug decided to open a self directed RRSP account and invest strictly in TD Bank common shares, which pay dividends. The dividends will be automatically invested in more TD shares (DRIP). At the end of 1977 Doug put $302.40 into the account and bought TD shares. The following year, 1978, he added $338.40 and bought more shares. At the end of 2015 Doug made his final contribution, $4959.90 and share purchase. This resulted in 39 years of max contributions to his RRSP account. Doug’s contributions to his RRSP, like his contributions to CPP were tax deductable each year.

    In March 2016 Doug turned 65 and he compared what he was to receive from CPP versus what he had available in his RRSP account.

    At the end of April 2016 Doug will start receiving 1092.50 per month (taxable) for the rest of his life from CPP. It will cease at his death. However, if he has a spouse they would receive no more and likely less than 60% of Doug’s CPP amount. Over the years during his working life Doug had received some inherent benefit, from his CPP account for disability protection (insurance) for himself and a life (insurance) benefit to his spouse in the event of his premature death. But after his and his spouse’s death there is no pot of money left. There is very little risk that Doug would ever, not receive his monthly CPP payment and he will receive annual CPI increases on his pension going forward.

    On March 18, 2016 he would have 20532 shares of TD Bank valued at $1,147,926 in his RRSP account. TD shares presently pay dividends of $2.20 per year, so effective April 30th Doug, could start withdrawing $3764.20 per month (taxable) from his RRSP account without reducing the number of shares he holds. While it is possible that dividends may not be paid at some point that is extremely unlikely. In fact the probability of them increasing at a rate much greater than the CPI is strong. The value of the shares will fluctuate. After age 71 he would have to start withdrawing money from his RRSP in accordance with the RRSP rules. Upon his death the RRSP could be transferred tax free to his spouse who could continue to receive the full amount of monthly dividends. After the spouse’s death all TD shares would be sold and taxes paid before the remaining amount would be available to their beneficiaries.

    Why did I choose TD Bank for my example? Because I am very familiar with it as an investment and it has a calculator on its investor website which allowed me to complete the 39 individual calculations necessary to get the numbers. Yes of course other investments could be used which would yield different results. The 39 yearly maximum CPP amounts were obtained from the DRPensions.ca website… with thanks.

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