Canada Pension Plan (CPP) is one of the pillars of retirement income benefits for Canadians. For the past 20 years since I have been in the financial industry, there has always been a perception that CPP may not be there in retirement.
Is the CPP in crisis?
That’s what we’ve been led to believe for the past 20 years but the hysteria about the CPP s more of a myth than reality. Back in 1996 when there was tremendous fear that a looming pension funding crisis might cause the collapse of CPP. At that time, CPP received $11 billion in contributions but paid out $17 billion in benefits, with an asset base of about $35 billion. Unless something was done, the plan’s collapse would be only a matter of time. The solution was to make some significant increases to the contribution rates and the creation of the CPP investment board to allow funds to be invested into market based securities.
CPP has come a long way since then. Today CPP is in a strong financial position and Canadians should feel good about CPP being there when they retire. Here’s some of my thoughts about why I think CPP will be there in the future.
- In 2009, the total assets of CPP sits at about $116 billion dollars and is expected to continue to grow from increased contributions and investment income.
- Back in 2000, The chief actuary of Canada, who reviews the health of the CPP every three years, said in his 2000 report that CPP is sound for at least 75 years. CPP continues to operate on the basis of a 75 year amortization period.
- The CPP reserve fund is segregated from general government revenue. In other words, CPP is a separate pot of money that belongs to all Canadians that have contributed to CPP. All Fund assets belong to CPP contributors and beneficiaries.
- CPP is a pay as you go system. Part of the money that is paid into CPP through contributions is used to fund the money leaving CPP for retirement benefits. If there is not enough money to fund the outgoing funds, CPP can simply increase contribution amounts which has been a significant reason for the growth of CPP in the last 10 years.
- The CPP was reformed in 1997 to stave off a funding crisis. And now, there is a surplus of contributions every year. In other words, there is more money coming into the plan through contributions than money going out as a result of benefits being paid to Canadians.
- CPP is about to undergo some more significant changes to help preserve the longevity of this key asset. I will discuss some of these proposed changes in a follow up article next week.
Despite the good news, it seems that most Canadians still think CPP may not be there in the future. In fact, public opinion research conducted last month shows that almost two-thirds of Canadians are still unaware that the CPP was successfully reformed 10 years ago.
In terms of your own retirement planning, I think you should incorporate CPP into your plans and assume you will get something. The best way to figure out how much is to simply contact Service Canada to get your CPP statement of contributions.
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Regarding the contribution window for the CPP, is there any recognition yet that this window needs to adapt to the current life-span of Canadians? Will the window be extended to 70 or 71 or older in recognition of the extra 30 years added to our lifespan since WW II?
I am one of those boomers who plan to keep working until at least my mid-70s. Yet I spent time out of the paying workforce when younger, working F/T as a volunteer in Africa and later getting graduate degrees.
I look forward to hearing from you on this!
CB
Who know what will happen till I retire. I don’t really believe in such plans.
Hey Ricco, thanks so much man;) Congrats on strtaing your offline marketing business.. I look forward to seeing it blossom.. let me know how it goes and if you need any help at all FOCUS and VISION is all you need.. let’s keep in touch,Blessings,Ontarian
The whole system seems like a bit of a ponzi scheme to me. We are forced to pay and the only way we can perpetuate the scheme is for new blood to enter the system and pay increasing percentages. The founders probably saw that the boomer generation was entering the work force and thought they should take advantage. Now it is my generation that will have to pay for the boomers retirement with increased payments. It will then be my children who must pay for my retirement. I think they should fully capitalize the system, and give people an option of participation, or pay out. We should at least be allowed to direct our own accounts if we are inclined to. Otherwise someone is left holding the bag somewhere down the road
That’s one way to look at it Steve. However, it is important to understand there is a significant surplus in CPP so there is money to sustain payments for quite a while. That being said, the plan requires new money to sustain the long term longevity of the plan. In fact you may not be paying for all the boomers in retirement because of this surplus.
It would be very difficult for anyone or any organization or any plan to accumulate enough money to sustain lifetime payments without new contributions.
The problem with giving people the option to opt out is that most people to not have the self-discipline to save money on their own. In my opinion there is a very small segment of the populations who is in a position to take on this huge responsibility on their own.
I appreciate you sharing your opinions on this matter. More people need to voice their thoughts on this important issue!
Jim
I was married 21 years , worked full time while my then spouse chose
To stay home and raise our 2 children ,
She decided after this time she wanted out of the marriage
Is now. Remarried to someone with an air Canada pension ,
In Ontario canada she is entitled to 1/2 of my cpp credits.
How long do I have to work before I can retire with cpp benefits
And restore max amount of credits .
Thnx Aron
Aron
You will never be able to get a maximum CPP benefit if you’ve now lost 1/2 credits for those 21 years. Your ex-wife may not even use all of those credits, because she may be able to use the Child Rearing Dropout (CRDO) for any of the years when the children were under age 7.
I am currently appealing this issue at the Federal Court level, and would be interested in hearing further details from you by email to:
Dogger1953@yajoo.com.
CPP is not in good form. You stated that it should simply increase payments to it, to provide funds for those drawing from it. This simply increases the debt. Hello that is basic economics. Not a valid arguement.
CPP/OAS should be indexed based on current retirement income. If someone has a great pension, investment income, they do not need CPP/OAS, save it for those who do need it, vis-a-vis our Canadian Social Contract.
I personally do not want to see my tax money used by oldies to travel around the world, buy sports cars and move into $300,000 condo’s – which is where I see it spent right now.
Please do not tell me to put money into RRSPs, as when the mass of baby boomers start to withdraw from their investments instead of adding to it, we will see a huge exodus of investment money and the Investment Sector will deplode, … again…
Many of my friends lost a huge amount of money before and we’ve learned our lessons.
We are due to retire in 20 years or so, we don’t have time to invest the majority of our take-home income in RRSPs hoping that it doesn’t become de-valued again when we are out of the workforce.
Pension Reform NOW!!
C Cusson
BA Pol Sci, Economics, Devt Studies
Business Owner
owns zero RRSPs invests elsewhere
Dear C Cusson
I view CPP and RRSPs as a Ponzi scheme but I dont have enough financial education to know WHAT to do with my money (not that I have a lot) can someone give me some resources, ideas on what I SHOULD invest in?
Thanks,
Nicki
Nicole
Keeping my fingers crossed that Canada Pension Plan stays there till eternity and comes as a support in our old age when we all retire
If you retired from GM after October 1, 1997, you know that your pension option decision time is coming to a close. On June 1, General Motors announced their plan to lessen their pension liability by approximately 26 billion dollars. This leaves you with the power to choose between a one-time lump-sum payment, continuing with your current monthly payment, or taking a new form of monthly benefit. You need to decide which option you’ll go with by July 20, 2012. Before you do, it’s important to understand the complexity of each and every option so that you can choose which is best for you. You can watch this informative video which outlines the three available options by following this link: http://www.youtube.com/watch?v=32ZRne7AoTQ&feature=youtu.be. Additionally, it’s highly encouraged that you seek the advice of a seasoned financial planner.
Hello, I just recently learned that I may qualify for half of my ex husbands CPP benefits while I stayed home raising our two children. Unfortunatley he passed away two years ago,I have had no success in trying to contact anyone from CPP for more information. I am now remarried and my kids are grown,can you shed any light on this situation.I would be most grateful. Regards Corrine
Corrine
You should be eligible for a survivor’s benefit under the CPP. The amount of that benefit depends on a number of factors, including what your husband’s earnings were, your age, and whether you are receiving CPP based on your own contributions.
You can apply at any Service Canada Centre and should do ASAP, as the maximum retroactivity is 12 months.
One aspect of the Canada Pension Plan that is not discussed anywhere on the internet (that I can find) is what led to CPP requiring reforms in the late ’90s.
I had researched this at one time and my recollection is that the CPP had a surplus in the 1970s and provided loans to the provinces to fund infrastructure – particularly roads. Periodically, the provinces would take out larger loans to repay the existing loans and fund new infrastructure. Eventually the loans became too large to repay and were forgiven (otherwise the Provinces could have taxed the provincial taxpayer to repay the federal CPP contributor – not really two entities).
You could argue that the CPP was a flow-through plan and that the expectation was that future inflows would fund outflows – so the surplus was there for the taking. I believe the true issue is that elected officials choose actions that are politically beneficial in the short-term and when this conflicts with the long-term interests of their constituents, they generally choose the short-term political benefit (and are pressured to do so by their colleagues).
Even if the average Canadian is not aware of the details of why their contributions to the plan have escalated, they do share an instinctive knowledge that something in the CPP just doesn’t add up. There is also an intuitive knowledge that entrusting long-term interests to politicians is generally a recipe for disappointment.
This is why Canadians question whether or not they will see a future return on their contributions. Canadians who responsibly contribute to RRSPs are concerned that their CPP earnings will be sacrificed to those who were less responsible (ant and grasshopper parable).