CPP expansion will do little to boost rate of return

By Staff | July 14, 2016 | Last updated on July 14, 2016
2 min read

Despite an expanded CPP, workers in Canada — particularly younger workers — will still receive a meagre rate of return from their CPP contributions (2.5%), finds a new analysis by the Fraser Institute.

The provinces and the federal government have reached an agreement in principle on CPP expansion. The move will increase mandatory contributions on working Canadians starting in 2019 in exchange for higher CPP retirement benefits in the future. Ratification of the agreement is expected this week.

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“As the provinces and Ottawa seek to ratify the CPP’s expansion, Canadians should clearly understand what they’ll receive in return for higher CPP contributions,” says Charles Lammam, director of fiscal studies at the Fraser Institute and co-author of rate of return for expanded CPP remains meagre.

Under the proposed CPP expansion, Canadians born in 1971 or later can expect to receive a rate of return (after inflation) of up to 2.5% from their CPP retirement benefits. This represents a small increase from the 2.1% rate of return before expansion.

Malcolm Hamilton, a senior fellow at the C.D. Howe Institute told Benefits Canada “the current CPP rates of return are unimpressive.” He adds, “unlike the current CPP plan, the expanded one might need to be fully funded, noting this will produce volatility in contributions and rates of return, but could produce higher outcomes.”

Further, the Fraser Institute notes Canadians who believe the CPP offers a high rate of return often confuse the individual rate of return with the 11.4% average return earned over the past five years by the CPP’s investment arm, the Canada Pension Plan Investment Board (CPPIB).

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CPPIB returns have no direct effect on benefits received by retirees.

CPP retirement benefits are determined by the number of years a person works, their annual contributions (up to a maximum of $5,089 this year, based on earnings), and the age they retire — not CPPIB rates of return.

“Even with the proposed changes to the CPP, the rate of return for individual Canadians remains meagre,” says Lammam. “Therefore, expansion of the CPP cannot be justified by claiming the plan provides a high rate of return for contributors.”

Advisor.ca staff

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.