How Much will/should the CPP be Paying You When You Retire

In the long run, anytime the government over promises, but under charges, you can expect there to be some blow back.
    Right from the get go, the original plan for the CPP was destined to fail. A combination of miss use of the surplus funds, lack of contributions vs the payments that the first retirees received, a lack of knowledge of demographics and a lack of political will kept the CPP from becoming a sustainable pension plan for the first twenty years.
    For the first twenty years, the combined contribution rate was only 3.6%. The contribution rate grew slowly usually by 0.20% a year until 1997 when the 6% combined contribution rate grew to a 9.9% combined rate by 2003.  For the first time ever, the retirees the past few years and all future retirees will get a monthly pension payment that would be considered below their value, when you add up their CPP contributions made and it will only get worse the younger you are.  The worst part is, the retirees that didn't get a chance to vote against the original unsustainable plan were not even able to vote for a more sustainable and fair pension plan.
    I can't even imagine the up roar if a nursing, teaching or any other government pension plan promised to pay what the CPP is going to be paying their future benefactors and was told that some provinces were thinking that the solution would be to increase their contribution rates.


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Credit Card Nerd Math

Below we have a chart displaying your year of retirement, the average amount you would have paid into the CPP based on your final 40 years, your inflation adjusted lifetime contributions and what real rate of return you would need on your CPP contributions in order to buy an equivalent annuity.
    The annuity was bought at the age of 65.  We have you as a married couple and the male was primary holder.  A female was used as your spouse and there was a 60% annuity benefit to the spouse upon your death.  The annuity payments also increased with the cost of living.  To buy this annuity with a $1093 monthly payment, it would cost between $263,587 and $280,608.  We are going to use $280,000 as the cost of the inflation indexed annuity.
    For the chart below, we removed the remaining years before your final 40 years of working.  Your top forty years of contributions are used to determine your CPP payout.  We decided to remove the additional years of CPP contributions, and any contributions that were collected from someone that passed away before retiring.  We put those payments aside to more than cover the approximately 12% of benefits that is paid out to disability and death benefits.  We also assumed that everyone retired at the age of 65.  Basically we stack the deck in favor of the CPP being a great return on investment.



CPP Real Rate of Return on Contributions by Age of Retirement

Year You Turned 65

Average Contribution Rate

Cumulative Annual Salary Worth of Contributions

Real Annual Rate of Return

1976

3.6% (10 years)

36%

11.15%

1986

3.6% (20 years)

72%

8.59%

1996

3.9667% (30 years)

119%

6.67%

2000

4.3% (34 years)

146.2%

5.85%

2004

4.676% (38 years)

177.7%

5.07%

2008

5.2525%

210.1%

4.37%

2012

5.8825%

235.3%

3.89%

2016

6.5125%

260.5%

3.46%

2020

7.1425%

285.7%

3.05%

2024

7.7725%

310.9%

2.68%

2028

8.3975%

335.9%

2.33%

2032

8.9575%

358.3%

2.04%

2037

9.545%

381.8%

1.74%

2043+

9.9%

396%

1.57%


The Canadians that will get the least amount of benefit for each dollar paid for their CPP contributions are those that are single males that are currently 36 years old or younger and have the same wage (inflation adjusted) from age 18 to age 65.  On average the real return needed to buy an equivalent indexed annuity for a single male would be less than 0.43%.  ($5,088.60 x (65 - 18 years) x (100% - 12% for disability and death benefits)) - $232,717 annuity = $22,252.51, if you use a compound investment calculator, the rate of return would be less than a 0.43% real return.


Can't Turn the Clock Back

For the first twenty years, the combined contribution rate was only 3.6%.  The contribution rate grew slowly usually by 0.20% a year until 1997 when the 6% combined contribution rate grew to a 9.9% combined rate by 2003.
    Below we have what your monthly maximum CPP payment would be based on the year you turned sixty-five, if it were based on actual contributions.  We ran the results on two investments with a 4.47% and a 3.3% real rate of return.  Contributions were added at the end of the year and compounded annually.  The contributions were then used to buy the annuity that was previously mentioned.



Maximum CPP Payment if Based on Actual Contributions (2016 Dollars)

Year You Turned 65

4.37% Real Return

3.3% Real Return

1976

$88

$84

1986

$224

$200

1996

$475

$398

2000

$648

$527

2004

$876

$692

2008

$1,093

$851

2012

$1,225

$953

2016

$1,356

$1,055

2020

$1,487

$1,157

2024

$1,618

$1,259

2028

$1,748

$1,361

2032

$1,865

$1,451

2037

$1,987

$1,546

2043+

$2,061

$1,604



CPP Max Payment Step-up Approach

There is about a 0% chance that the CPP will change your monthly CPP payment and factor what the estimated payment would be based on your contribution rate and how long you contributed for, and it's a good thing too.  The retirees that turned 65 in the 80's and the late 70's, were the ones that fought against Hitler and his army.
    Below we have a step-up payment chart.  The expected rate of return is based on a 4.37% real return, which is the rate of return for those that retired in 2008.  The base CPP payments would be the expected monthly payment from the base year, which would start off as eight years ago.  Anyone that is 73 years or older would get the base CPP payment.  All other retirees would get the base payment plus 20% of the difference between the base payment and what your expected monthly payment would be based on your contributions.  For example; someone that is turning 65 in 2016 could get $1,093 + ($1,356 - $1,093) x 20% = $1,146 a month.  Every year the base payment would increase to the expected monthly payment (in 2016 dollars) from the previous base year plus half a year (every two years, the base year would move up a year).


Maximum CPP Payments Annual Step up Method (2016 Dollars)

Year

Max CPP Payment (Year you turn 65)

2016

$1,093 (2008 or earlier)
$1,146 (2016)

2020

$1,159 (2010 or earlier)
$1,198 (2016)
$1,225 (2020)

2024

$1,225 (2012 or earlier)
$1,251 (2016)
$1,304 (2024)

2028

$1,291 (2014 or earlier)
$1,304 (2016)
$1,382 (2028)

2032

$1,356 (2016 or earlier)
$1,434 (2028)
$1,458 (2032)

2037

$1,422 (2018 or earlier)
$1,487 (2028)
$1,535 (2037)

2045

$1,553 (2022 or earlier)
$1,592 (2028)
$1,655 (2043+)

2055+

Flat Sustainable CPI Rate



CPP Max Payment 1.5% Step-up Approach

Below we have a step up approach that raises the CPP maximum for all retirees by 1.5% (2016 dollars, aka adjusted for inflation) each year.


Maximum CPP Payments with Annual 1.5% Step-up Method (2016 Dollars)

Year

Max CPP Payment with 1.5% Annual Step-Up

2016

$1,093

2020

$1,160

2024

$1,231

2028

$1,307

2032

$1,387

2037

$1,494

2045

$1,683

2055+

$1,953 (Back to CPI Rate)


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A Wake Up Call

Anybody that hasn't yet retired, could be getting a raw deal when compared to independent pension plans for government workers.  That is generally what happens when the people ahead of you get a bargain.
    Today a nurse that earns $54,900 can have a combined contribution rate of (7.9% + 7.9%) = 15.8% ($8,674.20 annually), work for 40 years, and expect to have 60% or their wage paid by their pension plan.  That is a pension benefit of $2,745 a month.  That same monthly pension payment, if it was a CPP payment that a thirty-five year old is expected to get, at the same contribution rate would be $1,744.38 a month or just under 64% of the pension payment.
    The above nursing pension seems unsustainable, but it is not.  Making annual $8,674.20 contributions and compounding it for forty years, you would only need a 3.3% real rate of return inside the pension plan to buy the equivalent annuity.
    Now I am a bit depressed, not only will I be expecting a subpar return on my CPP contributions, and any increase in the payment rates before I retire will further reduce my CPP monthly payment.  That is bad enough, but not knowing your expected CPP payment, will make it hard to plan for retirement.  The estimated value of my contributions and the current maximum payment, (depending on the realised real rate of return) can be as much as 47% to 89% more, if not due to ongoing legacy costs.  Not knowing the timeline and how much the CPP payments will increase (in 2016 dollars), makes it tough or near impossible to figure out how much savings is needed to plan ahead for retirement.


CPP Historical Contribution Rates