Canadian Savings Rate when you include CPP Contributions hasn't Changed Much in 30 Years

Despite what the media tells you, Canadians are saving the same amount than they did thirty years ago, not including work pensions.  The difference is we are not getting anywhere near the same deal as Canadians did thirty years ago.
    If you were sixty-five years old, forty years ago, you could have paid 3.6% of your salary over ten years and you would have had 25% of your salary in CPP payments for the rest of your life.  Even if you turned 65 in 1986, you would be getting a great deal based on your CPP contributions with only a 3.6% contribution rate over twenty years.  Anybody born after 1978, might need to pay 9.9% of their salary in CPP contributions over forty years to get the same inflation adjusted pay out.  Over the years, this will work out to more than ten times as much as someone that retired in 1976.  If the CPP fund had a 3.3% annual real rate of return on the investments over the contribution period, you would then have a value that is nineteen times more in inflation adjusted terms.


Advertisement

Credit Card Nerd Math

Below we have a chart displaying the CPP contribution rate (we took both your contributions and your employer contributions), the personal savings, the total savings rate and the wage replacement for each year.
    The wage replacement rate was calculated by adding 25% for the CPP payments and the percentage of earning covered by buying an annuity with your personal savings account.
    We used a 3.3% real rate of return (an inflation adjusted return) for your personal investment account.  Using a compound interest calculator we set the initial investment at $0, had annual lump sum payments that were based on the year's personal savings rate and compounded annually for forty years.  We then took the investment and calculated how much of your earning would be covered by an annuity that is indexed to the CPI rate.  Depending on the device you are using, the wager replacement after 40 years could be not listed below.



Canadian Personal Savings Rate and CPP Contribution Rate (1986 - 2016)

Year

CPP Contribution Rate

Personal Savings Rate

Total Savings Rate

Wage Replacement after 40 Years

1986

3.6%

12.38%

15.98%

74%

1988

4%

15.41%

19.41%

86%

1990

4.4%

11.4%

15.8%

70%

1992

4.8%

11.63%

16.43%

71%

1994

5.2%

8.99%

14.19%

61%

1996

5.6%

5.76%

11.36%

48%

1998

6.4%

3.55%

9.95%

39%

2000

7.8%

3.47%

11.27%

39%

2002

9.4%

2.4%

11.8%

35%

2004

9.9%

2.35%

12.25%

34%

2006

9.9%

3.59%

13.49%

39%

2008

9.9%

4.02%

13.92%

41%

2010

9.9%

4.5%

14.4%

43%

2012

9.9%

4.4%

14.3%

42%

2014

9.9%

4.3%

14.2%

42%

2016

9.9%

4.6%

14.5%

43%



Look for CPP Expansion Alternatives

Getting Canadians to pay for increased CPP contributions while getting a rather raw deal when compared to previous generations is going to be a hard sell.  Even with a 3.3% real return, Canadians in their mid-30's (and anyone younger) would be getting roughly $0.64 on the dollar on their CPP contributions.  There is no need to have us contribute more, to what will probably work out to our previous generation getting higher CPP distributions before we get to collect.
    Starting a Canadian Annuity and Saving Plan program instead of increasing CPP contributions would be more fair and a more flexible option for working Canadians.
    Note: We used the 3.3% real return for our calculations, because that is what we calculated the return needed to fund a nurses pension in one of the Canadian provinces.  Which shows that is a reasonable number to achieve over the long term.



CPP Historical Contribution Rates
Canadian Savings Rate 1981 - 2011
Canada household personal savings rate chart