May 6, 2016
Personal Investor: Can you count on CPP?
By Dale Jackson
Knocking the Canada Pension Plan has become a national past-time. Ask average Canadians if they are counting on the national nest-egg for retirement income and you’ll probably get a resounding “no”.
That’s odd because the Chief Actuary of Canada consistently reports the plan to be sound for decades to come – provided it can grow an average of at least four percent annually. That figure is based on complex actuarial charts that factor in shifting demographics as younger Canadians are left with the burden of supporting baby-boomers, and life expectancy increases.
Four percent is a realistic goal, even in this low interest rate environment. If it falls short, the plan has the weight of the government to force larger contribution amounts from employees and/or employers, which it has done on several occasions in the past.
The Canada Pension Plan has another ace up its sleeve. The $283 billion fund - among the 10 largest retirement funds in the world - is managed by a crown corporation called the CPP Investment Board (CPPIB), which invests a portion of the fund in long term holdings such as real estate and infrastructure around the globe. The CPPIB has posted an average rate of return of 8 percent since 2000.
The pessimism over the future of CPP, however, is understandable. Aside from scant mandatory reports, the CPPIB operates with under a cloak of secrecy that makes mutual funds look like an open book.
A report this week from the Fraser Institute began by acknowledging the confusion over CPP investments and CPP benefits, which have no direct relationship.
Your CPP entitlement
To help shed some light on what you can expect from your CPP contributions, think of the plan as a defined benefit pension where contributions and gains are pooled.
Payouts are based on how much you contribute to the plan during your working years. To receive the maximum benefit at 65 years old you must contribute the maximum amount to the plan for at least 40 years.
The maximum amount is currently about $13,000 a year and is adjusted to inflation.
CPP is intended to account for 25 percent of retirement income. The means it is actually a retirement supplement and not a retirement plan in itself. However, it can be considered a crucial part of your retirement plan.
Plan members have the option of taking a lower amount starting at 60 years old or a higher amount starting at 70.
The CPP also provides disability pensions to eligible workers who become disabled in a severe and prolonged fashion, and benefits to survivors of workers who die before they begin receiving retirement benefits.
You can find out how much you qualify for through the Canada Pension Plan website.
Nothing in life is certain, but CPP is certainly more certain than most investments.
