Enhanced CPP vs Personal Investing

[KJK]

Quote from Redeye:

Again, that's not what I said, and not what I'd argue for.  Any such change would take time to implement.  Some good CPP reforms have already been made, but there's room for more.  I'd even be interested in the idea of it being a voluntary system where one could double their contributions in exchange for a higher annuity later, however, I don't know that that could be practically or cost-effectively managed.  A one-size-fits-all system seems better.  The idea, thus, is to increase the amount the CPP collects in contributions and increase the payment levels proportionately.  That is to say, whatever benefits accrued under the old system remain the same, if a change in implemented it's only reflected in those years where it's implemented.  I'm not suggesting anything resembling "bailouts" or "something for nothing".  Such a change will not fix the situation for those who didn't save effectively now, but it will going forward - and going so would probably keep more people from using GAINS (supplements which are effectively entitlement programs) to live off.  It's a pretty forward thinking idea, a long term one, and politicians tend to concern themselves with instant gratification.

If this comes to pass I would rather see an opt in or out option but I agree that it could be a nightmare to administer. The other problem is that currently half of an employee's CPP contribution come from the employer. On an opt in situation either the employer would be on the hook for a matching contribution of around $2200/employee which I can't see being very popular amongst the business community or the employee would have to contribute 3x his/her current contribution to double the benefits. A 3x contribution would equal 14.85% of income up to the current max of $4X,XXX. As Larry Strong stated, the average Canadian family can barely make ends meet as it is so I don't see this a very popular solution. Add in the fact that you pay income tax on your CPP contributions vs getting a tax refund for RRSP contributions and both are taxed in the end I know which one I personally would pick.

On an opt out situation you could have unethical employers putting pressure on on their employees to opt out to save the company money and these would most likely be the people who would need the pension the most.

Quote from Redeye:

The state's only role to should be to act where markets fail or cannot reasonably expected to produce a socially optimal outcome.  Given that private sector employers offer pensions less and less, I see a good argument for a decent public pension system.

I would agree with that statement right up to the socially optimal outcome point.

KJK

Note: Mods, if you could bring the 'tangent posts' from the election thread over to this one that would be great.

 

[KJK]

Quote from Redeye:

I've only ever heard of a few Sprott funds charging that much.  Most come in below 2.5% - and even that in most cases is still far too high, but that's another matter all together.

I would agree although sadly every Investors Group fund I ever held was between 2.7X and 2.9X% plus sales commissions. I wonder why my ROI was very poor and nonexistent.

KJK

 

[Redeye]

Quote from Redeye:

I've only ever heard of a few Sprott funds charging that much.  Most come in below 2.5% - and even that in most cases is still far too high, but that's another matter all together.

I would agree although sadly every Investors Group fund I ever held was between 2.7X and 2.9X% plus sales commissions. I wonder why my ROI was very poor and nonexistent.

KJK

Frankly, anyone who deals with IG is a fool being swindled.

(incidentally, it's not "plus sales commissions", unless of course you triggered the DSCs which likely were never explained to you in the first place)

 

[KJK]

Frankly, anyone who deals with IG is a fool being swindled.

(incidentally, it's not "plus sales commissions", unless of course you triggered the DSCs which likely were never explained to you in the first place)

All of the above is correct, what can I say? I was young and not investment astute. That said there are a lot of people getting fleeced by IG.

KJK

edited to remove 1 too many 'said's

 

[Redeye]

Dammit, I lost my original response by accidentally logging out, but I'll try to recreate it.

If this comes to pass I would rather see an opt in or out option but I agree that it could be a nightmare to administer. The other problem is that currently half of an employee's CPP contribution come from the employer. On an opt in situation either the employer would be on the hook for a matching contribution of around $2200/employee which I can't see being very popular amongst the business community or the employee would have to contribute 3x his/her current contribution to double the benefits. A 3x contribution would equal 14.85% of income up to the current max of $4X,XXX. As Larry Strong stated, the average Canadian family can barely make ends meet as it is so I don't see this a very popular solution. Add in the fact that you pay income tax on your CPP contributions vs getting a tax refund for RRSP contributions and both are taxed in the end I know which one I personally would pick.

That most families find it hard to save for retirement is exactly why it is a popular solution for many.  Unless you're making more than $41,970/year (I'm using 2010 numbers here) individually, the cost of those CPP contributions to you is $0, because the non-refundable tax credit you receive for them completely offsets the cost by reducing your income tax payable.  Even beyond that, the cost in federal taxes is a whopping 7% on the contributions on the remaining $8000 or so up to YMPE at which point you no longer contribute.  So, the difference between the YMPE ($47,200 for 2010) and the top of the 15% bracket is $6,230.  On that you're going to pay $308.39 into the CPP and you'll shell out the princely sum of $21.59 in federal tax.  ($6,230 x 4.95% = $308.39 CPP Contribution.  Net federal tax = 22% - 15% non-refundable tax credit = 7%.  7% of $308.39 is $21.59.)  Frankly it's still a pretty good deal in my opinion.

On an opt out situation you could have unethical employers putting pressure on on their employees to opt out to save the company money and these would most likely be the people who would need the pension the most.

Another reason on top of the adminstrative nightmare not to have an opt-out mechanism.

As for business concerns, not unreasonable to look at adjustments to payroll taxes accordingly.

Quote from Redeye:

The state's only role to should be to act where markets fail or cannot reasonably expected to produce a socially optimal outcome.  Given that private sector employers offer pensions less and less, I see a good argument for a decent public pension system.

I would agree with that statement right up to the socially optimal outcome point.

So, just for interest's sake, what "socially optimal outcomes" are you opposed to?  Forcing businesses to adhere to environmental standards to try to protect our air, water, and natural resources?  Having social safety nets to help those who fall on hard luck and enable them to get on their feet again?  Law enforcement?  Food safety regulations and enforcement? Public health standards?  Infrastructure to facilitate economic activity? Education that enables us to have productive, competitive workforce?  These are just a few examples of the market failures our societies formed governments to address to get socially optimal/desired outcomes.

 

[Redeye]

All of the above is correct, what can I say? I was young and not investment astute. That said said there are a lot of people getting fleeced by IG.

KJK

Yeah, it's very sad.  I make my living try to get people out of that situation.  IG isn't the only culprit, but it's one of the worst I've seen in general.  They have some great, honest, decent people working for them and some that aren't.  I guess that happens everywhere, though.  To their credit, they have done a lot to get people to think about investing and planning for their future, they did kind of pave the way for that.  But when I show people what they're paying for their "service", the results are generally shock.

 

[KJK]

Dammit, I lost my original response by accidentally logging out, but I'll try to recreate it.

That sucks.

That most families find it hard to save for retirement is exactly why it is a popular solution for many.  Unless you're making more than $41,970/year (I'm using 2010 numbers here) individually, the cost of those CPP contributions to you is $0, because the non-refundable tax credit you receive for them completely offsets the cost by reducing your income tax payable.  Even beyond that, the cost in federal taxes is a whopping 7% on the contributions on the remaining $8000 or so up to YMPE at which point you no longer contribute.  So, the difference between the YMPE ($47,200 for 2010) and the top of the 15% bracket is $6,230.  On that you're going to pay $308.39 into the CPP and you'll shell out the princely sum of $21.59 in federal tax.  ($6,230 x 4.95% = $308.39 CPP Contribution.  Net federal tax = 22% - 15% non-refundable tax credit = 7%.  7% of $308.39 is $21.59.)  Frankly it's still a pretty good deal in my opinion.

Another reason on top of the adminstrative nightmare not to have an opt-out mechanism.

As for business concerns, not unreasonable to look at adjustments to payroll taxes accordingly.

So, just for interest's sake, what "socially optimal outcomes" are you opposed to?  Forcing businesses to adhere to environmental standards to try to protect our air, water, and natural resources?  Having social safety nets to help those who fall on hard luck and enable them to get on their feet again?  Law enforcement?  Food safety regulations and enforcement? Public health standards?  Infrastructure to facilitate economic activity? Education that enables us to have productive, competitive workforce?  These are just a few examples of the market failures our societies formed governments to address to get socially optimal/desired outcomes.

I'll go with your numbers on the tax implications. My accountant deals with this and the example is quite different from my situation. I would point out that for any contribution above the CPP into an RRSP the person would get a refund however small.

As for the 'socially optimal outcome' part the problem I have with it is it soon becomes 'social engineering'. Example: our current EI system and it's inequities across our great country.

Case in point - For 15 years I ran a small business in Alberta. As most people know labour can be very hard to come by out here and equally expensive. The price of a booming economy I guess. I had 2 workers start with my company that were from the Maritimes. I spent close to $50,000 dollars to train these people to company safety standards which in this particular industry is not unusual. Unfortunately after the workers in question accumulated enough weeks of qualifying earnings they quit and returned to the east to sit on EI for many weeks. Were an Albertan to quit a job under most circumstances there is no EI at all and if they are laid off they get many fewer weeks of benefits for the same cost to the individual. Socially engineering and hardly socially optimal. You can argue that this shouldn't happen and it should be the same across the country but it never works that way at least in this country. I could also mention the EI fund being moved to General Revenue to balance the budget and then there is nothing there when we need it. Let hope that as the workforce in Canada 'greys' and tax revenues drop accordingly that the same doesn't happen to the CPP fund. I would also note that this job paid between $60,000 and $95,000, a decent income wouldn't say?

The other things you mention are IMHO the things government should be working on.

KJK

 

[Redeye]

I'll go with your numbers on the tax implications. My accountant deals with this and the example is quite different from my situation. I would point out that for any contribution above the CPP into an RRSP the person would get a refund however small.

It's a misnomer to suggest that it gets you "a refund".  It does allow you to deduct that contribution from your income, which means you don't pay tax on it - and it comes "off the top", meaning it's a savings of tax at the highest marginal rate you'd pay.  And of course, anything beyond the CPP it makes sense in nearly all cases for.  I'm not suggesting that RRSPs would be irrevelant or that additional savings wouldn't be required - for most people, they would... but the amount coming from a pension source would be increased for all, which is a good outcome.

As for the 'socially optimal outcome' part the problem I have with it is it soon becomes 'social engineering'. Example: our current EI system and it's inequities across our great country.

Case in point - For 15 years I ran a small business in Alberta. As most people know labour can be very hard to come by out here and equally expensive. The price of a booming economy I guess. I had 2 workers start with my company that were from the Maritimes. I spent close to $50,000 dollars to train these people to company safety standards which in this particular industry is not unusual. Unfortunately after the workers in question accumulated enough weeks of qualifying earnings they quit and returned to the east to sit on EI for many weeks. Were an Albertan to quit a job under most circumstances there is no EI at all and if they are laid off they get many fewer weeks of benefits for the same cost to the individual. Socially engineering and hardly socially optimal. You can argue that this shouldn't happen and it should be the same across the country but it never works that way at least in this country. I could also mention the EI fund being moved to General Revenue to balance the budget and then there is nothing there when we need it. Let hope that as the workforce in Canada 'greys' and tax revenues drop accordingly that the same doesn't happen to the CPP fund. I would also note that this job paid between $60,000 and $95,000, a decent income wouldn't say?

Oh, don't even get me started on EI - you're preaching to the choir here, I find myself stunned living in the Maritimes how it works for seasonal workers.  That's a whole other kettle of fish that needs to be sorted.  Programs like EI and other "social safety net" type programs could do with substantial reform to make sure they are incentives to return to work quickly, or to get retraining, or otherwise get back to work.  Most people, I think, find earning a living doing whatever to be far more dignified than being on the dole... but some figure they may as well game the system as best they can.

As for CPP, I can't see the funds being appropriated like that due to the structure.  It's a solid, well funded system that is sustainable for the long haul, especially with the tweaks being made.  Eventually it'll be time to have a more serious national conversation about raising the retirement age, but in a lot of cases I see, people hitting 65 may be retiring from their "career" but are still doing lots to keep bringing in income...

Know why 65 was chosen as the standard age for retirement in most of the Western/industrialized world back at the beginning of the 20th Century?  Because life expectancy was between 58-63.  Most people never saw it.

 

[KJK]

Oh, don't even get me started on EI - you're preaching to the choir here, I find myself stunned living in the Maritimes how it works for seasonal workers.  That's a whole other kettle of fish that needs to be sorted.  Programs like EI and other "social safety net" type programs could do with substantial reform to make sure they are incentives to return to work quickly, or to get retraining, or otherwise get back to work.  Most people, I think, find earning a living doing whatever to be far more dignified than being on the dole... but some figure they may as well game the system as best they can.

As for CPP, I can't see the funds being appropriated like that due to the structure.  It's a solid, well funded system that is sustainable for the long haul, especially with the tweaks being made.  Eventually it'll be time to have a more serious national conversation about raising the retirement age, but in a lot of cases I see, people hitting 65 may be retiring from their "career" but are still doing lots to keep bringing in income...

Know why 65 was chosen as the standard age for retirement in most of the Western/industrialized world back at the beginning of the 20th Century?  Because life expectancy was between 58-63.  Most people never saw it.

Now I think we are getting somewhere. I don't wish to push my fellow man down and grind his face into the dirt because of bad luck or circumstance it is just that these programs snowball into something far different than was intended. Transfer payments are perfect example: Help out your fellow province in their time of need, OK fine. Now Quebec etc can spend far more per person on programs than can the provinces that are paying equalization.

Yeah, I know about the '65'. Unfortunately for the CPP, at least in my family, it was a very bad bet since most lived or are still living in their mid to late nineties. I'm afraid though that with the greying population it may be far too late to start trying to move the retirement age since seniors typically DO vote.

Very true about retiring from a career but still working. The current project I am commissioning has 12 contract operators working on it and 4 of them are 'retired' and 2 over 70. I would also add that their daily rate is more than their monthly CPP cheque.  :nod:

KJK

 

[a_majoor]

The intersection between government and business. It is interesting to see how the rhetoric (and tax, regulatory and legislative actions that follow the rhetoric) are counterproductive in the real world:

http://paulsrants-paulsstuff.blogspot.com/2011/03/ignatieffs-election-platform-debunked.html

Ignatieff's Election Platform Debunked- Corporate Tax Cuts And CPP

With Ignatieff releasing another plank in his platform today, changes to supposedly boost CPP, and with Ignatieff continuing to repeat how those bad banks don't deserve corporate tax breaks, it's time to put the two planks of the Liberal platform together, something it seems Ignatieff and the Liberal Party failed to do. The problem for Ignatieff is with today's platform release, it's like the Liberal leader is now going to try and strengthen CPP when in fact his platform to raise corporate taxes damages the strength of the CPP plan. Why? Well, you can start with this:

Who benefits from bank profits?

"Canadians do." At least, that's the line from the bankers. But what actually happens to those billions in profits? It's tempting to think of Daddy Warbucks-like bank CEOs gleefully counting out their bonuses and stock options. But CEOs don't make billions. Only millions. Of the $13.3 billion in profit made by all of Canada's chartered banks in 2004, they paid out $4.5 billion in dividends to their stockholders. You're probably thinking about Daddy Warbucks again.

But some of the biggest shareholders in Canadian banks are the big public and private pension funds and the big mutual funds — in other words, most Canadians. Let's take the Canada Pension Plan, as an example. It owned $2.6 billion in stock of the Big Six banks as of March 31, 2006. That's about $150 in bank stock for every one of its members.

At the $41-billion Ontario Municipal Employees Retirement System pension plan, banks occupy four of its top 10 equity holdings. Bank stocks are popular holds in hundreds of equity mutual funds too, because banks are such a big part of the Canadian economy, and because the market performance of the financial sector has been nothing short of sizzling over the last few years. For example, the giant Investors Dividend fund — with $11.8 billion in assets — lists five banks as its top holdings.

After paying out their dividends, banks use the leftovers to invest in their own operations. And they like to point out that they paid $7.6 billion in taxes in 2004. So, if you're so inclined, criticize the big banks for branch closures, or for not paying more interest, or for their service charges, or because you think they're too big and impersonal. But if you're a holder of bank stock (and directly or indirectly, we all are), rising profits have also meant rising dividends and stock prices that have, on average, doubled in the last four years.

Money we can take to the bank.

So there you have it. Much of the strength of the CPP is based on investment returns from corporations such as banks. And banks are only a percentage of corporations the CPP is heavily invested in. Raising corporate taxes results in lower dividends paid to funds such as CPP. Many mutual funds, trusts, and other investments held by seniors make their cash frm divedend payments. Why does Michael Ignatieff want to damage these dividends? One would think when a party puts forth an election campaign platform, each plank would mesh with the others. In the case of corporate tax cuts, make that corporate tax increases, Ignatieff and the Liberal Party are actually hurting the very CPP plan they claim to want to improve.

 

[a_majoor]

The low ROI of CPP and how it affects taxpayers and pensions"

http://www.oxygentax.com/2011/05/why-cpp-is-not-good-investment-repost.html

Why CPP is not a good investment *Repost*
*This is a repost from February 21st.  It's pretty long and information intensive, but at the end, it projects real world data on the CPP to show how badly it underperforms for you and me.  I hope you enjoy*

Every time I see a comment from Jack Layton about how we should increase the CPP contributions and double the maximum benefit. Every time I see an op-ed from a union boss saying the same thing. Every time I see these things, it doesn't sit right with me because I know it's the wrong thing to do. It doesn't sit right with me because it transfers more money to past generations at the expense of the current and future generations. It forces me to pay for the short-sightedness of my parent's generations (Dad was at the beginning of WWII, Mom was the first year of baby boomers).

In order to understand why I think the CPP is a bad idea, it's useful to understand how it was funded in the past, and is currently funded now (from wikipedia):

    At its inception, the prescribed CPP contribution rate was 1.8% of an employee's gross income up to an annual maximum. Over time, the contribution rate was increased slowly. However, by the 1990s, it was concluded that the "pay-as-you-go" structure would lead to excessively high contribution rates within 20 years or so, due to Canada's changing demographics, increased life expectancy of Canadians, a changing economy, benefit improvements and increased usage of disability benefits (all as referenced in the Chief Actuary's study of April 2007, noted above). The same study reports that the reserve fund was expected to run out by 2015. This impending pension crisis sparked an extensive review by the federal and provincial governments in 1996. As a part of the major review process, the federal government actively conducted consultations with the Canadian public to solicit suggestions, recommendations, and proposals on how the CPP could be restructured to achieve sustainability once again. As a direct result of this public consultation process and internal review of the CPP, the following key changes were proposed and jointly approved by the Federal and provincial governments in 1997:


    * Total CPP contribution rates (employer/employee combined) were increased annually from 6% of pensionable earnings in 1997 to 9.9% by 2003.
    * Continuously seek out ways to reduce CPP administration and operating costs.
    * Move towards a hybrid structure to take advantage of investment earnings on accumulated assets. Instead of a "pay-as-you-go" structure, the CPP is expected to be 20% funded by 2014, such funding ratio to constantly increase thereafter towards 30% by 2075 (that is, the CPP Reserve Fund will equal 30% of the "liabilities" - or accrued pension obligations).
    * Creation of the CPP Investment Board (CPPIB).
    * Review the CPP and CPPIB every 3 years.


I'm going to paraphrase that so that my point is clear. Until 1996, the CPP was a government ponzii scheme. In fact, in 1996, according to these two documents (Contributions (Page 16) and Payments(Page 7), archived from the StatsCan website here), the plan had been paying out more than was contributed for 12 solid years. The cumulative effect was that by 2000, the first year when contributions again exceeded benefit payments, total CPP payments had exceeded the total contributions made in the entire history of the plan. The only saving grace for the CPP at that point was that interest rates had been high for a large part of the 70s and 80s, giving the fund some breathing room to keep a nest egg.

I ran my own data back to 1994, the beginning of my working life.  Specifically, I had data back to 1999 and estimated my prior contributions.  I then took the information on current maximums and projected out what I will pay over the remaining 30 years of my working life.  Since I am self-employed, that is accurate to say "I PAY" because it's all coming from the same pocket.  Not only did I project out what I will pay, but I also projected out what those contributions would be worth when grown through normal investing.

From that total, I also projected out what the CPP maximum benefit would be when I begin to collect in 2041.  To make that projection I used an average inflation rate of 2.5%, a rate that has held fairly steady over the past 15 years.  The number I arrived at was slightly more than $2000 a month (2014/month).

Now here's where it gets interesting.  Assuming these numbers are correct, the CPPIB would only need to average 3.89% from 1994 until I die in order to pay me the maximum benefit.  This assumes that I live to age 88 - a full 15 years after the expected life span of a male my age when I was born.  Even if I lived to age 100, the CPPIB would only have to average 4.8% during that same span in order to pay me a maximum benefit.

Indeed, if I lived to age 88, the CPPIB would have to average 6.01% in order to pay me DOUBLE the maximum benefit from age 65 until I die.

Now, that last bit is important for 2 reasons.  The first reason, is that if I DON'T live to age 88, the remainder of my accumulated contributions are property of the CPPIB and do not accrue any benefits to my spouse unless she is younger than age 65 (assumption is that she will receive SOME CPP benefit when she turns 65, and thus would be cut out of a survivor pension from me).  The second reason is because currently, most money managers are using 6% as their assumption of what the market will yield over the next few decades.  Point of fact, the market HAS yielded approximately 8% over the past 100 years, despite certain notable Black periods such as the one beginning in 1929.

The essence is that if the CPPIB earns more than 3.89% at current benefit levels, or if I die between age 65 and age 88, the CPP will not have benefited me as contributor.  Further, even if I died prior to age 65, the CPP will not pay out to my surviving spouse or children in survivor benefits even as much as I contributed during my lifetime.

The importance of that knowledge  leads me to make one further question - if the CPPIB has to average slightly less than 2/3rds of the projected market yield in order to sustain current benefits, and it has to yield what the market it projected to yield in order to pay out double the maximum benefits, then why do contribution rates need to be increased?

Personally, what I would like to see in pension reform is a system where there is eventually no CPPIB.  I would like to see OAS GIS augmented to absorb the current CPP beneficiaries, and the current reserve apportioned to contributors based on their accumulated contributions.  In the meantime, the requirement for a CPP contribution would not go away, it would merely take the form of a mandated matched contribution to a locked in RRSP account which can not be accessed except on retirement (at age 65), disability or death.  The retirement account would be portable in that it moves with the individual, and like an RRSP, it would roll to your spouse tax-free upon death.  Most importantly, the individual would be responsible for investing the money and for determining their own annual income levels on retirement.

No, my reforms would not be fair for those people who didn't contribute enough during their lifetimes.  No, my reforms would not protect the individuals from market fluctuations (unless those individuals bought government T-Bills 5-7 years before they were due to retire).  What my reforms WOULD do is help nay FORCE individuals to create their own wealth for retirement and destroy the reliance not just on the government to provide for the poor, but destroy the current system which borrows from current generations to fund the short-sightedness of past generations.
Posted by oxygentax at 6:00 AM

 

[Dennis Ruhl]

Yes, CPP was nothing more than a Ponzi scheme.  I've been paying in since a few years after inception and almost all of that money went to overpay early claimants.  The premiums have gone through massive increases, but the deficit in the plan is still hundreds of millions.

 

[observor 69]

These amendments to the CPP were designed to ensure its long-term sustainability and affordability. To achieve this, a careful balance had to be struck between making sure that the CPP Disability program serves severely disabled Canadian workers effectively and managing costs overall to keep the CPP sustainable. The 1998 amendments helped to ensure that the CPP is available not only for workers when they retire, but also for contributors and their families should they become disabled or die. As an additional measure to help secure the CPP for the long-term, the legislation now requires that any increase in benefits must be accompanied by a permanent increase in the contribution rate to cover incremental future costs. Ensuring the future sustainability of the Canada Pension Plan remains a key policy objective shared by the Government of Canada and the provinces.

Together, the 1998 changes have led to the growth of a large reserve fund for the CPP. Investment earnings from this fund will help pay for growing costs, primarily due to the retirement of the baby boom generation, keeping the CPP sustainable for future generations. A review of the CPP by federal and provincial ministers of finance in 2002 confirmed that the CPP is financially sound and on track to provide retirement pensions well into the future.

http://www.hrsdc.gc.ca/eng/oas-cpp/cpp_disability/future/5thpg3.shtml

 

[a_majoor]

While it is very comforting to know that CPP (Unlike Social Security and most US government employee pension plans) is operating on a sustainable basis, the point upthread is current CPP imposes a large opportunity cost to the claimant. If the person had invested the money him/her self and received an average 6% compounded return, the amount received after retirement would be considerably higher (how much higher depends on the number of years the money compounded before retiring and cashing out), providing a much higher standard of living. (Someone who received the long term 8% ROI would have a correspondingly larger retirement nest egg).

As well, monies held in the contributors own hand could be passed on to the surviving spouse, children or relatives or even gifted to a charity, options that are not at all possible with CPP.

Arguments about market variability, fees etc. are somewhat beside the point; investors are responsible for protecting their wealth and the "rules of thumb" for competent investing are simple enough to be taught to school children (adjusting the proportions of high to low risk assets based on your age or years to retirement, for example). More flexibility in RRSP rules, new investment vehicles like TFSA's and imposing draconian penlties for early withdrawal are alternative approaches to divesting citizens of their own monies and imposing low ROIs on the funds that are taken.

 

[Brad Sallows]

The problem is that not everyone has the will to manage their finances prudently, and a few haven't even the ability. 

I suggest reading Fred Reed's column on Socialized Medicine.  He poses the real question with which we must wrestle.

 

[Dennis Ruhl]

Yes, CPP was nothing more than a Ponzi scheme.  I've been paying in since a few years after inception and almost all of that money went to overpay early claimants.  The premiums have gone through massive increases, but the deficit in the plan is still hundreds of millions.

Sorry - that's hundreds of billions - $ 619,985,000,000 to be exact.  That more than doubles our national deficit.  Since the plan is worth $ 620 billion less than has been paid in to date - the answer is to contribute more?  We are idiots, aren't we.  Feeding the National Madoff Fund.

Table 28 Balance Sheet as at 31 December 2006

($ billion)
Actuarial liability  733.5 10
Assets                (113.6 15)
                          -------------
Unfunded liability 619.9 85

http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/oca/reports/CPP/cpp23_e.pdf


First financial statement I've seen that hid the balance sheet in appendixes.

 

[a_majoor]

The idea most people can't manage their finances is true mostly because people have never been taught how to manage their money. I am teaching my own children because these concepts literally don't exist in school at all. My daughter in high school is in a "family studies" program which she describes as "extended therapy". This is what replaced "Home Ec", which at least taught people how to do things like sew and cook and some basic budgeting.

Most of the principles of money management are teachable to school children. The RRSP and TFSA programs need to be expanded to provide increased opportunities for the vast majority of Canadians to see better returns .

 

[Redeye]

The idea most people can't manage their finances is true mostly because people have never been taught how to manage their money. I am teaching my own children because these concepts literally don't exist in school at all. My daughter in high school is in a "family studies" program which she describes as "extended therapy". This is what replaced "Home Ec", which at least taught people how to do things like sew and cook and some basic budgeting.

Most of the principles of money management are teachable to school children. The RRSP and TFSA programs need to be expanded to provide increased opportunities for the vast majority of Canadians to see better returns .

Expanded in what way?  Most Canadians don't take advantage of the programs as they exist to the full extent to begin with.

I'm think I'm going to call BS on your opportunity cost claims, too, but I'll wait until I have some tools I need to do the math.

 

[a_majoor]

I'll wait until I have some tools I need to do the math.

http://www.oup.com/us/pdf/eeconstuds/interestTables.pdf

http://www.fintrend.com/ftf/calculators/compound_interest_calculator.asp

Fixed that for you

 

[Redeye]

http://www.oup.com/us/pdf/eeconstuds/interestTables.pdf

http://www.fintrend.com/ftf/calculators/compound_interest_calculator.asp

Fixed that for you

Actually, the calculator I wanted is one built into Naviplan, because a comparison involves a few moving parts.  First is to determine what a contribution equivalent to the CPP would earn if invested by an individual.  Then I'd have to consider how much they'd invest and from when until when.  So I started with a generous set of assumptions:

I assumed a contibution in today's dollars of $175/month (to approximate the max CPP contribution), starting at age 18 (unlikely) and running to age 65.  I assumed a 7% rate of return in an RRSP and into the RIF for until age 90, and assumed a tax rate of 30%.  That would generate an after-tax income of about $973/month in today's dollars.  Monthly CPP maximum right now is $980, applying the same tax rate yields about $686/month, so yes, there's some opportunity cost there, assuming of course one actually got those returns continuously.

So then I tried a more accurate modeling of the CPP.  The way it works is that your benefit is calculated based on your contributions but only 85% of your years of contributions are included - that is to say, basically, that your seven worst years of contributions are excluded.  So I moved the start date up to age 25 with similar assumptions.  After tax income still was a little higher  - about $700/month.  So far, Thucydides, your math's actually working out, if we assume someone was willing to actually invest more aggressively than a pension fund would generally be expected to.  Drop the rate of return to 6%, and CPP's better for the individual.  To 5% and it's miles ahead.

There's a couple of variables I haven't factored - first, employer contributions - which make an impact for sure., and the second of course is portability, which is a key factor whenever anyone is making a pension vs private savings decision.  CPP pays a small death benefit but that's it, whereas money saved privately can be transferred to a spouse or become part of an estate, and often there's a lot of value to that.  The tradeoff is that it's also possible to outlive your money, which with a pension isn't a problem.  Also, I haven't worked out an easy way that won't take forever to use phasing to use different rates of return either.

The problem, however, comes back to a more philosophical one as I see it.  CPP forces people to save something, which is important because sadly without it there would be a lot of people retiring with absolutely nothing, because they don't save anywhere near enough on their own.  Of course, in the business I'm in I'd love it if people had to save more on their own but in the long run I'm not convinced it's the best overall strategy.

I will say that I agree that we definitely don't see people learning enough about finances in school, it falls to parents to do that, and while there's been efforts to add something to the curriculum I don't think it's anywhere near enough because the rate of financial illiteracy in this country is atrocious.