Pension Reform (in 3 paragraphs)

[bush_cheney2004]

Even with OAS and GIS (given claw backs), American seniors do better. (I won't mention US Medicare compared to our provincial health wait system...)

Still, as an "American senior" with maxed out "social security" benefits, I am not concerned with higher or lower CPP benefits levels in Canada, as it had no relevance or impact. I this yet another case of "look at what they have" for political points ?

[TimG]

CPP reserve fund is not part of general revenue and it's managed by an investment board not the government. Tim, do you ever think to educate yourself on a topic before slapping your ideology out on the table?

Do you ever read the argument written instead of making up strawmen? The CPP investment board is independent *today* but we have had one major politician already call for the pensions funds to be directed to politically favoured projects and you can bet that if the federal government does not start managing it finances responsibly soon that a future federal government would not hesitate to raid the pension piggy bank. That is why I said that any future pension promises depend entirely on the willingness of governments to manage government finances responsibly. If pattern established by Trudeau/Wynne continues then the CPP promises will be worthless in 20-30 years. Edited June 23, 2016 by TimG

[?Impact]

Who controls/decides who sits on this "investment board"?

The investment board has many professional employees who do the appropriate research and make the investment recommendations/decisions, but I assume you are talking about directors of the CPPIB. The nominating committee has a federally appointed chair and one representative from each participating province. The federal Finance Minister will then make the appointments in consultation with the provincial Finance Ministers.

[bush_cheney2004]

Looks like the CPPIB investment portfolio is diverse with lots of exposure in China. Lots of other foreign investments by total market value, not denominated in CAD:

http://www.cppib.com/en/what-we-do/our-investments.html

So who are these guys again ?

[jacee]

That is why Wynne said that she wanted pension funds to 'invest' in public infrastructure. Such phrasing hides the fact that what Wynne really wants to do is expropriate the pension funds and spend them on things that help Wynne get re-elected.

Wynne is Ontario. She has nothing to do with cpp.

And her Ontario pension is dead in the water now.

.

[jacee]

Do you ever read the argument written instead of making up strawmen? The CPP investment board is independent *today* but we have had one major politician already call for the pensions funds to be directed to politically favoured projects and you can bet that if the federal government does not start managing it finances responsibly soon that a future federal government would not hesitate to raid the pension piggy bank. That is why I said that any future pension promises depend entirely on the willingness of governments to manage government finances responsibly. If pattern established by Trudeau/Wynne continues then the CPP promises will be worthless in 20-30 years.

You are totally out there ... confused.

.

Edited June 23, 2016 by jacee

[?Impact]

Lots of other foreign investments by total market value, not denominated in CAD:

I did a quick check on the private equity side, and the exposure by trading currency is:

US dollar - 65%

Euro - 15%

Indian rupee - 9%

Chinese yuan - 6%

Canada dollar- 5%

Australian dollar - <1%

of course, that is only the trading currency and the companies could be anywhere with any of them. Equities in US dollars are probably mostly traded in New York & Chicago, those in Euro's are traded in Frankfurt, London, and Parris, etc.

I didn't look at public holdings or real-estate.

Edited June 23, 2016 by ?Impact

[msj]

Argus argued that Harper was concerned about job creation. Our current PM seems to want to create jobs for civil servants, and tax accountants.

No, Harper created lots of work for me thanks to introducing all his idiotic boutique tax cuts - fitness tax credit, art tax credit, that one year for the home renovation tax credit, and various other tax credits.

Trudeau has already started the process to eliminate some of those credits.

And msj, make no mistake: as an accountant, you'll claim more hours calculating all these various payroll deductions.

This is why there are computers - the calculations are easy to program so no new jobs will be created as a result.

[msj]

How is it a substandard return?

Open up Excel.

In a column enter all the CPP that you have paid over the years, and expect to pay until you take CPP, as negative numbers.

Then, in the year you expect to earn CPP, enter those amounts as a positive number and do it for each year until you expect to die.

Simplify this by just using today's values for paying into CPP and earning CPP - that is ignore inflation as it is an unnecessary complication.

Now, at the bottom of the column enter the formula "IRR(select range of negative and positive values)" hit enter.

For example, my wife and I are self employed so in a typical year we pay about $5,000 each for CPP which includes both the employee and employer portion. So that $10,000 goes in as a negative number until we hit 65.

Then I put in a positive number of about $28,000 or so until I die (hopefully I will last to 85) and till she dies - age 95.

Our internal rate of return? 2.84 %

If we die sooner then the return goes down and if we live into our hundreds then we will have done a bit better (a whole 3.85% if we both live to 105!).

So, yeah, substandard return.

Your mileage will vary depending on if you are an employee and whether or not you think you should consider the employer portion of the CPP to be as a cost to you or a cost to your employer. That is, even as an employee you should probably take box 16 on your T4 slip and double it to get an idea of what you are really paying into CPP.

----

I will point out that my wife and I had a misspent youth and spent too much time studying in University (philosophy no less), so we have quite a few low paying years which reduces the amount we have paid into CPP but also reduces the amount we will receive from CPP hence I do not anticipate receiving the maximum CPP for either one of us.

Edited June 23, 2016 by msj

[bush_cheney2004]

of course, that is only the trading currency and the companies could be anywhere with any of them. Equities in US dollars are probably mostly traded in New York & Chicago, those in Euro's are traded in Frankfurt, London, and Parris, etc.

What matters most is how the CPPIB asset allocations have performed over time. I leave that exercise to those it should matter to the most.

[Smallc]

Even with OAS and GIS (given claw backs), American seniors do better.

That's just not true - no Canadian senior gets less than the minimum at the time (about $1400 right now) between their public and private incomes.

This isn't a tax, and I support it wholeheartedly.

Edit: Social Security is broke, as we again found out today. Not so for any of Canada's public plans.

Edited June 23, 2016 by Smallc

[Smallc]

Even with OAS and GIS (given claw backs),

Oh, and if you get GIS, there are no clawbacks.

[msj]

Oh, and if you get GIS, there are no clawbacks.

GIS is clawed back at the rate of 50%.

That is, if you earn $1,000 in interest then you lose $500 of GIS next year.

Which is why TFSA's are so nice since that $1,000 is earned and not taxed and not effecting amy clawbacks.

[msj]

People should keep in mind that Americans pay more into SS than we do (at least for now).

So one would hope they would get more benefits.

[Smallc]

GIS is clawed back at the rate of 50%.

That is, if you earn $1,000 in interest then you lose $500 of GIS next year.

I'm not sure I'd call that a clawback - GIS is considered to be social assistance, after all. If you aren't judged to need it, you simply don't get it. 50% is actually a pretty generous allowance with an income.

[Smallc]

Open up Excel.

In a column enter all the CPP that you have paid over the years, and expect to pay until you take CPP, as negative numbers.

Then, in the year you expect to earn CPP, enter those amounts as a positive number and do it for each year until you expect to die.

Simplify this by just using today's values for paying into CPP and earning CPP - that is ignore inflation as it is an unnecessary complication.

Now, at the bottom of the column enter the formula "IRR(select range of negative and positive values)" hit enter.

For example, my wife and I are self employed so in a typical year we pay about $5,000 each for CPP which includes both the employee and employer portion. So that $10,000 goes in as a negative number until we hit 65.

Then I put in a positive number of about $28,000 or so until I die (hopefully I will last to 85) and till she dies - age 95.

Our internal rate of return? 2.84 %

If we die sooner then the return goes down and if we live into our hundreds then we will have done a bit better (a whole 3.85% if we both live to 105!).

So, yeah, substandard return.

Your mileage will vary depending on if you are an employee and whether or not you think you should consider the employer portion of the CPP to be as a cost to you or a cost to your employer. That is, even as an employee you should probably take box 16 on your T4 slip and double it to get an idea of what you are really paying into CPP.

The reality is, without this, most people will be extremely poor in retirement. The CPP is something that will almost certainly actually be there, rather than mythical investments they should have made.

[msj]

OAS is clawed back at 15 cents on each earned dollar above the threshold.

For GIS it is 50 cents.

That's a clawback pure and simple.

[bush_cheney2004]

People should keep in mind that Americans pay more into SS than we do (at least for now).

So one would hope they would get more benefits.

It was inevitable I guess...the U.S. comparison and anxiety is reported here:

http://business.financialpost.com/personal-finance/family-finance/when-it-comes-to-retirement-concerns-canada-and-the-u-s-are-on-equal-footing

[msj]

The reality is, without this, most people will be extremely poor in retirement. The CPP is something that will almost certainly actually be there, rather than mythical investments they should have made.

Sure, and in 2019 I will run the math and either do one of these:

1) take dividends and pay more corporate tax and less personal income tax and no CPP.

2) only take wages to the CPP max and leave the rest in the company and/or take dividends above the maximum amount.

So it's likely that I'm not going to be paying more into CPP and maybe we have found a new reason for people to incorporate - don't pay the extra CPP above the maximum amount....

[cybercoma]

Do you ever read the argument written instead of making up strawmen? The CPP investment board is independent *today* but we have had one major politician already call for the pensions funds to be directed to politically favoured projects and you can bet that if the federal government does not start managing it finances responsibly soon that a future federal government would not hesitate to raid the pension piggy bank. That is why I said that any future pension promises depend entirely on the willingness of governments to manage government finances responsibly. If pattern established by Trudeau/Wynne continues then the CPP promises will be worthless in 20-30 years.

So you're complaining about the fantasy world you think might happen in 30 years. Cool story.

[TimG]

So you're complaining about the fantasy world you think might happen in 30 years.

So you are saying that politicians are silly to be changing the CPP because, after all, who cares about what happens in 30 years - its all a fantasy.

[msj]

Do you ever read the argument written instead of making up strawmen? The CPP investment board is independent *today* but we have had one major politician already call for the pensions funds to be directed to politically favoured projects and you can bet that if the federal government does not start managing it finances responsibly soon that a future federal government would not hesitate to raid the pension piggy bank. That is why I said that any future pension promises depend entirely on the willingness of governments to manage government finances responsibly. If pattern established by Trudeau/Wynne continues then the CPP promises will be worthless in 20-30 years.

So you're complaining about the fantasy world you think might happen in 30 years. Cool story.

Agreed.

We hear about this "the politicians are going to takeover the CPPIB" without any clear understanding of how the rules in place help prevent this and keep CPP well run thanks to the balance of power that requires provinces to be involved in such matters.

I mean the Provinces also help select the governance board so it would require quite a bit of collusion to do what Tim thinks is so easy for the Feds to do.

[TimG]

I mean the Provinces also help select the governance board so it would require quite a bit of collusion to do what Tim thinks is so easy for the Feds to do.

The CPPIB is a product of federal legislation. A sufficiently motivated federal government can do whatever it wants. Whether we get such a government depends on the voters and given the musings of Wynne there is a significant block of voters that think that raiding the pension piggy bank is a wonderful idea.

[msj]

Nope. To change legislation would require provincial approval.

There is a reason Trudeau has to suck up to 7/10 provinces with 2/3 of the population.

Those same provinces select the board of governance.

Checks and balances.

http://www.cppib.com/en/who-we-are/governance-overview/legal-regulatory.html

Edited June 23, 2016 by msj

[?Impact]

The CPPIB is a product of federal legislation.

The provinces hold much more control over the operation of the CPPIB than the federal government, and yes it is a product of federal legislation but making vast changes to the legislation would be very difficult (political suicide) without provincial buy-in. Yes, technically it could happen but there would have to be a significant change in Canadian politics for that to occur. Note however the CPPIB is separate from the government, and separate from the CPP itself. This is an investment board that manages investments on behalf of the CPP. Change to the CPP are not under control of the CPPIB and the federal government could make changes there more easily. In fact I believe the CPPIB act is still in its original 1997 form, but the CPP act is changed regularly (average of twice a year over the past decade).