Pension Reform (in 3 paragraphs)

[Bonam]

Open up Excel.

...

So, yeah, substandard return.

Thanks for posting that. I saw the question and started typing a similar answer too but then gave up before I finished.

[Bonam]

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.

Yes, so because most people are too stupid to bother saving for retirement, those of us who might make smarter decisions instead have to have a considerable portion of our funds funneled into a program that barely keeps pace with inflation. Oh if only one could opt out...

[poochy]

Yes, so because most people are too stupid to bother saving for retirement, those of us who might make smarter decisions instead have to have a considerable portion of our funds funneled into a program that barely keeps pace with inflation. Oh if only one could opt out...

Liberals know best, might as well outlaw all private plans and retirement savings, allow the government to ensure we all have an equally good retirement, surely no one should be forced to endure the outcome of their bad decisions. The idea that most didn't have enough for retirement, or that CPP was going broke, is a myth, this whole thing is just another example of the back door socialism that the left craves for, might as well go all the way. O but I know, the Fraser institute, and others, who have said as much aren't as credible as Kathleen Wynne and Smallc.

[poochy]

http://news.nationalpost.com/full-comment/andrew-coyne-employees-and-employers-alike-may-live-to-regret-historic-cpp-agreement

Hey look, sensible, non liberal partisan arguments, supported by actual facts.

[Smallc]

Yes, so because most people are too stupid to bother saving for retirement, those of us who might make smarter decisions instead have to have a considerable portion of our funds funneled into a program that barely keeps pace with inflation. Oh if only one could opt out...

Would you like to live in a society with a bunch of broke seniors? I'm not much in favour of that.

This will create enough to find my retirement, and allow me to not really worry about it. That's fine with me.

Edited June 23, 2016 by Smallc

[Smallc]

http://news.nationalpost.com/full-comment/andrew-coyne-employees-and-employers-alike-may-live-to-regret-historic-cpp-agreement

Hey look, sensible, non liberal partisan arguments, supported by actual facts.

[Big Guy]

Interesting discussion: Why should those who plan for a comfortable retirement have to subsidize those who spend all their money before retirement and have no money when they are too old to work?

I suggest that this philosophical argument is similar to the "guaranteed minimal income" argument.

It does not make sense from a financial point if view to allow people to age into poverty. Medical costs increase, they purchase nothing and become a constant drain.

Basically, what we are doing with mandatory pension plans is creating a "guaranteed minimal income" for seniors. The only question is what the "minimum" should be.

I wonder what would be the result if every Canadian citizen turning the age of 65 would receive a cheque for $2,500 every month - notwithstanding any other income or pensions that they had - with no CPP payments. Any other plan or income would be a "bonus".

[TimG]

I wonder what would be the result if every Canadian citizen turning the age of 65 would receive a cheque for $2,500 every month - notwithstanding any other income or pensions that they had - with no CPP payments. Any other plan or income would be a "bonus".

It already happens. It is called the GIS/OAS but the amounts are lower because the program is not affordable otherwise. As time goes on financial constraints will force the government to increase the rate of clawback to keep the program sustainable.

[Argus]

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.

Indeed. They have MANY very well paid employees making decisions, where a decade or two back they had very, very few. The addition of all these new, very highly paid employees has enormously expanded the little empire builders who run the CPP, and greatly increased costs, but have not resulted in any increase in profits.

[Argus]

Randal Denley has always struck me as an extremely intelligent guy. And I have to say I largely agree with his take on things, particularly the bit about the government solving a non-existent problem.

Sure, we have a lagging economy, a lack of meaningful work for young people, a health-care system that’s squeezed, a federal government that can’t even pay its own workers promptly and an Ontario provincial government that mismanages, well, everything. But let’s not be distracted by the transient problems of today. Let’s cast our minds ahead to the problems today’s teenagers might face when they retire more than four decades from now.

Using their unique ability to see into the future, our political leaders have determined that a perceived lack of retirement savings today will be a huge problem in decades to come. So, using some of your money and some of your employer’s money, they have solved the problem by increasing the amount the CPP will pay out.

http://ottawacitizen.com/opinion/columnists/denley-canada-pension-plan-change-is-far-from-benign

[dre]

Yes, so because most people are too stupid to bother saving for retirement, those of us who might make smarter decisions instead have to have a considerable portion of our funds funneled into a program that barely keeps pace with inflation. Oh if only one could opt out...

Well you can essentially say the same thing about the entire concept of government. Id like to opt out of paying to bomb random darkies in the middle east. Like to opt out of paying for all corporate subsidies as well.

In fact, I would like to pay for nothing besides water to my house, and maintenance on the roads within 100 miles of it.

[jacee]

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.

Remember to factor in your annual tax deduction for your CPP contributions.

And remember that your 'rate of return' is without risk, unlike investing elsewhere.

.

Edited June 23, 2016 by jacee

[jacee]

Randal Denley has always struck me as an extremely intelligent guy. And I have to say I largely agree with his take on things, particularly the bit about the government solving a non-existent problem.

Sure, we have a lagging economy, a lack of meaningful work for young people, a health-care system thats squeezed, a federal government that cant even pay its own workers promptly and an Ontario provincial government that mismanages, well, everything. But lets not be distracted by the transient problems of today. Lets cast our minds ahead to the problems todays teenagers might face when they retire more than four decades from now.

Using their unique ability to see into the future, our political leaders have determined that a perceived lack of retirement savings today will be a huge problem in decades to come. So, using some of your money and some of your employers money, they have solved the problem by increasing the amount the CPP will pay out.

http://ottawacitizen.com/opinion/columnists/denley-canada-pension-plan-change-is-far-from-benign

How stupid is someone to disparage planning for retirement!

He's an idiot.

.

[Bonam]

Remember to factor in your annual tax deduction for your CPP contributions.

And remember that your 'rate of return' is without risk, unlike investing elsewhere.

Without risk? Hardly. Retirement programs and their associated benefits can change. Governments cut benefits all the time, just look at how many governments had to cut benefits in the wake of the 2008 crisis. I'd much rather manage my market risk myself, or if I am risk averse stick the money in a savings account and accept that it will be eaten away at by inflation, rather than accept unknowable political risk and have my retirement benefits be changeable at the whim of any political party between now and 40 years from now? There is almost nothing HIGHER risk than that!

[jacee]

Without risk? Hardly. Retirement programs and their associated benefits can change. Governments cut benefits all the time, just look at how many governments had to cut benefits in the wake of the 2008 crisis. I'd much rather manage my market risk myself, or if I am risk averse stick the money in a savings account and accept that it will be eaten away at by inflation, rather than accept unknowable political risk and have my retirement benefits be changeable at the whim of any political party between now and 40 years from now? There is almost nothing HIGHER risk than that!

Try it: Invest the same amount as your CPP contributions and see if you can do as well.

Get back to us on that, eh?

CPP benefits have never been cut.

Any government that tried would be run out of office ... immediately.

.

[eyeball]

The CPP fund has never vapourized during a market meltdown.

[Bonam]

Try it: Invest the same amount as your CPP contributions and see if you can do as well.

Get back to us on that, eh?

CPP benefits have never been cut.

Any government that tried would be run out of office ... immediately.

.

CPP hasn't been cut because Canada's economy is doing well and its government finances are doing well and it hasn't needed to be cut. Other Western governments haven't all done as well, and some of those countries have cut their equivalent of CPP. It is not impossible that Canada will see similar austerity in the future. The risk most certainly exists that CPP would be cut.

And yes, I am investing on my own, and my investments have done approximately the same as the S&P500 because that's mostly what I invest in, and the S&P500 consistently outperforms the returns of CPP by a wide margin.

[August1991]

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.

Agreed. I'll read through the rest of thread for other comments/posts but on this msj, I agree with you.

====

Harper brought "boutique tax cuts" to Canada because of Australia. It was a fad in democratic politics at the time - Big Data and all. But then, the current fad in democratic politics is selfies and social media.

[msj]

Remember to factor in your annual tax deduction for your CPP contributions.

Already factored in for my own case. My spreadsheets are always more complicated than I let on because as an accountant I compound and compound when it comes to spread...sheets.

In fact, when I did my math and compared it to what Kevin Milligan¹ posted on his twitter feed i was surprised that my number looks so close. According to him the average IRR for a person with my birth year is closer to 2.1%.

The fact that my number is higher is due to my projection that the wife and I will have ~30 years of max CPP contributions which is higher than usual and because I assumed we would live longer than is typical (i.e. I would recieve CPP to 85 and she to 95) which gooses the IRR rate up.

And remember that your 'rate of return' is without risk, unlike investing elsewhere.

The rate of return is not without risk - the CPPIB does invest in risky assets just as I do (personally I'm 100% stocks).

It is entirely possible that both the CPP and my investments will not be there for me when I retire in 23 or so years.

I'm okay with that since my backup retirement plan is a silver bullet.

^{1 He is a pension expert at UBC and I highly recommend anyone to check out his twitter feed.}

[Ash74]

Credit where credit is due.

The Ontario Liberals did indeed start the ball rolling with expanding the CPP and as far as money flushed down the toilet they did a pretty good job keeping the tab down this time.

http://news.nationalpost.com/news/canada/canadian-politics/taxpayers-spent-close-to-20m-on-ontario-pension-plan-that-never-started-and-is-now-winding-down

This is of course the first count the Wynne government has released and will likely be more but I must admit I was surprised it did not have another zero or two behind it.

Things are looking up for Ontario

[msj]

And remember that your 'rate of return' is without risk, unlike investing elsewhere.

.

I should add that the problem with CPP is that the risk really lies with survival.

Even with a spouse, should I die youngish then my IRR is extremely negative.

Even my wife with my survivor benefit (likely not much since she is expected to get nearly the max CPP anyway, therefore the survivors portion from me is piddly) would still be looking at a negative IRR unless she lived to be very very old.

Meanwhile, if I have those CPP premiums to do what I want with them, prior to my demise, maybe I would have enjoyed the fruits of my own labour and lived a full life before dying young-ish or, if I saved them, then I would have more in savings that would then benefit my wife much more than the piddly survivors pension she would get.

So, there is plenty of risk with CPP.

[poochy]

So i can invest my own money, take it when i need it, or, invest with the government and hope i live long enough to get what they owe me a little at a time, and what is it called when the government takes your money and you don't get it back...a tax. Many, many Canadians are taxed in this way.

[msj]

Well, something like 6-7% of Canadians between the ages of 55-64 end up dying prior to reaching age 65 so for those people yes the IRR is negative and it certainly is a tax.

[Bonam]

Already factored in for my own case. My spreadsheets are always more complicated than I let on because as an accountant I compound and compound when it comes to spread...sheets.

In fact, when I did my math and compared it to what Kevin Milligan¹ posted on his twitter feed i was surprised that my number looks so close. According to him the average IRR for a person with my birth year is closer to 2.1%.

Is that at least after inflation? If not, that's really sad.

I ran my own numbers for what I'll put in and get back out under Social Security here in the US and it is actually a negative IRR.

[msj]

Yes the 2.1% is after inflation.