Myth 4 – The CPP produces excellent returns for individual contributors
Some CPP expansion proponents point to the excellent returns earned by the Canada Pension Plan fund since 2000, implying that expanding the program would be a good deal for contributing Canadians. However, this claim conflates the returns earned by the investment arm of the CPP (the CPPIB), and the returns that individual Canadians receive in the form of CPP retirement benefits.
Certainly, the CPPIB’s investments of CPP funds have performed well since 2000. However, that strong performance does not directly translate into a retirement benefit for Canadian workers. CPP benefits are calculated based on the number of years worked, CPP contributions, and the age the worker retires. Nowhere in this calculation is the CPPIB investment returns included.
The return that Canadian workers receive in the form of CPP retirement benefits (compared to their contributions) varies considerably depending on when the worker was born and retired. For instance, a worker born in 1905 who retired at age 65 in 1970—one of the first years Canadians received CPP benefits—would have enjoyed a 39.1% rate of return after inflation. For Canadians born after 1956, however, the CPP rate of return is a meagre 3.0% or less—and that rate of return declines further to 2.1% for those born after 1971.
The rates of return have declined for two main reasons. First, the contributory period in the CPP’s early years (10 years) was much less than is the case now (47 years). Second, the total contribution rate has increased from 3.6% when the program was started in 1966 to its current level of 9.9%. While in its current form the CPP is an important component of Canada’s overall retirement income system, its proposed expansion cannot be justified on the basis of its rate of return to retirees.