The Canada Pension Plan turns 60: How good a deal has it been?

January marks the 60th anniversary of the Canada Pension Plan, an appropriate time to assess how good of a deal the CPP has been.

When the CPP was launched in 1966, Canadians contributed just 1.8 per cent of their pay, up to a maximum annual amount of $79.20. Employers made a matching contribution.

In spite of the modest contributions, the politicians of the day decided that a full CPP pension should be payable as early as 1977. This created a deficit which will continue in perpetuity.

The contribution rate started inching up in 1987, and then a change in the funding method in 1997 required the contribution rate to rise more quickly until it reached 4.95 per cent of covered earnings in 2003.

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When the CPP was expanded in 2016, the contribution rate was increased again in steps to 5.95 per cent of earnings. (I will gloss over some technical details.)

In the chart below, I show what might have been if workers had opted out of CPP and contributed the same amount – including the employer’s share – into an individual RRSP instead. I will call this the “DIY Alternative.”

To be very clear, the DIY Alternative is purely hypothetical since you can’t opt out of the CPP. I compare the DIY Alternative to the maximum CPP pension over two time periods: (a) 1966 to 1996 and (b) 1986 to 2026. The first period was chosen because it covers the 30 years from the start of the program when the rules allowed for a full pension to be paid earlier, while the second period covers the 40 years up to the current year. (A full contributory period is deemed to be about 40 years.)

As the chart shows, it would have been better to participate in the CPP in the 1966-96 period while the DIY Alternative would have provided a higher income in the 1986-2026 period.

This reflects the fact that early contributors to CPP were not paying their own way and that future generations are paying the price. The situation in Quebec, incidentally, is even worse as the QPP has required higher contributions than the CPP for many years now.

In spite of the chart, I believe the Canada Pension Plan has generally been beneficial to Canadians. It ensures at least a modest level of retirement security and doesn’t require the worker to have any investment expertise.

Even though the CPP is mandatory, the chart above is useful to one group of Canadians: the self-employed. They have the option of taking income from their business in the form of dividends – instead of a salary – and they don’t have to contribute to the CPP on their dividend income.

In calculating the income under the DIY Alternative, I made the following assumptions:

1. The money would be invested only in the S&P/TSX (Canadian equities), the S&P 500 (U.S. equities) and long-term Canada bonds and the annual investment fee would be 1 per cent. I assume no additional return owing to active management.
2. The asset mix would start out at 100 per cent in equities and 0 per cent in bonds and gradually change to an ultimate asset mix of 60 per cent/40 per cent.
3. The annuity that one could buy from an insurance company would be indexed to the inflation rate. To approximate the cost of such an annuity, I used a real return of 4.25 per cent in 1996 and 1.75 per cent today.

Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca).