CPP promises meagre return, especially for younger workers

Canadians born after 1971 will receive just 2.1% return from the Canada Pension Plan.

Don't bank on big returns from your CPP contributions. Image: Fraser Institute

Don’t bank on big returns from your CPP contributions.
Image: Fraser Institute

TORONTO — When the time comes to access the Canada Pension Plan (CPP), expect a meagre rate of return – especially if you’re a younger worker, says a Fraser Institute study.

The public policy think-tank notes CPP retirement benefits are determined by the number of years a person works, annual contributions (up to a maximum of $5,088.60 this year, based on earnings), and the age the person retires.

Anyone born after 1955 (retiring in 2021 or later) will receive a modest return on their contributions of 3% or less. Any CPP-eligible Canadian born after 1971 (retiring in 2037 or later) who worked full-time will receive an annual return of just 2.1% in retirement.

By contrast, eligible Canadian workers born between 1905 and 1914 (retired between 1970 and 1979) enjoyed a rate of return of 27.5%.

The steep decline in the rates of return is a function of two main factors: early plan contributors paid into the program for a shorter period of time, and they made smaller contributions – the CPP contribution rate increased from 3.6% at inception (1966) to the current rate of 9.9%.

Many Canadians confuse their individual rate of return with the 11.4% rate of return earned by the investment arm of the CPP, the Canada Pension Plan Investment Board.

“The CPP Investment Board has achieved impressive results since its creation but it has no direct effect on the benefits received by Canadian workers in retirement,” said Jason Clemens, executive vice-president at the Fraser Institute and co-author of Rates of Return for the Canada Pension.

Click here for study results.

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