Canada Pension Plan Expansion

So the government recently announced an agreement to "enhance" the CPP going forward. This means your contribution rate will increase, but you'll get more money in retirement in exchange. These changes will be phased in quite slowly, so it will be many years (even decades) before any meaningful impact is felt, both in terms of less money in your pocket now and more money for your retirement.

But is this a good thing? Should we enhance the CPP? The answer depends on your point of view.

Much has been made about the returns the CPPIB (CPP Investment Board) has been earning on its investments, and truth be told they can be quite good certain years. But this is different from YOUR actual return on your contributions. In other words, is the pension you receive from the CPP a good return on the money you (and your employer) have contributed to it?

The answer to that question is "no". While estimates vary, the Fraser Institute estimates that our real return is around 2.1% (real return means it has taken into account the effects of inflation) going forward. You can read their paper on the matter here.

To put this return into perspective, the average annualized return for global stock markets (Canadian, US and international) since 1970 is around the 9.5% range. Taking into account inflation of 3.5% or so, you're looking at a 6% real rate of return. Compared to this, the 2.1% return the CPP gives you is pretty...dismal.

Now on the flip side, the CPP is forced savings. As I mentioned (very diplomatically, I might add) in one of my previous posts, the reason a lot of people don't have pensions/retirement savings is that they simply don't save. For all its faults (and the CPP has many) a forced savings plan that essentially saves people from their own laziness/ignorance/stupidity is a good thing, regardless of its poor returns.

However, for those with the discipline to save and invest their own money, the CPP is a pretty bad deal. But that's socialism for you - you gotta take the good with the bad.