Why the Canada Pension Plan will still be solvent — and then some — when you retire

As the Canada Pension Plan Investment Board releases its annual report this week on the billions of dollars it has under management, many Canadians remain unsure about where their own CPP money is and how secure it might be.

Financial advisers say there's a misconception that the government can dip into the money, as well as unfounded concern about whether it might run out as baby boomers all retire and start drawing their pensions.

People also don't know when to take CPP and what benefit they might receive, says Craig Hughes, director, advanced financial planning, at IG Wealth Management.

"The thing we see the most is 'What am I going to get out of it?' People don't understand the mechanics and, at the end of the day, what am I going to get when I retire," he told CBC News.

The CPPIB manages a huge pot of cash — $392 billion as of the end of March 2019 — with a mandate to invest on behalf of Canadians and keep the CPP sustainable over many generations. The professionally managed investment group has earned an average of 10 per cent a year on that money for the past 10 years.

1. But won't it run out before I get it?

People see the money coming out of their paycheque and are confused about where it goes, hence the worry that the government will spend it, Hughes said.

Your CPP contribution is kept entirely separate from government general accounts. And in 1997, the federal government created a rule that pension benefits must be covered each year by the cash that comes in from Canadian employers and workers. That year's benefits come out of what the working population pays and any additional money — and there is additional money — goes to CPPIB. 

That's because the contribution rates have been set at a level where there is extra to set aside in an investment fund. That's what will cover the additional cost of benefits for the baby boomers, who will be retiring in large numbers until about 2030 and could live years beyond that.

That investment fund is operated at arms length from the federal government, not at the behest of whatever party is in power.

"From a practicality standpoint, CPP is segregated and not part of general government revenues. That money is independently managed. The chief actuary looks at the plan every three years.  They project over the next 75 years at the very least, there will be no shortfall," Hughes said.

2. Wouldn't I do better investing it myself?

Some people do  think they can do better, Hughes said. They opt out of paying into CPP at age 65, even if they're still working.

"The return on the investment has to be quite high to match CPP. The thing you have to remember is that CPP is indexed to inflation, whereas your investment is at the will of what the markets do," he said.

3. If the CPPIB has $392 billion — why is the benefit so low?

The maximum annual benefit for someone retiring in 2019 is $13,610, but most people don't get the maximum, says Benjy Katchen, executive vice-president and chief digital strategy officer, Home Trust Company.

The CPP was designed to replace just 25 per cent of an average income. Your benefit is based on how much you have contributed through your working life — from about age 18 to age 65, or 47 years. In order to receive the full benefit, you must contribute the maximum amount each year for the vast majority of these years. The pensionable earnings maximum is set each year, based on an average income, and for 2019 is $57,400.

"I think we should not be relying 100 per cent on CPP," Katchen says.

"CPP provides a base amount of income that everybody should know is there, but people should know it's a very modest one, so anything extra above and beyond that's got to come from your company pension or investing money in GICs [guaranteed investment certificates] or other instruments."

4. But I went to university for four of those years and made peanuts early in my career?

When your CPP is calculated, the eight years with the lowest earnings are eliminated — for example, the years when you were getting an education or if you were laid off in your 60s.

But you don't need to guess what you'll get, says John Krasevec, a financial adviser for Edward Jones, based in Burlington, Ont.

He advises his clients to get an account with MyService Canada and ask for the record of their personal CPP contributions over their working lives. 

"It will show all your retirement history, what years you've worked, have you contributed the max every year, did you skip a year? They'll give you an estimate that says, based on what you've contributed, at 60 years old, you'll get 'X' at 65 years old, you'll get 'Y' at 70 …'."

5. I stayed home with children, so will I get a really low pension?

Not necessarily. The federal government allows parents to eliminate additional low-earning years when they had children under the age of seven. The catch is, you have to apply for it, says Krasevec.

"That's called the child-rearing dropout. If you're a parent — and either parent can do this — you can have … those years taken out of your calculation," he said.

"This is not automatic, you have to apply fill out a form that says, I want to take out those years, because I had a child under seven."

6. Shouldn't I take the CPP at 60 so I can get the most out of it?

If you take CPP at age 60, you will have a reduced benefit compared to whether you take it at 65 or 70. In fact, you can increase your benefit by 42 per cent if you wait to age 70, compared with taking it at 65. But figuring what to do is a bet on how long you will live.

"Everyone's situation is different, and there is no blanket answer on when to take it," Krasevec said.

"I always start with the first question — is your health compromised? Someone may have had a heart attack or may have a life span that is shortened for whatever reason, cancer or family history. If the answer is yes, that means take CPP."

The next question, he said, is: "Do you need it?"

At 60, many people are still working and may not need to draw the pension.

"If the answer is yes, I do need it because I have various expenses. I need that income to supplement my lifestyle, the answer is yes. Take it."

The next question is, "Will it put you in a favourable or unfavourable tax bracket?" If it puts you in a higher tax bracket, don't take it, he advises.

"If you have another pension. If you made $100,000 in income and you collected $10,000 in CPP, you made $110,000 and you'll pay tax on that."

Krasevec said it's best to keep asking yourself these questions every year.

7. So why are they taking more money this year?

Since 2003, people in the workforce have contributed 4.95 per cent of their earnings up to the yearly maximum pensionable earnings, which was $57,400 for 2019. This year that contribution is going up to 5.1 per cent, and it will increase gradually to 5.95 per cent in 2023. Employers match the employee contribution. And the maximum pensionable earnings figure is also set to rise.

What that's going to mean is that eventually retiring Canadians will get up to 33 per cent of their average income in retirement.  In today's dollar terms, the enhanced CPP would be $7,000 more, to a maximum benefit of nearly $20,000.

That's necessary because fewer Canadians have good pensions and people aren't saving as they should, Hughes said. Younger Canadians who won`t retire for years will get the greatest benefit.

"The government has shown a very good commitment to CPP,  the fact they made that enhancement with more money going into CPP on the understanding that with longevity and declining pensions, they need to provide a guarantee to people with CPP."

8. Why is CPPIB not investing in Canada and promoting the Canadian economy? Why is my money going to China and India?

It does invest in Canada. About 15.5 per cent was invested in Canadian assets as of the end of March.

But it would not be a good idea to put all of that money into Canadian markets and Canadian companies, in part because any investment is safer if it is diversified, according to Katchen.

"They wouldn't be investing only in GICs or bonds insured by the government. They should have some diversification. And I think it's the same thing at a national level," he said.

"And the other area is that the CPP is at arms length from the government. Do you really want the investment to be politically motivated depending on what political party is in power?" he said.

Instead, CPPIB has a mandate to optimize the return on investment and keep the risk profile low, "so that Canadians today and the future generation of Canadians can be secure in the portion of retirement they're relying on from CPP," Katchen said.