Wednesday, February 8, 2012

Boomers Get a Good Deal with CPP

In a recent post, I showed that under current rules, baby boomers will get more from Old Age Security (OAS) than they contributed through their incomes taxes. I expected to get angry comments from boomers who don’t like the idea of changing OAS. Instead, several readers observed that boomers will get more from CPP than they paid in as well.

Robert Hurdman pointed out that CPP is not fully funded which means that retirees get some of their benefits from current CPP contributions. Fortunately, the situation is improving as the degree of funding increases each year. This should reduce future inequities.

Reader Greg put together a CPP spreadsheet analysis concluding that the oldest baby boomers will collect about twice as much as they paid into CPP. Changes to CPP contribution rates between 1986 and 2003 have made CPP less of a good deal for younger baby boomers. Greg’s second spreadsheet summarizes results for different birth years. Here is Greg’s summary of the spreadsheet results:
“Not surprisingly, the first folks to collect CPP got value up to 17 times their contributions. The first baby boomers get just about double their contributions, the last only get about 85% of their contributions in value. And it just keeps getting worse for GenX, stabilizing at value worth 66% of contributions. The breakeven point is boomers born in 1960, with those who are younger increasingly subsidizing those who are older.”
My take is that CPP has been unfair, but is headed in the right direction, if glacially. On the other hand, OAS is still in need of fixing. All potential changes proposed for OAS are likely to be unpopular, but something has to change.


  1. I am part of the Boomer Generation and life is not fair.

    You win some and you lose some so

    I won't cry either way about who benefits the most in the CPP or OAS.

    I want both programs to be there for future generations so if we must adjust the OAS to ensure future paymenst so be it.

    Let us all have the courage to do what is best for society as a whole going forward.

  2. I've been looking at this as well. Some of us can find ways to not be eligible for CPP, which makes it more than a question of fairness. When compared to a full investment portfolio or the long-term returns of stocks it doesn't look like a great investment.

    On the other hand if you treat it as fixed income it might not be that bad with a 2.5-3% real return. In fact the amount of contributions could easily overwhelm the amount a young person would allocate to fixed income.

    Unlike bonds it comes with political risk though. The age to start receiving benefits could rise in the next 30-40 years, or someone who practices political timing well could retire right after a socialist government puts responsible management into the history books and buys the CARP votes.

  3. @Anonymous: The "life is not fair -- get over it" philosophy is a good one in many cases, particularly when discussing past injustices, which is what I assume you mean. Going forward, we need to fix OAS, both to make it more fair and more affordable.

    @Value Indexer: The problem for most investors is that even when they invest in stocks, they manage to get long-term returns more in line with fixed income because they pay high fees and fail at market timing.

    I'm less concerned with whether CPP is a good deal than I am with the relative benefits between generations.

    You're right that politicians will be tempted to buy CARP votes. Maybe this was a factor in how Greece got into its debt mess.

  4. @Anonymous I don't think it is enough for CPP and OAS to just "be there" for future generations. For somebody born in 1980 to pay 3 times as much for the same CPP benefit of somebody born in 1945 isn't what is best for society as a whole.

    @Value Indexer- interestingly, if I assume the CPP investments return 2% more than inflation, even those born in 1980 and later get back value equal to their CPP contributions. But those born in 1945 still get back 2.25 times the value of their contributions. I couldn't consider CPP investments as fixed income, after all it is a multi-decade investment that is professionally managed.

    @Michael what really is so wrong with OAS? The only proposal on the table is to increase OAS slowly, which isn't fair at all. The real way to make OAS more affordable would be to increase the retirement age quickly to catch the bulge of baby boomers. Or claw it back at lower incomes. Seems fair, if you don't really need it why should you get it? I'm more concerned with CPP because it is a force savings mechanism (which I personally don't need but it seems most people do) which must be invested in a crappy to great investment depending on your age. In case anybody is interested, I was born in the mid 60's so I don't do too badly by CPP, but it is a terrible deal for my children. Now if they start increasing the age for CPP before I can collect I'll be annoyed, I see that as making ones investment performance in the CPP even worse.

  5. @Greg: The problem I see with OAS is that it starts being paid too early. It makes no sense to have 20-year retirements. As a country, we need to encourage more people to work. Based on current longevity, a more sensible retirement age is 70. Ever increasing numbers of employees in public service combined with typical retirements in the late 50's is not sustainable.

  6. The story with boomers always seems to be the same ... it's always the best of times. For a group that has huge appreciation of real estate, great stock booms, and low interest rates / inflation, I don't understand how so many of them can be screwed. It's not my problem as a young worker that they lived a life they couldn't afford. My grandparents were savers, my parents were spenders.

  7. @Chris: Maybe it shouldn't be your problem that boomers lived a life they couldn't afford, but they still have huge voting power, and their governments may try to tax you to death.