Here’s a recent example of this complaint about CPP and the new ORPP by Gail Vaz-Oxlade:
If you imagine an account in the CPP system with your name on it holding all the money you paid in, then it seems logical that your estate should get what’s left of that money when you die.If you die early ORPP gives yr estate nothing regardless of how much you put in. This is the big flaw with CPP too! #ShoutNowShoutLoud— Gail Vaz-Oxlade (@GailVazOxlade) August 18, 2015
But what happens if you live unusually long? Your account will be empty. But CPP keeps paying. CPP is taking part of your longevity risk. CPP makes money if you die early and loses money if you live long. This is a fair trade, and you get the security of knowing that the CPP payments will continue for your whole life ticking up by inflation each year.
One of the biggest challenges of handling a portfolio in retirement is longevity risk. If you knew exactly how long you will live, you could plan to spend every penny. But you don’t know. To be safe you have to plan to spend much less to make the money last. With CPP, they take care of all this worry for you.
What would happen if the value of everyone’s CPP benefits were guaranteed to say age 90? By this, I mean that if you live past 90, you keep getting payments, and if you die earlier, your estate gets a lump sum of the remaining payments to age 90. The simple answer is that either CPP benefits would drop a lot or CPP premiums would rise a lot.
So, when someone complains that CPP doesn’t pay out to your estate when you die early, what they are really calling for is a big drop in CPP payments or a big increase in CPP premiums. Don’t fall for this. Whatever problems we may have with our CPP system, having payments stop when you die is not one of those problems.