Blogs & Comment

Will you get your CPP premiums back?

A post by Canadian Capitalist on the recent proposal to raise Canada Pension Plan (CPP) premiums and benefits drew heated commentary on his blog. I too have some concerns to pass on.
Many people seem to think the CPP premium hikes are OK. They appear to be assuming they will get those premiums back when they retire. But I fear they are being too trusting and will actually get less than what they expect. Here are some reasons why:
1. The CPP is government run. Bureaucrats and politicians do not have the same incentive to manage your savings as cost-effectively and prudently as you would. Here are some examples of the potential for waste and graft.

kickbacks paid by investment counselorsto obtain portfolio management contracts

for many years, 60 to 64 year olds have taken advantage of the undemanding Work Cessation Test to qualify for early CPP benefits while remaining in the workforce and not paying CPP premiums (only recently have initiatives been taken to plug this double-dipping)

2. The rules surrounding government agencies and programs can be changed mid-stream, contrary to the interests of those targeted for benefits. Some examples of what could go awry:

the age at which full CPP benefits can be collected could be moved closer to 70 (witness changes European countries are making now to retirement ages)

benefits may be cut in a variety of ways, such as the decision in 1998 to freeze the value of the CPP death benefit and the income exemption ($3,500)

3. According to Duncan Hoods The War on the Family, birthrates in Canada are trending below the level required to sustain government retirement programs — because families are too squeezed financially to have that many children. Hiking CPP premiums would further reduce take-home pay for young families and pile yet another straw on the camels back of declining birth rates.
4. As a government body, the CPP is subject to political interference. For example:

CPP portfolio managers are presently under pressure to become more socially-responsible investors (SRI) from certain quarters of society –this may be a desirable goal but many CPP contributors may instead prefer that investment returns be maximized without such constraints.

there are also pressures to limit investing of CPP funds within Canada.

from the mid-1960s to the mid-1990s, the CPP was used to subsidize provincial governments (CPP funds were allocated exclusively to provincial bonds at below-market rates)

federal governments in other countries are currently allowed to borrow the surplus in the state pension planto fund operations– legislation prohibits the Canadian federal government from borrowing the CPP surplus, but parliament is sovereign and can change legislation

the Quebec Pension Plan is now in financial difficulty (despite contribution rates being hiked to 9.9% in recent years) thanks, in large part, to unwisely using funds to invest in Quebecs industrial policy.