Author: Financial Awakening Blog
If you still haven’t read Step 1 – Plan ahead. Imagine where you are when you retire, I highly recommend you to read it first.
CPP
First of all, I will give you some facts about CPP, the Canada Pension Plan.
- You cannot opt out of CPP, every person who is over 18 years old and is earning salary must pay CPP
- There are 2 portions in CPP. You pay half and your employer pay half. In other words, if you are self employed, you pay double what other people pay.
Here is a table with all the data of CPP over the years
|
Year
|
Pensionable Earnings | Contribution Rate | ||
| Minimum | Maximum | Employed | Self-employed | |
| 1985 | $2,300 | $23,400 | 1.80% | 3.60% |
| 1986 | $2,500 | $25,800 | 1.80% | 3.60% |
| 1987 | $2,500 | $25,900 | 1.90% | 3.80% |
| 1988 | $2,600 | $26,500 | 2.00% | 4.00% |
| 1989 | $2,700 | $27,700 | 2.10% | 4.20% |
| 1990 | $2,800 | $28,900 | 2.20% | 4.40% |
| 1991 | $3,000 | $30,500 | 2.30% | 4.60% |
| 1992 | $3,200 | $32,200 | 2.40% | 4.80% |
| 1993 | $3,300 | $33,400 | 2.50% | 5.00% |
| 1994 | $3,400 | $34,400 | 2.60% | 5.20% |
| 1995 | $3,400 | $34,900 | 2.70% | 5.40% |
| 1996 | $3,500 | $35,400 | 2.80% | 5.60% |
| 1997 | $3,500 | $35,800 | 3.00% | 6.00% |
| 1998 | $3,500 | $36,900 | 3.20% | 6.40% |
| 1999 | $3,500 | $37,400 | 3.50% | 7.00% |
| 2000 | $3,500 | $37,600 | 3.90% | 7.80% |
| 2001 | $3,500 | $38,300 | 4.30% | 8.60% |
| 2002 | $3,500 | $39,100 | 4.70% | 9.40% |
| 2003 | $3,500 | $39,900 | 4.95% | 9.90% |
| 2004 | $3,500 | $40,500 | 4.95% | 9.90% |
| 2005 | $3,500 | $41,100 | 4.95% | 9.90% |
| 2006 | $3,500 | $42,100 | 4.95% | 9.90% |
| 2007 | $3,500 | $43,700 | 4.95% | 9.90% |
| 2008 | $3,500 | $44,900 | 4.95% | 9.90% |
| 2009 | $3,500 | $46,300 | 4.95% | 9.90% |
| 2010 | $3,500 | $47,200 | 4.95% | 9.90% |
| 2011 | $3,500 | $48,300 | 4.95% | 9.90% |
CPP Pensionable Earning Change
As you can see, the CPP maximum contribution is a linear line over the years. It increases every year. By using simplified method. Here’s the maths.
(48300 – 23400)/26 years
= $957.69 per year increase.
$957.69/23400 * 100%
= 4% increases every year with refer to the year 1985.
In other words, if you are making $48000 a year, you will see a CPP break in your pay check in 2010, while you will never see the CPP break in the year 2011.
- You cannot control how they invest the CPP.
- You also cannot control how much bonus the CPP Investment Board Executives get for their bonus. It is just normal for them to lose 18.6% of value of investment while getting 7 millions in bonuses.
You probably will wonder how long will our hard earn money will be depleted either by bad investment or executives bonuses.
Let’s do another math and see how much you pay into CPP and how much you get back.
Let’s take the 2012 max rate and consider it does not change anymore.
Let’s say you are 30 now and you will retire at 65, 35 more working years.
48300 x 35 x 4.95%= $83,679.75
You pay a total of $83,679.75 when you retire.
Let’s say you get an average benefit of $512.64 for every month you retired. You get $6151.68 per year. Let’s say you live until 80. You get $92275.20. It all looks good so far, right. However, if you consider the fact that you are paying only half of the contribution. Your employer pays for the other half, then you can see the $83679.75 becomes $167,359.50. Now, if you are self employed, you won’t think that this is a good investment anymore….
The main idea of CPP is for the younger to support the older. Now that the baby bloomers are retiring. Less youngers are going to support the elders. Can this system sustain? On the other hand, if everyone take care of themselves and save all the administrative fee (including the bonuses for the executives), would it be more productive? CPP give people a false peace of mind. People believe that CPP will take care of them in the worse case situation. Now, if there is no CPP and OAS, would people worry more about retirement and actually spend more time planning?
With the new change in CPP. I hope everyone will wake up and start planning their retirement. Our fate should be controlled in our own hands.
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I think that CPP is good…since you can’t opt out, you better off be happy to receive a check at 65
Seriously, I think the Gov should force us to save more and increase the CPP to make sure people have something once they retire. We don’t save enough right now
»crosslinked«
Yeah. I think we should save more. The inflation is going crazy now.