The strong returns that the CPP Investment Board (CPPIB) generates don’t necessarily translate into higher benefits for pensioners, a new report from the Vancouver-based Fraser Institute suggests.
The think tank, which issued a report on Thursday that aims to illuminate the distinction between the returns the CPPIB earns and the returns that pensioners are projected to receive on their contributions, found that “The returns of the CPPIB do not in any direct way influence the [Canada Pension Plan (CPP)] retirement benefits received by individual Canadian workers.”
Rather, the Fraser Institute’s report makes the point that the retirement benefits that workers receive under the CPP are essentially determined by the number of years they work, their annual earnings and the age when they retire.
However, the returns the CPPIB has produced may benefit workers and retirees indirectly, the report states. For example, strong returns could allow for higher benefits or a reduction in contribution rates. Conversely, sustained underperformance could lead to benefit reductions or higher contribution rates.
The report then aims to project the real returns that workers receive on their contributions. In the early days of the CPP, workers received very high returns primarily because their contribution obligations were much lower than they are today, the report states.
As a result, workers born between 1905 and 1914, who retired between 1970 and 1979, received a 27.5% return on their contributions. Since then, returns have declined as contribution obligations have risen.
Specifically, the study indicates that workers retiring in 2021 or later will receive a return of 3% or less (assuming they retire at age 65) while workers retiring in 2037 or later will receive an annual return of 2.1%.
“The steep decline in the rates of return is a function of two main factors: early contributors [to the CPP] paid into the program for a shorter period of time and they made smaller contributions [as] the CPP contribution rate increased to the current rate of 9.9% from 3.6% at inception (1966),” the report says.
“It’s easy to see how average Canadians could confuse the rates of return earned by the CPP fund with what they actually receive via their CPP retirement benefits. The reality is that Canadians born after 1971 are receiving modest returns from the CPP,” said Jason Clemens, executive vice-president at the Fraser Institute and co-author of the report.
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