The expanded Canadian Pension Plan will bring only a slightly higher rate of return for retirees — 2.5 per cent in the expanded plan compared to 2.1 per cent in the current plan, according to a new report by the Fraser Institute.
The report assumes employees will retire at the age of 65 and looked at the rates of return of the current CPP and the expanded plan, which has been agreed on in principle by federal and provincial finance ministers and will begin as a five-year phased increase on Jan. 1, 2019.
In May, the Fraser Institute published a report that found Canadian employees born after 1971 can expect to receive a rate of return of just 2.1 per cent on their CPP contributions. That compares to higher returns for employees born between 1955 and 1971, who can anticipate a return of three per cent, and those born between 1905 and 1914 who retired between 1970 and 1979. That group saw a real return of 27.5 per cent.
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Calculating rates of return under the new program, the Fraser Institute’s new report found Canadians born after 1956 will not see a change, with their rate of return remaining around 30 per cent or less. Those born between 1971 to 1980 will receive a return of 2.3 per cent, according to the report, and those born in 1993 or later will receive a return of 2.5 per cent.
“What’s so terrible about Canadians earning a long-term, after expenses, real rate of return of 2.5 per cent in a world where real return bonds earn 0.5 per cent and where retail investors are likely to earn negative real returns?” says Keith Ambachtsheer, president of KPA Advisory Services.
There’s no doubt the current CPP rates of return are unimpressive, notes Malcolm Hamilton, a senior fellow at the C.D. Howe Institute, adding the study didn’t consider the expanded CPP’s rates of return in isolation from the current CPP’s rates. The fact that the current CPP doesn’t do a terribly good job for participants in terms of rates of return is no surprise, he says.
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However, unlike the current CPP plan, the expanded one might need to be fully funded, says Hamilton, noting this will produce volatility in contributions and rates of return, but could produce higher outcomes.
“What [the Fraser Institute] did is put the two pieces together and when you put two pieces together, the returns will continue to be disappointing because of the current CPP,” he says.