The new agreement, once fully implemented, will cost you $34 more per month, and will cost your employer the same. That’s a total of $68 per month, or $816 per-year that the government will collect for each working person.
In exchange for this increase, the federal government will increase the current CPP amount by $4478 per-year.
Now, let’s assume you’re a young person just entering the work force.
You’re 18-years-old, and the normal retirement age is 65. What if you were allowed to keep your portion of the CPP increase of $34 per month, and invested it in a simple TSX index fund?
The Toronto Dominion TSX index fund has returned six per cent annually since its inception. The RBC TSX index fund has returned seven per cent annually since its inception. We’ll divide the two and use 6.5 per cent as our rate of return.
Using a compound calculator, we see that contributing $408 per year for 47 years at 6.5 per cent annually, you would have $122,297.
Now, if you take that number and divide it by the increase in CPP ($4478) you get 27. That’s the number of years you would have to collect CPP in order to have a pension income of $122,297.
That means you have to live until you are 92 years old just to break even.
The average life expectancy for those born in Canada between the years 2000 and 2002 is 77 years for males, and 82 years of age for females. If we use more recent stats, males born in 2012 have an average life expectancy of 80 years, while females have an average life expectancy of 84 years of age. Neither of these stats comes close to the 92 years of age you need to reach to break even.
What does this all mean? Well, for most young people, it would be financially beneficial for them to keep the $34 per month and invest it in a simple index fund. Of course, this requires that you are diligent with your money, and actually invest it every month.
Now, let’s not forget, I haven’t even factored in the employers portion of the CPP increase. I guess the government will just use that as some extra pocket money.
This is yet another example of the government taking your money, and then patting themselves on the back for giving you back only a fraction of what they took from you.