Research conducted by The Fraser Institute shows that Baby Boomers and older generations are earning disproportionately high rates of return on their contributions to the Canada Pension Plan (CPP).
In their report, Rates of Return for the Canada Pension Plan, co-authors Jason Clemens and Joel Emes calculate that people born in the 1970s and after are only receiving a modest 2.1% rate of return on their CPP contributions. In contrast, those born in the early 1930s are earning between 9.5% and 8%, while Baby Boomers born in the mid to late 1940s are earning between 4.3% and 3.6%.
Impressive investment returns
The problem is not one of poor investments. The authors point out that the CPP Investment Board (CPPIB) has earned impressive returns that are well above what are necessary in order to keep the plan solvent. Instead, it is a question of plan design. The inequality in internal rates of returns is due the fact that the CPP was created in 1966: older people have paid into the the program for a shorter period of time and have made smaller contributions, leaving younger workers to shoulder an inordinately heavy share of the load.
"It’s fairly easy for average Canadians to confuse the returns earned by the CPP Investment Board, which is tasked with actively investing the investable funds of the CPP, with what they themselves might actually earn from their contributions to the CPP in the form of retirement benefits," say the authors. "Indeed, some advocates for the expansion of the CPP have conflated, or at least not clearly differentiated between, the rates of return earned by the CPPIB and the actual returns received by individual Canadian workers in the form of CPP retirement benefits."
OSFI made similar conclusions
The Office of the Superintendent of Financial Institutions (OSFI) conducts its own review of the CPP every three years, and the last report issued November 2013 came to similar conclusions: OSFI’s Office of the Chief Actuary found that those born in 1950 were earning an internal real rate of return of 4.2% on their CPP contributions, while those born in 1970 were only receiving 2.4%.