Comments on Rates of Return on CPP by Jason Clemens and Joel Emes [1]

It is an excellent paper. In the following, we will discuss some details that will affect the results of their calculations and predictions.

First, they exclude the CPP deduction in the first eight years of work. This exclusion makes the return look higher. When the early years of work are included, the rate of return will be lower. The authors have pointed out this issue.

Second, for life expectancy data, the authors use life expectancy at 65. This makes the rate of return higher than reality. For example, suppose someone dies at 64. He pays all the deductions but receives no benefit. It would be more accurate to use life expectancy at 18, or 26, or somewhere between 18 and 26. This will lower the rate of return.

Third, the authors had assumed no future change in CPP policies. However, CPP policies have changed numerous times since inception, lowering the rate of return along the way. Since the publication of their paper, CPP policies have undergoing major changes, which will further lower the rate of return in the future. The mainstream might not agree. On paper, the increase of deduction is matched by generous increase of benefit. But the increase of deduction is immediate. The proposed increased of benefit will be phased in slowly, till 2065. During this period, many new deduction policies may occur, and have occurred, such as CPP2, to increase deduction. Hence the prediction that rate of return will stabilize at 2.1%, or 1.7% factored in the cost of early deductions, is not accurate.

I made a simple calculation myself.[2] The future expected return is about zero. When factoring situations from second and third comments, the adjusts made from the paper may reach similar results.

References

1.        Rates of Return on the Canada Pension Plan by Jason Clemens and Joel Emes, Fraser Institute, May 2016

https://www.fraserinstitute.org/sites/default/files/rates-of-return-for-the-canada-pension-plan.pdf

2.         On the Broad Impacts of Pension Systems, Jing Chen, Jan 2022

https://www.researchgate.net/publication/357717339_On_the_Broad_Impacts_of_Pension_Systems