What is the return on CPP contribution?

All Canadian workers need to contribute to CPP (Canada Pension Plan) after 18 years old. When we retire at 65, we will collect benefit from the government. There are 47 years between 18 and 65. Naturally we are concerned about the return of our CPP contribution.

CPP is a pay as you go system. The earliest participants of the CPP system received very high returns, when many people contribute to the system and few people receive benefit. But what about future?

One way to gauge the future return is to compare today’s contribution to benefit ratio. We assume all numbers are inflation adjusted in our discussion. In 2018, the maximum contribution to CPP from workers and their employers is 5188 dollar, the maximum benefit to retirees is 13610 dollar. The ratio is 5188/13610 = 0.38. Then we look at the numbers of years receiving benefit and the number of years contributing. The average Canadian lifespan is 82 years old. The expected lifespan after retirement is higher than 82. However, some people who contribute to CPP die before retirement. As a first approximation, on average the number of benefit year is 82-65=17. To receive the maximum benefit, one need to contribute for 47 years, from 18 to 65. The ratio of benefit year to contribution year is 17/47 =0.36. This is slightly smaller than 0.38, the ratio of contribution to benefit. As a first estimate, the return on CPP contribution is slightly less than 0%, inflation adjusted. 

The return on investment fund of CPP might be much higher. But what ordinary people actually get is a return around 0%, inflation adjusted.