How does the CPP Compare to Other Investments?

The issue is: mandatory or voluntary? Do required contributions to a retirement plan really make more sense than shopping around for the right investment–both at contribution and withdrawal time?

Let’s take a look at the affordability of mandatory contributions to the CPP, from a tax and survivor viewpoint. It’s been my experience that many people don’t understand the current options well. For example, did you know:

  • CPP retirement benefits: income can be split during your lifetime with an assignment to a spouse to save tax dollars at age 60. Many people miss out on after-tax cash flow because they are unaware of this provision.

The issue is:  mandatory or voluntary?  Do required contributions to a retirement plan really make more sense than shopping around for the right investment–both at contribution and withdrawal time?

Let’s take a look at the affordability of mandatory contributions to the CPP,  from a tax and survivor viewpoint.  It’s been my experience that many people don’t understand the current options well.  For example, did you know: 

  • CPP retirement benefits:  income can be split during your lifetime with an assignment to a spouse to save tax dollars at age 60.  Many people miss out on after-tax cash flow because they are unaware of this provision.
  • CPP disability benefits:  Most people don’t know the income qualifies for RRSP contribution purposes, which can further enhance retirement income, and that taxes on disability benefits received can be saved with CRA’s lump sum averaging
  • CPP death benefit:  This is a flat amount of $2500, never indexed;  which may not be a great return on investment  for those who don’t live long enough to collect CPP retirement, disability or survivor benefits.  As a minimum this death benefit should be indexed and “leave a representative legacy”, more accurately reflective of actual contributions.
  • CPP survivor benefits:   If you are single, there is nothing left to your estate once you die other than the unindexed lump sum death benefit of $2500.  The maximum monthly survivor benefit available to the surviving spouse or common law spouse in 2010 is (under 65)  $516.57  and $560.50 for 65 and over ; however, see the important note below. 

Note:  that at age 65 or greater 60% of the contributor’s retirement pension is available if the surviving spouse is not receiving other CPP benefits.  If they are, the survivor benefit is combined with your retirement benefitThe most that can be paid is the maximum retirement pension for one person.  So if you both worked at the maximum contributory earnings ($47,200 for 2010) the survivor will not get anything more for the spouse’s contribution to the plan!

What do you think about this?  Remember, it’s Your Money. Your Life.

Next time: Your Good Thoughts Needed on Pension Reform.

Evelyn Jacks is President of The Knowledge Bureau, a national educational institute focused on excellence in financial education, and a member of the federal Task Force on Financial Literacy.  For information about self study courses and books visit www.knowledgebureau.com

2 thoughts on “How does the CPP Compare to Other Investments?”

  1. I'd like to see the self employed have the option of making contributions to some type of locked in RRSP or RPP instead of CPP; still saving for retirement, but likely better returns for the 9.9% required contribution. The locked in version would ensure they are not used until age 60 just like CPP today.

  2. Thanks for your comment, Anni M.  This is a really important discussion and I hope we can get more people involved to think strategically about retirement funding.  What about increasing the 18% earned income limit for an RRSP contribution?  Do you think this might help those at lower income levels save more in windfall years?      

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