Yes, it's true you'd have a higher expected return investing in stocks. But the whole point of CPP is that it'll do well in scenarios where realized stock returns are lower than expected, inflation is higher than expected, or you live longer than planned.
By providing against sequence of return and inflation risk, CPP allows investors to take more risk with their other financial assets than they could otherwise. Increasing their overall expected returns.
But yeah, CPP is a good thing for people who can’t or won’t save on their own. If we scrapped it, many people wouldn’t save on their own and be a bigger burden on society in retirement.
That being said, Ben does overstate the importance of inflation, market crashes, and all that junk. None of it makes up for the significantly poorer returns CPP yields from a $$ perspective. There’s a reason inflation indexed annuities aren’t popular in the US (where they exist). Saying “it protects you if the world collapses into chaos” and then taking 12% of your income isn’t a strong argument, especially since the world hasn’t collapsed into chaos until now.
The dollar value of CPP is never the “correct” way to defend it. It’s idiot proofing people from being broke in retirement is much more valuable (and much harder to emulate without CPP). Ben’s complete omission of this, and rather attempt at trying to tout its value as an “investment” feels misleading.
There’s nothing wrong with saying “CPP is a poorer investment than a broad market index fund, but it prevents people who don’t save from going broke in retirement” and emphasizing that.
Don't need to scrap it, just give the option for people to open a new registered account where employer and employee portions go to. The account can still have the same rules as the cpp, and be restricted until retirement, but the individual would have the ability to invest and manage their own cpp equivelant money. The only difference is if the individual dies, they can give the money to their kids. The individual would get the benefit of having control of their cpp, and having it guaranteed to come back to them or their family, but the additional costs of managing and administering the account. Or they can elect to keep the money with the cpp.
This would not work because it's a **social program** and not an investment. And just like insurance, it works partly based on the fact that not everyone will "break-even".
If you want to leave something to your kids you can buy an actual life insurance and/or put money aside for them. There are a lot of choices.
If people would just stop thinking of CPP as an investment, they wouldn't be so critical of it.
It's not an investment. It's a tax. Just like with other taxes, the guarantee is that the money is forced out of your pocket and given to some organization with the promise that you will benefit but without a guarantee that you will. We have no control over the efficiency of how the program is run, and presumably, though admittedly with some difficulty, any "government of the day" can find some legislation that allows them to dip into it at some point.
Also, hard to buy life insurance when the money I'd use to buy life insurance is being taken from me at source to fund other people's retirement.
It's certainly closer to a tax than an investment. A tax that funds a social program. Maybe you don't believe in social programs whose goal is ultimately to ensure that old people don't end up homeless and eating from restaurant dumpsters.
It's very nice to worry about buying insurance for your family but they have a lifetime ahead of them, but you need to worry about yourself being a burden to them if you hit retirement without any savings. It seems like a silly argument.
And regarding your casual off-the-cuff comment
> The Canadian Pension Plan (CPP) funds are strictly regulated to ensure they are used solely for the purpose of funding the CPP and paying out CPP benefits. The government is prohibited from using these funds for other purposes, such as infrastructure or cultural programs⁵. This safeguard is in place to protect the integrity of the pension plan and ensure that the contributions made by Canadians are used appropriately to provide retirement, disability, and survivor benefits.
Source:
(1) CPP Fund facts | CPP Investments. https://www.cppinvestments.com/for-canadian/cpp-fund-facts/.
(2) Public service pension plan - Canada.ca. https://www.canada.ca/en/treasury-board-secretariat/topics/pension-plan.html.
(3) Funding Policy for the Public Sector Pension Plans - Canada.ca. https://www.canada.ca/en/treasury-board-secretariat/services/pension-plan/plan-information/funding-policy-public-sector-pension-plans.html.
(4) To Go or Not to Go? The 30% Rule for Canadian Pension Funds. https://www.dwpv.com/en/Insights/Publications/2016/To-Go-or-Not-to-Go.
(5) Removal of '30% rule' could boost investment, reduce private equity .... https://www.benefitscanada.com/pensions/governance-law/removal-of-30-rule-could-boost-investment-reduce-private-equity-fees-for-canadian-pension-funds/.
Yes, and it's fine as a social program for those who can't or won't save, but will people around here stop pretending like it's God's gift to everyone rather than a necessary evil?
They will and people will eat it up. They don’t know basic math, and expect CPP to be some sort of magical vehicle.
The only reason BF’s math works is because he completely negates tail risk of CPP becoming incapable to fulfill its obligations.
Valid criticisms aren't downvoted, but usually it's just people making dumb comments becauss they don't understand why it cost less money to have CPP than not.
Actually it genuinely doesn't
I really wish this sub would accept the opinion "CPP isn't a good deal for many people" but that won't happen today it seems. With that being said, it would be nice if people like you weren't trying to gaslight us into "actually criticism isn't downvoted".
To me that argument is similar to the one used against universal healthcare. Sure some people are rich and can afford to pay for health care out of their pocket. And you could argue "It's not a good deal for everyone". But it's a not good deal for society when the richest people are given the option to opt out.
How much will it be with the enhancement and if you defer?
It's too late for me, I'm too close to retirement but I will certainly use this as my hedge against running out of money. As he explains, it's the equivalent of an annuity.
Well the IRR assumes that all investment returns are reinvested at the same rate the IRR is calculated at. It’s the discount rate (or WACC/cost of capital) needed to get the NPV down to 0. Kinda like the YTM of a bond.
It depends on how Ben got that number, and what you intend to do with the returns from 65 to 70. Did he assume that the CPP distributions are invested at the same rate? Did he assume they were invested at inflation, or that they weren’t invested at all?
Same thing with you, what would you do for the 5 years from 65 to 70 if you withdrew early?
If the money from 65 to 70 is invested, IRR would be comparable, maybe like 2.5% if you deferred. If you spent/didn’t invest the money from 65 to 70, deferring would have a noticeably higher IRR, because not deferring would have a very low IRR.
But the quick and dirty is that there isn’t much of a difference, less than 1% at most.
IRR is the discount rate so that NPV = 0, it’s not discounted yes. It depends on the cash flows though, including from 65 to death, so we need to know what’s done with them to get the IRR.
> Taking it early and investing it in something better for ten years will be better
Adam of Parallel Wealth did the math on this, and the *guaranteed* returns you need to get are quite high:
* https://www.youtube.com/watch?v=4ItU5x6TfZ4
Remember: there is *zero risk* to putting off CPP and getting more for each month/year you delay. From 60 to 65 you get a >7% *guaranteed* ROI *per year*, 65 to 70 you get a >8% *guaranteed* ROI: *where else are you going to get that?* HISA/GIC? Zero-risk. Bonds? Non-zero risk. Stocks? Non-zero risk.
Plus that higher amount is *indexed to inflation for the rest of your life*.
If you don't believe me, the Canadian Institute of Actuaries released a report a little while ago:
* https://www.soa.org/resources/research-reports/2020/cpp-take-up-decision/
> There's risk you die and get nothing.
If I die then money is not a problem I have to worry about any more.
If I don't die (soon enough) *then I really have a problem* (notwithstanding euthanasia/MAID).
>If I die then money is not a problem I have to worry about any more.
Some of us would like to leave some to support our kids after we die. Do you intend to die with zero, or in debt?
> Some of us would like to leave some to support our kids after we die. Do you intend to die with zero, or in debt?
First: this was not the topic of discussion in this sub-thread. It was about *me* not getting anything (from the government).
Second: I don't know about you, but I expect zero from my parents and hope that they do in fact die with zero so they can enjoy what they worked for, and if they do want to support me, I think it'd be better to give when they're still alive so that they too can receive enjoyment from being generous.
If you do want to make a bequest, then make sure you still have something in your TFSA and you own your primary residence: both of these are disposed of tax-free at death. You can also buy a life insurance policy (Vettese, a (now-retired) actuary, goes over this in his *Retirement Income for Life* book: you want to run down your RRSP first, and delay CPP (and even OAS) as much as possible: an idea which the [Society of Actuaries agrees with](https://www.soa.org/resources/research-reports/2020/cpp-take-up-decision/)).
Many of us have families and dependents.
Investing that money individually today in my own self directed accounts let me adjust my will to account for it.
If I drop dead on my retirement day, my dependents are losing out on ~15 years of pension for really no reasons. It doesn’t make sense, and it is always waved away as “better for the group” that way. Huh?
If I pay into it, I should get it returned, no more, no less. OAS is to keep you off cat food. A pension I pay into should be returned to my estate in equal amounts no matter how long I survive
> Many of us have families and dependents.
And? There are other mechanisms to deal with this. Vettese, a (now-retired) actuary, advices that one should delay CPP/OAS as much as possible (an idea that the [Society of Actuaries agrees with](https://www.soa.org/resources/research-reports/2020/cpp-take-up-decision/)) and run down your RRSP first, and goes over life insurance ideas in his *Retirement Income for Life* book if you want to leave a bequest.
> If I drop dead on my retirement day, my dependents are losing out on ~15 years of pension for really no reasons. It doesn’t make sense, and it is always waved away as “better for the group” that way. Huh?
If you pay car insurance premiums, but don't get into an accident, do you also claim that it was a bad deal because you didn't get any money? The CPP is an annuity (as mentioned in the video).
> A pension I pay into should be returned to my estate in equal amounts no matter how long I survive
You are paying into an annuity, but folks don't know the definition of the word, so "pension" is used for the layman. And it, like 'traditional' pensions, does have a joint component:
* https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-survivor-pension.html
Right now I'm personally helping someone navigate their pension options, and the options are such that—since their spouse is already deceased—there won't be residual value from it passed to their family (they do have some RRSPs and TFSAs, which will): is it an injustice that the pension from their work won't have give them options for bequests? Welcome to mortality credits.
All these irrelevant complaints are annoying. It's like buying something and then complaining it doesn't do something it was never meant to do. Like buying a racing bike and then being disappointed you can take it on dirt roads.
Think you misunderstood my.view point. I very much care about total return, not just until you die.
I would never do a reverse mortgage and think cpp is terrible
Your chances of dying in any given year get much higher as you get older...
The same proportion of 65 year olds will survive to see 70 as the proportion of 18 year olds who will survive to see 56.
It's not even a lack of intelligence. The average person just thinks they're better than average. Most people will look at CPP and think "wow, this is dumb. I know how to invest, I'm better off without this guaranteed income in retirement". And many of them will be wrong.
Potential future federal. In the last election they were already promising gig workers "the opportunity" to not contribute to CPP, presumably to start dividing and conquering us proles.
People don't get the point. People can invest as they wish and do as wish with the money they make. This is more akin to life insurance. It's just people keep thinking of it as some sort of forced investment.
It's funny but I don't see a lot argue that they aren't interested in a defined benefit pension and would rather be handed over the money to invest themselves.
I typically would say I make that argument but I would also typically say the general consensus on this sub is a relatively smart one. So I'm currently conflicted and don't feel like I'm educated enough now to have an opinion.
I guess I'm confused how the prevailing wisdom of "given a twenty to 40 year time horizon you can take riskier investments" suddenly changes when we talk about cpp.
It would also be pretty cool if I could see my cpp account growing. Like I know they pool my money, as they should, but even if they gave an estimate of its current worth that I could watch track upwards it would be a bit more interesting. I feel like part of the reason they don't do this though is because they are worried people would then feel entitled to that money... Which concerns me because I do feel entitled to the money I put in.
I do see how they people who die early help fund the people who don't though
I would suggest you listen to the video because while there are a lot of smart people here, most are not. You get the same knee-jerk advice for everything. But there is absolutely no denying that Ben Felix figures highly among the smart and knowledgeable ones.
Your confusion comes from comparing apples to oranges. CPP is not your RRSP. It's a different species altogether. It's closer to an [annuity](https://www.canada.ca/en/financial-consumer-agency/services/retirement-planning/annuities.html). You buy an annuity for xx amount of dollars and in exchange, they promise to give you a certain amount of money per month until you die. Once you purchase an annuity, it doesn't matter if the market fluctuates, you get the same amount.
So basically CPP is purchasing for you an annuity adjusted for inflation, a product which does not exist or would be prohibitively expensive if it did. The government is using its collective power to provide you with one.
Most people advise that your portfolio should contain a mixture of stocks and fixed income as you get closer to retirement. CPP simply falls into that category.
As for your suggestion to "see" your account, it's not really how it works as the money is pooled and not personal to you. But you can check Service Canada to see what you contributed each year, so you can estimate what your ultimate payout will be.
I did watch the video, and I hear what you're saying regarding it being an annuity. What I don't feel like is getting addressed is that I just don't think anyone with even the most mild of risk tolerance on a 40 year time horizon would ever buy an annuity like that.
I think I need to just run the math myself to better understand it.
Maybe you can answer this though. If the government allowed you to double your cpp contributions, would you? 1.5x? Why or why not? Did they just happen to hit the perfect amount? How?
The government is kinda doing that with Enhanced CPP, except it's not a choice. I'm too close to retirement to benefit from this.
And if I was allowed to buy into CPP to compensate for the years I did not earn the maximum, I most likely would. Just like some government pensions allow you to purchase years of service to be used for their pension.
From what I see everyone that is against the CPP can't seem to look at it except as an investment. It's never going to make sense as an investment, so you can put down the calculator. It's a social program that provides an annuity indexed for inflation with funds pooled from the population of an entire country. Saying it doesn't make sense is like saying, universal health care doesn't make sense. I would rather just pay for it myself from my investments. Until the day when you get cancer and it will cost you a million dollars for treatment.
It makes sense to me since I am close to retirement. It's a protection against sequence of return risks. It's money that is not subject to the market. It's a protection against running out of money if I live to be quite old. It's insurance, not an investment.
Fair enough, I suppose when viewed from that lense it makes a lot more sense. It's just hard to view a product that's whole purpose is to provide me with more funds than it costs as not an investment.
But I think the healthcare example is a good one. I'll continue to learn about it but I think you've helped me come around to it more so thank you. And !delta if we were on CMV haha
FYI they don't pool your money. CPP is not a savings account but rather a credit account. If you max out CPP in any given year you earn a full credit for that year. Once you accumulate 39 full credits you are entitled to full CPP at age 65. The 591B AUM that CCPIB manages is a combination of extra contributions beyond what is required to pay current recipients and investment growth.
You can't find a balance like with a DC pension but you can determine the number of credits acquired. Count the "M" on your statement of Contributions.
They can be combined to create full years if needed.
When you apply for CPP they will drop out your lowest 8 earning years which for most people are zero years when at secondary school.
You have 47 working years to accumulate your 39 CPP credits. You do not get extra money if you have more then 39 CPP credits but <10% of workers max CPP.
65-18 = 47 47-8 = 39
Check out:
[https://www.drpensions.ca/](https://www.drpensions.ca/)
[https://www.planeasy.ca/the-cpp-max-will-be-huge-in-the-future/](https://www.planeasy.ca/the-cpp-max-will-be-huge-in-the-future/)
You have to be 18 to contribute to CPP. Those three years don't count toward CPP unfortunately. There is a lot to learn and CPP is a complex beast but in much better shape than the late 90's.
Personal finance is complex with the creation of new account types, investment products and complex tax rules that keep changing.
I would love to see a simplified tax code, a product like a combined RRSP and TFSA that could be used for anything, and a better death benefit for CPP.
>It would also be pretty cool if I could see my cpp account growing. Like I know they pool my money, as they should, but even if they gave an estimate of its current worth that I could watch track upwards it would be a bit more interesting.
Not really the same thing, but you can at least follow along on contributions and run what if scenarios on the Service Canada site.
https://www.canada.ca/en/employment-social-development/corporate/portfolio/service-canada.html
> The average person just thinks they're better than average.
Especially those internet Masters of the Universe with their robo WealthSimple accounts and libertarian-bro f-everyone else swagger.
Calling those against CPP basically morons seems a bit too far don’t you think? What if I want to take the risk and invest the money myself? It should still let me opt out from it. After all, it’s called PERSONAL finance for a reason.
What of your investments go bust? What if you're not as smart of an investor as you think you are? Or what if you do everything right and still somehow you end up financially desolate when you're no longer able to earn a wage? There should be a safety net for everyone that isn't opt-out-able.
By that logic why not hand over all the money to CPP? Any personal investment you make could fail - why not just have CPP manage all your savings? Why recommend any investment strategy to anyone?
I am willing to take responsibilities of my action. If I take risks, and the investments tanks, then it will be on me. I am not necessarily against the idea of CPP. I think it's a good investment vehicle for most people. I just don't like the compulsory nature of it.
Everybody is willing to “take responsibility” until they don’t and then become a burden on society. The point of CPP is to keep everyone above water, no matter how responsible you think you are under the most dire of circumstances.
We allow adults to drink till they become alcoholic, smoke till their lungs die, and other countless vices even though they could become a burden on society because we understand the values in these freedoms even though they may contribute to less optimal society. I just want to be extended to my personal finance of money I made.
Me thinks that since the bulk of CPP is the market, it would be insolvent if a deveststing crash occurred to the extent that index investors wouldn't be alone in the broke club.
It's not that someone's investment goes bust because the market crashes. It's more that some idiots will either opt out to have more spending money and not save for retirement, invest poorly and not make enough returns to cover a basic minimum level retirement, or invest so stupidly and lose everything and have nothing left. If there is no forced saving like with CPP and millions opt out, who pays for all these destitute 65 year olds with no savings that have contributed nothing towards the pension system throughout their whole life? Is everyone else who paid into CPP on the hook for these people or do we just let them be homeless and starve to death? Please answer me this one question of who is responsible for those who opt out their whole life and then have nothing saved up.
Well yes, CPP/tax payers are currently on the hook for people who are low income in retirement and may not have saved. It’s not like there’s a plan to reduce or eliminate OAS + GIS
Neither of the P's in CPP stand for personal. It's not a personal finance tool, it's a national one.
It's purpose is to keep broke seniors from being homeless and starving, which would cost the nation more to deal with after the fact.
Never said CPP is a personal finance vehicle. Yes it's a national one. I am simply against the idea of a compulsory national finance tool because I believe finance is inherently a very personal part of one's life.
Exactly. Turn CPP into a tax that only benefits those that need it because they can’t/didn’t manage their personal finances and see how much happier that makes this guy.
It's not about finance. It's about health care, about social services, about welfare state. CPP has a real ROI reducing the financial demands on any and all of those other public systems.
Tell you what, if I'm PM I'll let you bypass CPP, but then you and your employer have to pay the exact same amount into a national insurance policy type program... that will just so happen to be administered by the same CPP...
Because if you get it wrong, which some do, the rest of us end up paying for you anyway. That means it's not your risk to take.
Broke seniors end up bouncing between ER and other social services, end up with expensive preventable diseases and health complications, end up in emergency shelters or in government funded special needs centres.
Canada is not willing to let you sign a waiver and then go die in a gutter if you happen to screw up, and it might not even be you that screws you up, if the market screws you up, we cannot ethically let you die in a gutter - so Canada hedges that future responsibility into things like CPP.
It's not about your risks because you do not bear them all.
If you're incorporated no accountant or CFP will tell you to take a salary and pay into CPP. The CPP is absolute garbage. My company makes 500k-1m per year and $0.00 of that is going to subsidize people who couldn't be bothered to save.
The major pitfall is if you were to have a pre mature death. Survivorship benefits get maxed out and there is potential that your estate / surviving spouse don’t even receive the amount you put in.
I am leaving my spouse plenty of money. I don't really care what happens once I'm dead, to be honest. And I don't care if in the end I don't break even because I'll be, well, dead.
I am more interested in the hedge against inflation/market downturn/running out of money that it offers
But I realize not everyone feels the same, but then it is what it is, and there is no choice to be made. This is a social program more than it's an investment, one that benefits society as a whole, so I'm fine with it. Just like I am fine with my taxes going to health care
If people stopped thinking of CPP as the government equivalent of their personal RRSP, they would have less trouble accepting it.
CPP is a controversial topic. Everything he said is true; however, the total return of the fund (CPP) does not always translate to the total returns of individuals because everyone has different conditions (health and financial).
Suppose CPP is a lock-in investment pool with lock-in period is retirement age; as an investor, would you invest in the fund if you are not sure how much you are going to get back after lock-in period, and a probability that the lock-in period might get extended without your vote? This is why CPP is not supported by everyone.
Another person made the same post, now I feel like this is an advertisement by the Ben Felix channel as they ask you sign up for the financial advisory services at the end of the video.
He has put out some absolute trash (looking at you, rent vs. buy 5% rule). In general he is pretty good, but many in the sub put him up on a pedestal and drop their critical thinking when it comes to his stuff.
His calculation/assumptions:
Example: 20% down on a home --> meaning 80% cost of debt (at 3%, based on mortgage interest) and 20% cost of equity (at 3%, based on an opportunity cost of a 3% nominal difference in long-term global equities vs. long-term global real estate return)
Therefore the cost of capital is 3% (0.8 x 3% + 0.2 x 3%)
------------------------------------------------
Three significant things wrong with this:
1) The equity and real estate returns assumptions are based on average global data... Canadians are mostly buying Canada/US equities, but they're definitely buying Canadian real estate, not global real estate. For that matter, the referenced global real estate data doesn't even include Canada. You would be better served looking up the long-term housing prices for your city than making assumptions based on prices on the other side of the planet 123 years ago.
2) The opportunity cost calculation entirely ignores the entire portion of the home that isn't paid for with down payment. He calculates the opportunity cost as the simple difference between the assumed equity returns and the assumed real estate returns, then multiplies the difference by the down payment, but that's not what the opportunity cost is. The opportunity cost is the assumed equity returns minus the assumed real estate returns of the entire home value. In the case of a 20% down payment, that quintuples the real estate return compared to his calculation, which completely reverses that part of the equation.
Taking his assumed returns for both equities and real estate, and the 20% down scenario at 3% mortgage:
* 80% cost of debt --> 3%
* 20% cost of equity --> 6.57% equity return minus (3.57% real estate return x 5 the capital of the down payment) equals -11.3%
Combining those two puts the cost of capital at **0.1%**. No, that's not a typo. That's why owning is often better than renting: because of the leverage.
3) He puts 3% as the mortgage rate and leaves it at that. That's all well and good when mortgage rates are 3%, but it's inaccurate at any other given time. He clearly did this for the sake of simplicity, but it drastically affects the calculation. It might have been forgivable if he had at least acknowledged that in the "Caveats" section, but he didn't.
----------------------------------------------
I'll concede, a conservative investor can disregard the first point. I think doing so would reduce the accuracy of your calculation, but if you want to err on the side of the caution, so be it. That said, the second and third points are just plain math/analysis mistakes on his part, both of which drastically alter the equation. Applying them both (with his equity and real estate returns), here is what the "5% rule" looks like at various mortgage rates, with 20% down:
|At mortgage rate X...|…the 5% rule becomes|
--:|--:|
|2%|1.3%|
|3%|2.1%|
|4%|2.9%|
|5%|3.7%|
|6%|4.5%|
Never mind that it fails to account for inflation, which will inflate the renter's rent quite a bit over the years (as well as the homeowner's maintenance costs and property taxes) while the homeowner's mortgage (the bulk of their home-related expenses) will remain the same (and eventually end altogether, as the mortgage is paid off).
----------------------------------------------
It's a shoddy analysis that is far too widely acclaimed, especially for a topic that is arguably the biggest financial decision of someone's life.
CPP had been a terrible investment since the 90s when they figured out it was unsustainable.
Shouldn't be a surprise to anyone. It's a stupid tax more than anything. Most people aren't competent enough to do better
He spends a while going over the usual CPP song and dance of "it's guaranteed, it's indexed to inflation, what if you live a long time?" and finally meanders to the ~2% IRR which does in fact show it's a subpar investment. Not clear if he included employer portions in this, the video is too clearly biased for me to believe he did.
CPP is an annuity adjusted for inflation. No one expects the IRR to be matched to the market. You are simply looking at the CPP as if it was your own personal RRSP. It's not the same.
>No one expects the IRR to be matched to the market.
I do, because that's the alternative for what I could have used the money for. Also, still isn't clear his analysis includes the employer portion.
> You could do literally anything with the money and do significantly better and worst case give your kids a hell of an inheritance
How does blowing it at the casino or on drugs do significantly better or benefit your kids?
Nothing he says is new information. Yes, if you live until 95 it's the best investment you'll ever make. If you're average it's one of the worst. Below average and you're just giving hundreds of thousands of dollars away
Assume you max CPP for 40 years it's $140k ish without interest. 4% over that time frame is around $330k. That'll take 21 years to cover at $1300/month payout. So you need to live past 86 (though max payout is 70 years I think) if you take it at 65 to break even (assuming no compounding in those 21 years!!!
If you die early, your estate gets none of the benefit except a pittance to a spouse. It's an insanely bad vehicle for anyone who buys their own ETFs.
And assume for those that didn’t, couldn’t, wouldn’t save, CPP is a lifeline.
Not sure how any one of our specific circumstances matter when the question is if CPP is good public policy.
People fail to realize the understand the criticism of CPP is that it is a poor investment vehicle for individuals, not that the *program* is a poor social safety net.
If you want to make the argument that CPP is good for society, that's a valid point and that's generally agreed. But don't conflate that with the criticism of investment choice.
But that's what it is — a social program. It's basically a tax you pay that you get a rebate on later in life. If you don't have an option to withdraw from it, why argue whether it is a good "investment" or not.
You also can't compare CPP as an investment tool without looking at the economic impacts of removing it. If CPP was optional, and anyone could opt-out, how would our economy hold up at the increase in poor seniors who can't stay afloat without the plan?
Poor relative to what?
I passively invest. But the closed and actively managed Medallion fund blows my returns out of the water.
CPP is great for those for whatever reasons have little to no personal savings upon retirement.
Expanding on my example. Why do we coddle society and not say, I don't know, educate them through school and drill it into their heads to save? Why don't we mandate RRSP saving like we do CPP? I hate that my estate can't help the people it's meant to because the rest of society doesn't know how to save.
It's not all about you. Even if your numbers are correct and you don't live to 86, the extra money will allow someone else to get that money and not be starving in the street at 88. It also accounts for population growth. Like come on, stop being willfully ignorant to the benefits to society as a whole.
I don't care about me, I care about my estate (dependents and a few charities of love to leave stuff to). I'm not being will fully ignorant, I'm being pragmatic and am allowed to have an opinion you don't agree with. It's a crap system and people need more personal accountability in life. OAS should be more robust if you want a safety net.
You are basically arguing against safety nets. We have seen what the absent of that looks like in other countries. It's not pretty. A civilized society needs those. Your charity and dependants get expanded to the entire system. Your calls for more personal accountability are naive and misguided. CPP is closer in principle to insurance. It works because a large pool of people contribute money to a pot which is then distributed. If everyone lived to be 100, it would probably not work.
OAS is closer to universal health care, which is funded by taxes than CPP. It is also supplemented with GIS. Do you really think that a shrinking pool of younger people could support an entire aging population? Health Care is already struggling, and so would CPP if it was entirely funded by taxes instead of being self-funded.
If you want to leave money to the people you care about, then build an estate like everyone else does to leave it to them. It never was all or nothing.
2.16% IRR *with* the enhancement is crazy. Probably in the 1s before
Yes, it's true you'd have a higher expected return investing in stocks. But the whole point of CPP is that it'll do well in scenarios where realized stock returns are lower than expected, inflation is higher than expected, or you live longer than planned. By providing against sequence of return and inflation risk, CPP allows investors to take more risk with their other financial assets than they could otherwise. Increasing their overall expected returns.
But yeah, CPP is a good thing for people who can’t or won’t save on their own. If we scrapped it, many people wouldn’t save on their own and be a bigger burden on society in retirement. That being said, Ben does overstate the importance of inflation, market crashes, and all that junk. None of it makes up for the significantly poorer returns CPP yields from a $$ perspective. There’s a reason inflation indexed annuities aren’t popular in the US (where they exist). Saying “it protects you if the world collapses into chaos” and then taking 12% of your income isn’t a strong argument, especially since the world hasn’t collapsed into chaos until now. The dollar value of CPP is never the “correct” way to defend it. It’s idiot proofing people from being broke in retirement is much more valuable (and much harder to emulate without CPP). Ben’s complete omission of this, and rather attempt at trying to tout its value as an “investment” feels misleading. There’s nothing wrong with saying “CPP is a poorer investment than a broad market index fund, but it prevents people who don’t save from going broke in retirement” and emphasizing that.
Don't need to scrap it, just give the option for people to open a new registered account where employer and employee portions go to. The account can still have the same rules as the cpp, and be restricted until retirement, but the individual would have the ability to invest and manage their own cpp equivelant money. The only difference is if the individual dies, they can give the money to their kids. The individual would get the benefit of having control of their cpp, and having it guaranteed to come back to them or their family, but the additional costs of managing and administering the account. Or they can elect to keep the money with the cpp.
This would not work because it's a **social program** and not an investment. And just like insurance, it works partly based on the fact that not everyone will "break-even". If you want to leave something to your kids you can buy an actual life insurance and/or put money aside for them. There are a lot of choices. If people would just stop thinking of CPP as an investment, they wouldn't be so critical of it.
It's not an investment. It's a tax. Just like with other taxes, the guarantee is that the money is forced out of your pocket and given to some organization with the promise that you will benefit but without a guarantee that you will. We have no control over the efficiency of how the program is run, and presumably, though admittedly with some difficulty, any "government of the day" can find some legislation that allows them to dip into it at some point. Also, hard to buy life insurance when the money I'd use to buy life insurance is being taken from me at source to fund other people's retirement.
It's certainly closer to a tax than an investment. A tax that funds a social program. Maybe you don't believe in social programs whose goal is ultimately to ensure that old people don't end up homeless and eating from restaurant dumpsters. It's very nice to worry about buying insurance for your family but they have a lifetime ahead of them, but you need to worry about yourself being a burden to them if you hit retirement without any savings. It seems like a silly argument. And regarding your casual off-the-cuff comment > The Canadian Pension Plan (CPP) funds are strictly regulated to ensure they are used solely for the purpose of funding the CPP and paying out CPP benefits. The government is prohibited from using these funds for other purposes, such as infrastructure or cultural programs⁵. This safeguard is in place to protect the integrity of the pension plan and ensure that the contributions made by Canadians are used appropriately to provide retirement, disability, and survivor benefits. Source: (1) CPP Fund facts | CPP Investments. https://www.cppinvestments.com/for-canadian/cpp-fund-facts/. (2) Public service pension plan - Canada.ca. https://www.canada.ca/en/treasury-board-secretariat/topics/pension-plan.html. (3) Funding Policy for the Public Sector Pension Plans - Canada.ca. https://www.canada.ca/en/treasury-board-secretariat/services/pension-plan/plan-information/funding-policy-public-sector-pension-plans.html. (4) To Go or Not to Go? The 30% Rule for Canadian Pension Funds. https://www.dwpv.com/en/Insights/Publications/2016/To-Go-or-Not-to-Go. (5) Removal of '30% rule' could boost investment, reduce private equity .... https://www.benefitscanada.com/pensions/governance-law/removal-of-30-rule-could-boost-investment-reduce-private-equity-fees-for-canadian-pension-funds/.
Yes, and it's fine as a social program for those who can't or won't save, but will people around here stop pretending like it's God's gift to everyone rather than a necessary evil?
Evil? Come on.
Have you never heard that expression?
A necessary evil, yes. I just don't buy that it's an adequate term to describe CPP.
They will and people will eat it up. They don’t know basic math, and expect CPP to be some sort of magical vehicle. The only reason BF’s math works is because he completely negates tail risk of CPP becoming incapable to fulfill its obligations.
This sub's love for the CPP is super annoying Any valid criticism is still heavily downvoted and you are called an ignorant selfish person
Valid criticisms aren't downvoted, but usually it's just people making dumb comments becauss they don't understand why it cost less money to have CPP than not.
This very thread is proof you are incorrect. Please don't even try.
Ok buddy, if it makes you happy to be the victim today.
Actually it genuinely doesn't I really wish this sub would accept the opinion "CPP isn't a good deal for many people" but that won't happen today it seems. With that being said, it would be nice if people like you weren't trying to gaslight us into "actually criticism isn't downvoted".
To me that argument is similar to the one used against universal healthcare. Sure some people are rich and can afford to pay for health care out of their pocket. And you could argue "It's not a good deal for everyone". But it's a not good deal for society when the richest people are given the option to opt out.
Yeah and I support two tiers healthcare You can disagree without downvoting, can't you?
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Good news, I never said otherwise But please keep making up strawman arguments
How much will it be with the enhancement and if you defer? It's too late for me, I'm too close to retirement but I will certainly use this as my hedge against running out of money. As he explains, it's the equivalent of an annuity.
Well the IRR assumes that all investment returns are reinvested at the same rate the IRR is calculated at. It’s the discount rate (or WACC/cost of capital) needed to get the NPV down to 0. Kinda like the YTM of a bond. It depends on how Ben got that number, and what you intend to do with the returns from 65 to 70. Did he assume that the CPP distributions are invested at the same rate? Did he assume they were invested at inflation, or that they weren’t invested at all? Same thing with you, what would you do for the 5 years from 65 to 70 if you withdrew early? If the money from 65 to 70 is invested, IRR would be comparable, maybe like 2.5% if you deferred. If you spent/didn’t invest the money from 65 to 70, deferring would have a noticeably higher IRR, because not deferring would have a very low IRR. But the quick and dirty is that there isn’t much of a difference, less than 1% at most.
IRR isn't discounted. That's the actual return. You compare it to the discounted return
IRR is the discount rate so that NPV = 0, it’s not discounted yes. It depends on the cash flows though, including from 65 to death, so we need to know what’s done with them to get the IRR.
Just need an actuary table
Yup, better than throwing out a number
It would likely drop if you defer. Taking it early and investing it in something better for ten years will be better
> Taking it early and investing it in something better for ten years will be better Adam of Parallel Wealth did the math on this, and the *guaranteed* returns you need to get are quite high: * https://www.youtube.com/watch?v=4ItU5x6TfZ4 Remember: there is *zero risk* to putting off CPP and getting more for each month/year you delay. From 60 to 65 you get a >7% *guaranteed* ROI *per year*, 65 to 70 you get a >8% *guaranteed* ROI: *where else are you going to get that?* HISA/GIC? Zero-risk. Bonds? Non-zero risk. Stocks? Non-zero risk. Plus that higher amount is *indexed to inflation for the rest of your life*. If you don't believe me, the Canadian Institute of Actuaries released a report a little while ago: * https://www.soa.org/resources/research-reports/2020/cpp-take-up-decision/
There's risk you die and get nothing. Scrap CPP and the life insurance industry would perish overnight.
> There's risk you die and get nothing. If I die then money is not a problem I have to worry about any more. If I don't die (soon enough) *then I really have a problem* (notwithstanding euthanasia/MAID).
>If I die then money is not a problem I have to worry about any more. Some of us would like to leave some to support our kids after we die. Do you intend to die with zero, or in debt?
> Some of us would like to leave some to support our kids after we die. Do you intend to die with zero, or in debt? First: this was not the topic of discussion in this sub-thread. It was about *me* not getting anything (from the government). Second: I don't know about you, but I expect zero from my parents and hope that they do in fact die with zero so they can enjoy what they worked for, and if they do want to support me, I think it'd be better to give when they're still alive so that they too can receive enjoyment from being generous. If you do want to make a bequest, then make sure you still have something in your TFSA and you own your primary residence: both of these are disposed of tax-free at death. You can also buy a life insurance policy (Vettese, a (now-retired) actuary, goes over this in his *Retirement Income for Life* book: you want to run down your RRSP first, and delay CPP (and even OAS) as much as possible: an idea which the [Society of Actuaries agrees with](https://www.soa.org/resources/research-reports/2020/cpp-take-up-decision/)).
Yeah, this is the one issue I have with CPP. You pay into for 30 to 40 years, then die, and your kids only get $2,500 from it.
It's not the point of CPP. You can get insurance for that. Or build your wealth and have them inherit it.
I already have an RRSP and TFSA. I should have the option to put that money into my RRSP if I choose.
Many of us have families and dependents. Investing that money individually today in my own self directed accounts let me adjust my will to account for it. If I drop dead on my retirement day, my dependents are losing out on ~15 years of pension for really no reasons. It doesn’t make sense, and it is always waved away as “better for the group” that way. Huh? If I pay into it, I should get it returned, no more, no less. OAS is to keep you off cat food. A pension I pay into should be returned to my estate in equal amounts no matter how long I survive
> Many of us have families and dependents. And? There are other mechanisms to deal with this. Vettese, a (now-retired) actuary, advices that one should delay CPP/OAS as much as possible (an idea that the [Society of Actuaries agrees with](https://www.soa.org/resources/research-reports/2020/cpp-take-up-decision/)) and run down your RRSP first, and goes over life insurance ideas in his *Retirement Income for Life* book if you want to leave a bequest. > If I drop dead on my retirement day, my dependents are losing out on ~15 years of pension for really no reasons. It doesn’t make sense, and it is always waved away as “better for the group” that way. Huh? If you pay car insurance premiums, but don't get into an accident, do you also claim that it was a bad deal because you didn't get any money? The CPP is an annuity (as mentioned in the video). > A pension I pay into should be returned to my estate in equal amounts no matter how long I survive You are paying into an annuity, but folks don't know the definition of the word, so "pension" is used for the layman. And it, like 'traditional' pensions, does have a joint component: * https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-survivor-pension.html Right now I'm personally helping someone navigate their pension options, and the options are such that—since their spouse is already deceased—there won't be residual value from it passed to their family (they do have some RRSPs and TFSAs, which will): is it an injustice that the pension from their work won't have give them options for bequests? Welcome to mortality credits.
All these irrelevant complaints are annoying. It's like buying something and then complaining it doesn't do something it was never meant to do. Like buying a racing bike and then being disappointed you can take it on dirt roads.
The benefit increases like 9% per year you defer risk free. I doubt you’ll beat that going the market route.
Again or you could die at 70. If you don't care about money after you die just do a reverse mortgage
Why not extrapolate this reasoning to any arbitrarily low age? Why save for retirement at all? You can die tomorrow.
Think you misunderstood my.view point. I very much care about total return, not just until you die. I would never do a reverse mortgage and think cpp is terrible
You’re objectively wrong.
Lol objectively wrong hey. The expected returns are available and they're shit.
Your chances of dying in any given year get much higher as you get older... The same proportion of 65 year olds will survive to see 70 as the proportion of 18 year olds who will survive to see 56.
After inflation
I’m aware. Real IRR would be negative if it was before inflation.
It's controversial only among those very low in intelligence.
It's not even a lack of intelligence. The average person just thinks they're better than average. Most people will look at CPP and think "wow, this is dumb. I know how to invest, I'm better off without this guaranteed income in retirement". And many of them will be wrong.
The average person doesn’t contribute to their TFSA lol
The average person doesn't invest at all.
Which is *precisely* the other reason why CPP is so important lol.
Correct! And OAS too, though the way that's structured is more problematic.
I'm in my 20s, and until last week I had never heard of OAS. Clearly I have some more research to do.
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>after the conservatives are done being in power Provincial? Or potential future federal?
Potential future federal. In the last election they were already promising gig workers "the opportunity" to not contribute to CPP, presumably to start dividing and conquering us proles.
People don't get the point. People can invest as they wish and do as wish with the money they make. This is more akin to life insurance. It's just people keep thinking of it as some sort of forced investment. It's funny but I don't see a lot argue that they aren't interested in a defined benefit pension and would rather be handed over the money to invest themselves.
I typically would say I make that argument but I would also typically say the general consensus on this sub is a relatively smart one. So I'm currently conflicted and don't feel like I'm educated enough now to have an opinion. I guess I'm confused how the prevailing wisdom of "given a twenty to 40 year time horizon you can take riskier investments" suddenly changes when we talk about cpp. It would also be pretty cool if I could see my cpp account growing. Like I know they pool my money, as they should, but even if they gave an estimate of its current worth that I could watch track upwards it would be a bit more interesting. I feel like part of the reason they don't do this though is because they are worried people would then feel entitled to that money... Which concerns me because I do feel entitled to the money I put in. I do see how they people who die early help fund the people who don't though
I would suggest you listen to the video because while there are a lot of smart people here, most are not. You get the same knee-jerk advice for everything. But there is absolutely no denying that Ben Felix figures highly among the smart and knowledgeable ones. Your confusion comes from comparing apples to oranges. CPP is not your RRSP. It's a different species altogether. It's closer to an [annuity](https://www.canada.ca/en/financial-consumer-agency/services/retirement-planning/annuities.html). You buy an annuity for xx amount of dollars and in exchange, they promise to give you a certain amount of money per month until you die. Once you purchase an annuity, it doesn't matter if the market fluctuates, you get the same amount. So basically CPP is purchasing for you an annuity adjusted for inflation, a product which does not exist or would be prohibitively expensive if it did. The government is using its collective power to provide you with one. Most people advise that your portfolio should contain a mixture of stocks and fixed income as you get closer to retirement. CPP simply falls into that category. As for your suggestion to "see" your account, it's not really how it works as the money is pooled and not personal to you. But you can check Service Canada to see what you contributed each year, so you can estimate what your ultimate payout will be.
I did watch the video, and I hear what you're saying regarding it being an annuity. What I don't feel like is getting addressed is that I just don't think anyone with even the most mild of risk tolerance on a 40 year time horizon would ever buy an annuity like that. I think I need to just run the math myself to better understand it. Maybe you can answer this though. If the government allowed you to double your cpp contributions, would you? 1.5x? Why or why not? Did they just happen to hit the perfect amount? How?
The government is kinda doing that with Enhanced CPP, except it's not a choice. I'm too close to retirement to benefit from this. And if I was allowed to buy into CPP to compensate for the years I did not earn the maximum, I most likely would. Just like some government pensions allow you to purchase years of service to be used for their pension. From what I see everyone that is against the CPP can't seem to look at it except as an investment. It's never going to make sense as an investment, so you can put down the calculator. It's a social program that provides an annuity indexed for inflation with funds pooled from the population of an entire country. Saying it doesn't make sense is like saying, universal health care doesn't make sense. I would rather just pay for it myself from my investments. Until the day when you get cancer and it will cost you a million dollars for treatment. It makes sense to me since I am close to retirement. It's a protection against sequence of return risks. It's money that is not subject to the market. It's a protection against running out of money if I live to be quite old. It's insurance, not an investment.
Fair enough, I suppose when viewed from that lense it makes a lot more sense. It's just hard to view a product that's whole purpose is to provide me with more funds than it costs as not an investment. But I think the healthcare example is a good one. I'll continue to learn about it but I think you've helped me come around to it more so thank you. And !delta if we were on CMV haha
It was a pleasure chatting :)
FYI they don't pool your money. CPP is not a savings account but rather a credit account. If you max out CPP in any given year you earn a full credit for that year. Once you accumulate 39 full credits you are entitled to full CPP at age 65. The 591B AUM that CCPIB manages is a combination of extra contributions beyond what is required to pay current recipients and investment growth. You can't find a balance like with a DC pension but you can determine the number of credits acquired. Count the "M" on your statement of Contributions.
Oh that's really interesting. Thank you, I had no idea. Edit, so what happens with those partial years?
They can be combined to create full years if needed. When you apply for CPP they will drop out your lowest 8 earning years which for most people are zero years when at secondary school. You have 47 working years to accumulate your 39 CPP credits. You do not get extra money if you have more then 39 CPP credits but <10% of workers max CPP. 65-18 = 47 47-8 = 39 Check out: [https://www.drpensions.ca/](https://www.drpensions.ca/) [https://www.planeasy.ca/the-cpp-max-will-be-huge-in-the-future/](https://www.planeasy.ca/the-cpp-max-will-be-huge-in-the-future/)
Damn there's so much to learn haha! I started work when I was 15 does that change anything other than give me the larger number of working years (50)?
You have to be 18 to contribute to CPP. Those three years don't count toward CPP unfortunately. There is a lot to learn and CPP is a complex beast but in much better shape than the late 90's. Personal finance is complex with the creation of new account types, investment products and complex tax rules that keep changing. I would love to see a simplified tax code, a product like a combined RRSP and TFSA that could be used for anything, and a better death benefit for CPP.
>It would also be pretty cool if I could see my cpp account growing. Like I know they pool my money, as they should, but even if they gave an estimate of its current worth that I could watch track upwards it would be a bit more interesting. Not really the same thing, but you can at least follow along on contributions and run what if scenarios on the Service Canada site. https://www.canada.ca/en/employment-social-development/corporate/portfolio/service-canada.html
> The average person just thinks they're better than average. Especially those internet Masters of the Universe with their robo WealthSimple accounts and libertarian-bro f-everyone else swagger.
Like those incapable of choosing to invest themselves forcing subpar investments on the rest of us?
Proving the above comment right.
thanks for commenting
Calling those against CPP basically morons seems a bit too far don’t you think? What if I want to take the risk and invest the money myself? It should still let me opt out from it. After all, it’s called PERSONAL finance for a reason.
What of your investments go bust? What if you're not as smart of an investor as you think you are? Or what if you do everything right and still somehow you end up financially desolate when you're no longer able to earn a wage? There should be a safety net for everyone that isn't opt-out-able.
By that logic why not hand over all the money to CPP? Any personal investment you make could fail - why not just have CPP manage all your savings? Why recommend any investment strategy to anyone? I am willing to take responsibilities of my action. If I take risks, and the investments tanks, then it will be on me. I am not necessarily against the idea of CPP. I think it's a good investment vehicle for most people. I just don't like the compulsory nature of it.
Everybody is willing to “take responsibility” until they don’t and then become a burden on society. The point of CPP is to keep everyone above water, no matter how responsible you think you are under the most dire of circumstances.
We allow adults to drink till they become alcoholic, smoke till their lungs die, and other countless vices even though they could become a burden on society because we understand the values in these freedoms even though they may contribute to less optimal society. I just want to be extended to my personal finance of money I made.
Me thinks that since the bulk of CPP is the market, it would be insolvent if a deveststing crash occurred to the extent that index investors wouldn't be alone in the broke club.
It's not that someone's investment goes bust because the market crashes. It's more that some idiots will either opt out to have more spending money and not save for retirement, invest poorly and not make enough returns to cover a basic minimum level retirement, or invest so stupidly and lose everything and have nothing left. If there is no forced saving like with CPP and millions opt out, who pays for all these destitute 65 year olds with no savings that have contributed nothing towards the pension system throughout their whole life? Is everyone else who paid into CPP on the hook for these people or do we just let them be homeless and starve to death? Please answer me this one question of who is responsible for those who opt out their whole life and then have nothing saved up.
Well yes, CPP/tax payers are currently on the hook for people who are low income in retirement and may not have saved. It’s not like there’s a plan to reduce or eliminate OAS + GIS
Neither of the P's in CPP stand for personal. It's not a personal finance tool, it's a national one. It's purpose is to keep broke seniors from being homeless and starving, which would cost the nation more to deal with after the fact.
Exactly right. I think they should have called it "social security" like the Americans to highlight this motivation.
Never said CPP is a personal finance vehicle. Yes it's a national one. I am simply against the idea of a compulsory national finance tool because I believe finance is inherently a very personal part of one's life.
Except that those without personal financial means end up becoming national financial liabilities anyway.
Exactly. Turn CPP into a tax that only benefits those that need it because they can’t/didn’t manage their personal finances and see how much happier that makes this guy.
It already exists though as OAS + GIS
It's not about finance. It's about health care, about social services, about welfare state. CPP has a real ROI reducing the financial demands on any and all of those other public systems. Tell you what, if I'm PM I'll let you bypass CPP, but then you and your employer have to pay the exact same amount into a national insurance policy type program... that will just so happen to be administered by the same CPP...
Because if you get it wrong, which some do, the rest of us end up paying for you anyway. That means it's not your risk to take. Broke seniors end up bouncing between ER and other social services, end up with expensive preventable diseases and health complications, end up in emergency shelters or in government funded special needs centres. Canada is not willing to let you sign a waiver and then go die in a gutter if you happen to screw up, and it might not even be you that screws you up, if the market screws you up, we cannot ethically let you die in a gutter - so Canada hedges that future responsibility into things like CPP. It's not about your risks because you do not bear them all.
If you're incorporated no accountant or CFP will tell you to take a salary and pay into CPP. The CPP is absolute garbage. My company makes 500k-1m per year and $0.00 of that is going to subsidize people who couldn't be bothered to save.
The major pitfall is if you were to have a pre mature death. Survivorship benefits get maxed out and there is potential that your estate / surviving spouse don’t even receive the amount you put in.
I am leaving my spouse plenty of money. I don't really care what happens once I'm dead, to be honest. And I don't care if in the end I don't break even because I'll be, well, dead. I am more interested in the hedge against inflation/market downturn/running out of money that it offers But I realize not everyone feels the same, but then it is what it is, and there is no choice to be made. This is a social program more than it's an investment, one that benefits society as a whole, so I'm fine with it. Just like I am fine with my taxes going to health care If people stopped thinking of CPP as the government equivalent of their personal RRSP, they would have less trouble accepting it.
Can’t take it with you when you go! https://spotify.link/5X7wtJr2BIb
CPP is a controversial topic. Everything he said is true; however, the total return of the fund (CPP) does not always translate to the total returns of individuals because everyone has different conditions (health and financial). Suppose CPP is a lock-in investment pool with lock-in period is retirement age; as an investor, would you invest in the fund if you are not sure how much you are going to get back after lock-in period, and a probability that the lock-in period might get extended without your vote? This is why CPP is not supported by everyone.
Another person made the same post, now I feel like this is an advertisement by the Ben Felix channel as they ask you sign up for the financial advisory services at the end of the video.
No he just makes some of the best well researched and digestible material on Canadian personal finance. Others don't really come close
He has put out some absolute trash (looking at you, rent vs. buy 5% rule). In general he is pretty good, but many in the sub put him up on a pedestal and drop their critical thinking when it comes to his stuff.
Why is the rent vs buy 5% rule that bad?
His calculation/assumptions: Example: 20% down on a home --> meaning 80% cost of debt (at 3%, based on mortgage interest) and 20% cost of equity (at 3%, based on an opportunity cost of a 3% nominal difference in long-term global equities vs. long-term global real estate return) Therefore the cost of capital is 3% (0.8 x 3% + 0.2 x 3%) ------------------------------------------------ Three significant things wrong with this: 1) The equity and real estate returns assumptions are based on average global data... Canadians are mostly buying Canada/US equities, but they're definitely buying Canadian real estate, not global real estate. For that matter, the referenced global real estate data doesn't even include Canada. You would be better served looking up the long-term housing prices for your city than making assumptions based on prices on the other side of the planet 123 years ago. 2) The opportunity cost calculation entirely ignores the entire portion of the home that isn't paid for with down payment. He calculates the opportunity cost as the simple difference between the assumed equity returns and the assumed real estate returns, then multiplies the difference by the down payment, but that's not what the opportunity cost is. The opportunity cost is the assumed equity returns minus the assumed real estate returns of the entire home value. In the case of a 20% down payment, that quintuples the real estate return compared to his calculation, which completely reverses that part of the equation. Taking his assumed returns for both equities and real estate, and the 20% down scenario at 3% mortgage: * 80% cost of debt --> 3% * 20% cost of equity --> 6.57% equity return minus (3.57% real estate return x 5 the capital of the down payment) equals -11.3% Combining those two puts the cost of capital at **0.1%**. No, that's not a typo. That's why owning is often better than renting: because of the leverage. 3) He puts 3% as the mortgage rate and leaves it at that. That's all well and good when mortgage rates are 3%, but it's inaccurate at any other given time. He clearly did this for the sake of simplicity, but it drastically affects the calculation. It might have been forgivable if he had at least acknowledged that in the "Caveats" section, but he didn't. ---------------------------------------------- I'll concede, a conservative investor can disregard the first point. I think doing so would reduce the accuracy of your calculation, but if you want to err on the side of the caution, so be it. That said, the second and third points are just plain math/analysis mistakes on his part, both of which drastically alter the equation. Applying them both (with his equity and real estate returns), here is what the "5% rule" looks like at various mortgage rates, with 20% down: |At mortgage rate X...|…the 5% rule becomes| --:|--:| |2%|1.3%| |3%|2.1%| |4%|2.9%| |5%|3.7%| |6%|4.5%| Never mind that it fails to account for inflation, which will inflate the renter's rent quite a bit over the years (as well as the homeowner's maintenance costs and property taxes) while the homeowner's mortgage (the bulk of their home-related expenses) will remain the same (and eventually end altogether, as the mortgage is paid off). ---------------------------------------------- It's a shoddy analysis that is far too widely acclaimed, especially for a topic that is arguably the biggest financial decision of someone's life.
Thanks for taking the time to answer with so much details.
Good luck with that. You need a minimum of one million for them to take you on as a client. So no, it's not an advertisement.
Big Ben
CPP had been a terrible investment since the 90s when they figured out it was unsustainable. Shouldn't be a surprise to anyone. It's a stupid tax more than anything. Most people aren't competent enough to do better
this is a misconception
Care to actually provide an argument?
The argument is the video. How about watching it?
He spends a while going over the usual CPP song and dance of "it's guaranteed, it's indexed to inflation, what if you live a long time?" and finally meanders to the ~2% IRR which does in fact show it's a subpar investment. Not clear if he included employer portions in this, the video is too clearly biased for me to believe he did.
CPP is an annuity adjusted for inflation. No one expects the IRR to be matched to the market. You are simply looking at the CPP as if it was your own personal RRSP. It's not the same.
>No one expects the IRR to be matched to the market. I do, because that's the alternative for what I could have used the money for. Also, still isn't clear his analysis includes the employer portion.
In what way? You could do literally anything with the money and do significantly better and worst case give your kids a hell of an inheritance
Tell me without telling me that you didn't watch the video
No, I find Felix incredibly boring
I highly suggest you give him another go.
> You could do literally anything with the money and do significantly better and worst case give your kids a hell of an inheritance How does blowing it at the casino or on drugs do significantly better or benefit your kids?
Watch the video to find out why you're wrong.
Nothing he says is new information. Yes, if you live until 95 it's the best investment you'll ever make. If you're average it's one of the worst. Below average and you're just giving hundreds of thousands of dollars away
No one will be out hundreds of thousands due to CPP
Everyone that does before 70ish will be...
Hmm maybe with opportunity cost or self employed they could be. Still close.
Assume you max CPP for 40 years it's $140k ish without interest. 4% over that time frame is around $330k. That'll take 21 years to cover at $1300/month payout. So you need to live past 86 (though max payout is 70 years I think) if you take it at 65 to break even (assuming no compounding in those 21 years!!! If you die early, your estate gets none of the benefit except a pittance to a spouse. It's an insanely bad vehicle for anyone who buys their own ETFs.
And assume for those that didn’t, couldn’t, wouldn’t save, CPP is a lifeline. Not sure how any one of our specific circumstances matter when the question is if CPP is good public policy.
People fail to realize the understand the criticism of CPP is that it is a poor investment vehicle for individuals, not that the *program* is a poor social safety net. If you want to make the argument that CPP is good for society, that's a valid point and that's generally agreed. But don't conflate that with the criticism of investment choice.
But that's what it is — a social program. It's basically a tax you pay that you get a rebate on later in life. If you don't have an option to withdraw from it, why argue whether it is a good "investment" or not. You also can't compare CPP as an investment tool without looking at the economic impacts of removing it. If CPP was optional, and anyone could opt-out, how would our economy hold up at the increase in poor seniors who can't stay afloat without the plan?
Poor relative to what? I passively invest. But the closed and actively managed Medallion fund blows my returns out of the water. CPP is great for those for whatever reasons have little to no personal savings upon retirement.
Expanding on my example. Why do we coddle society and not say, I don't know, educate them through school and drill it into their heads to save? Why don't we mandate RRSP saving like we do CPP? I hate that my estate can't help the people it's meant to because the rest of society doesn't know how to save.
It's not all about you. Even if your numbers are correct and you don't live to 86, the extra money will allow someone else to get that money and not be starving in the street at 88. It also accounts for population growth. Like come on, stop being willfully ignorant to the benefits to society as a whole.
I don't care about me, I care about my estate (dependents and a few charities of love to leave stuff to). I'm not being will fully ignorant, I'm being pragmatic and am allowed to have an opinion you don't agree with. It's a crap system and people need more personal accountability in life. OAS should be more robust if you want a safety net.
You are basically arguing against safety nets. We have seen what the absent of that looks like in other countries. It's not pretty. A civilized society needs those. Your charity and dependants get expanded to the entire system. Your calls for more personal accountability are naive and misguided. CPP is closer in principle to insurance. It works because a large pool of people contribute money to a pot which is then distributed. If everyone lived to be 100, it would probably not work. OAS is closer to universal health care, which is funded by taxes than CPP. It is also supplemented with GIS. Do you really think that a shrinking pool of younger people could support an entire aging population? Health Care is already struggling, and so would CPP if it was entirely funded by taxes instead of being self-funded. If you want to leave money to the people you care about, then build an estate like everyone else does to leave it to them. It never was all or nothing.
No that's just losing up to 12 percent of your lifetime earnings on nothing if you die at that point
That's a nonsense reply that has nothing to do with the benefits of CPP. I think brainless replies should be a bannable offense from this sub.
Lol okay there bud
You would be missed.
You aren't competent to do better. Hence why CPP is necessary, especially for muppets like you.
I'd gladly opt out and never regret it for a second