Actually, We're Not Earning 10% Returns On Our CPP

I want to correct an all-too-common confusion about the CPP.

Whenever we introduce the prospect of an Alberta Pension Plan (APP) to the public, opponents of the idea often reply that “CPP investments earn an incredible 10% rate of return!”*

The insinuation, of course, is that no one with an ounce of economic sanity would want to leave the pension plan. Why would we want to do so when the CPP is earning 10% returns on its investments?

The answer is that while the pension might be earning 10% returns on its investments, pensioners certainly aren’t.

A substantial portion of our CPP contributions are rapidly distributed to seniors collecting their pensions. But due to demographics and other economic factors, a moderate surplus of cash remains at the end of each year. For example, in 2022–2023, the CPP collected $74.8 billion from contributors and paid out $56 billion to pensioners, generating a surplus of $18.8 billion.**

This surplus is transferred to the CPP fund and is subsequently invested in various holdings like public and private equities, bonds, real estate, and infrastructure.

When all is said and done, and after all reported management costs are calculated, base CPP investments earn a 10-year average return of 8.3%.*' It’s not the 10% trophy we’ve heard about so often, but it’s impressive nevertheless.

Granted, the 8.3% rate of return applies to the fund as a whole. What are our returns as individual members of the fund? Are we averaging 8.3% on our CPP “investments” as well?

Split between employers and employees, full-time working Canadians contribute an average of $600/month to the CPP.**' We repeat this process for 40 years, and then we collect our pensions (if we live that long).

But suppose that instead of giving the CPP $600/month, that money was privately invested and earned average returns of 8.3%, just like the CPP.

What would an investor’s bank account look like after working 40 years?

Total contributions? $288,000.

Total investment growth? $2 million.

Total amount in the bank? $2.28 million.

If a 65-year-old retiree used that $2.28 million conservatively, he could pull between $7670–9580/month for the rest of his life without ever touching the principal.

How does that compare with our CPP returns?

It doesn’t.

As it stands right now, a retiree who cashes his CPP at 65 will earn a maximum of $1433/month. That’s $17,196/year. He will not, and cannot, earn more than that.

Compared to a private investment with the same 8.3% returns, the retiree earning between $92,040 and 114,960/year shows that the CPP payouts aren’t just low, but urgently anemic.

Why the differential? Why is there such a magnificent offset between and individuals private and CPP earnings?

Put simply, CPP earnings are not calculated using private performance, but by measuring how many years you worked, how old you were when you cashed your CPP, and the amount of money you contributed to the CPP while working.

This means that even if the CPP earns 8.3%, 9%, or 10% average rates of return on its investments, your pension cheque stays the same.

More than that, the CPP is not so much a pension fund as it is a social insurance fund. It was never meant to pay out big dollars to retirees (that’s not an excuse for its poor returns), but to insure Canadians against growing old. And, as everyone knows, insurance companies generally prefer to keep as much of their clients’ money as possible.

Speaking of which, what are our payouts with the CPP? As individuals, what are our rates of return?

They’re not 10%, 8%, or even 6%. On the average, CPP rates of return for Canadians are more like 2–4%.*'' This, like most things the government guarantees, is a far and pitiful cry from what we were promised. Thank you so much for reading! If you enjoyed the article, please consider supporting Tanner Hnidey's work here! https://www.tannerhnidey.com/support

  *https://www.tiktok.com/@janis.irwin/video/7308500650839608582 **https://www.canada.ca/content/dam/esdc-edsc/documents/programs/pensions/reports/annual-2023/2022-2023-CPP-Annual-Report-EN.pdf (Pg 7) *'https://www.cppinvestments.com/the-fund/f2025-annual-report/

**'https://www.canadianlic.com/blog/canadas-average-income-what-you-need-to-know/ Derived From Average Canadian Individual Income *''https://www.fraserinstitute.org/5-myths-canada-pension-plan