CPP Contributions Are (Not) Theft
The Canada Pension Plan (CPP) is often debated, with some Canadians feeling that it unfairly penalizes those who die before they can fully collect its benefits. Critics of CPP argue that mandatory contributions, when considering the possibility of early death, result in a system where many people pay into it without ever seeing a return on their “investment.” On the other hand, proponents of CPP highlight its role as a social safety net, ensuring financial security for retirees, survivors, and people with disabilities.
To explore this argument, let’s consider the lives of two brothers — fraternal twins William and James — born on September 16, 1934, in Brandon, Manitoba. In addition to their birthdate, they shared many other similarities, including the number of children they had, the fact they both lived their entire lives in Brandon, and their lifelong contributions to CPP beginning with their first paycheques in January 1966, when the plan came into effect. But the outcomes for William and James in relation to CPP could not be more different, illustrating the complexity of the debate about whether CPP is fair or could be seen as “theft.”
The Lives of William and James
William’s Story
William married Marie in 1959. After many years without children, they felt fortunate to have three kids born to them in 1972, 1974, and 1976. William worked hard throughout his life, contributing regularly to CPP from its inception. However, William died on August 17, 1994, just before his 60th birthday, and thus he never had the chance to apply for his CPP retirement benefits. Marie, however, was eligible for the CPP Survivor’s Pension. This pension is available to the surviving spouse of a CPP contributor, provided that the contributor made sufficient contributions during their working life. The amount Marie received depended on William’s contributions and her own age at the time.
Marie, born in 1936, was 58 when William passed away. Since she had not yet reached the standard age of retirement, she received a reduced survivor’s benefit based on the assumption that she would still be able to generate her own income. The CPP Survivor’s Pension is calculated using a formula that considers both the age of the surviving spouse and the contributor’s lifetime earnings. The formula is a flat rate portion plus 37.5% of the deceased contributor’s (William) retirement pension if he had been 65 at the time of his death. At the time Marie began receiving her CPP retirement pension, at age 65, she combined her own benefit with the survivor’s pension from William to receive, in her case, the maximum CPP pension for a 65-year-old retiree. However, because the combination of her own CPP retirement pension and the survivor’s pension that she was receiving was greater than her maximum, the survivor’s portion was reduced to the regulated limit. In that sense, after age 65, Marie’s payments from the CPP survivor portion were no longer fully compensating her for the years William contributed to CPP.
William’s children, all under 25 at the time of his death, were eligible for the CPP Children’s Benefit. This benefit is available to the children of a deceased contributor, provided they are under 18 or, if still in school full-time, under 25. William’s children received this benefit for three, five, and seven years, respectively, given their ages when their father passed away. For a child survivor in the same position in 2024, the amount is $294.12 per month.
James’ Story
James, the younger twin, had quite a different experience with CPP. James married Shirley in 1962, and together they had three children, born in 1964, 1966, and 1967. James, like William, contributed regularly to CPP from its inception to his retirement in September 1994. However, unlike William, James lived well past the age of retirement. At 60, James applied for CPP retirement benefits and began receiving monthly payments. Now, at 90 years old, James has been receiving CPP for three decades, far exceeding the value of his contributions.
James’ wife, Shirley, passed away in 2017, after 55 years of marriage at age 80. Although she too contributed to CPP, Shirley did not receive retirement benefits for as long, as she began taking payments in 1997, at age 60. In other words, she collected CPP for only 20 years versus James’ history of 30 years of benefits and counting. James, as the surviving spouse, became eligible for a Survivor’s Pension after Shirley’s death. Under CPP rules, when a surviving spouse is age 65 or older, as James was in this case, he was eligible to receive up to 60% of Shirley’s retirement pension as long as it did not exceed the maximum combined amount he could receive as an individual from his own CPP retirement pension. In other words, as was the case with William’s widow, Marie, for James the Survivor’s Pension was also capped. The actual payout was not significantly higher than what James was already receiving.
James and Shirley’s children, unlike William and Marie’s, were all well into adulthood and, therefore, ineligible for the CPP Children’s Benefit.
The Argument: Is CPP Theft?
For some Canadians, William’s story exemplifies a common complaint about CPP. Here was a man who worked for decades, diligently contributing to the plan, only to pass away shortly before he could enjoy the retirement benefits he had earned. His widow, Marie, did receive some survivor benefits, but they were reduced because of her age at the time of his death, and they did not match the full value of what William might have received had he lived. This can feel unfair, particularly when one considers the mandatory nature of CPP contributions.
Critics of CPP argue that this system essentially “takes” from Canadians like William without providing them with the benefits they rightfully earned. For those who die young, they contribute to a pool but see little or no return on their investment. These critics may argue that individuals should have more control over their retirement savings, allowing them to invest in private plans where the money can be passed on to their heirs if they die early.
On the other hand, James’ story illustrates the potential benefits of CPP, particularly for those who live a long life. James has been receiving CPP benefits for 30 years — far more than he contributed throughout his working life. In his case, CPP has provided steady financial support in his retirement, ensuring he did not outlive his savings. James’ long life highlights the unpredictability of lifespan, one of the reasons why pooled social insurance programs like CPP exist.
The Broader View: CPP as Social Insurance
At its core, CPP is a social insurance program, not a private retirement savings plan. As we know, every Canadian has a “Social Insurance Number.” It is designed to pool risk and provide financial security for all Canadians, including retirees, surviving spouses and children, and people with disabilities. Risk pooling is essentially the way every insurance policy works. The fact that not everyone benefits equally is not a flaw of the system but a reflection of its design. While William’s early death meant he never directly benefitted from the CPP contributions he made, his widow and children did receive support. James, by contrast, has benefited significantly from the system, living to enjoy decades of retirement benefits.
CPP also has redistributive elements. Lower-income individuals receive proportionally more benefits relative to their contributions, helping to reduce poverty among seniors. Examples are the flat-rate portion of the calculations for benefits due to survivors and those with disabilities, the provision of the child-rearing dropout as well as the general dropout. The cap on pensionable earnings and the related payouts is another consideration, limiting the benefit to high-income earners relative to their overall incomes. This social safety net aspect of CPP helps support Canadians with an inflation-adjusted lifelong income stream, providing a degree of assurance to Canadians regardless of how long they live.
A Balanced Perspective
While it’s understandable that some Canadians, particularly the friends and relatives of those who die young or have spouses who do, may feel shortchanged by CPP, the program’s broader purpose must be considered. CPP is not a personal savings account; rather, it is a collective insurance program that protects all Canadians. For every William who dies before receiving benefits, there are many more who live long enough to benefit, and some, like James, benefit significantly. In this light, CPP is not theft; it is, rather, a reflection of shared responsibility and mutual support within Canadian society.
This is the 262nd blog post for Russ Writes, first published on 2024-09-16
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