How CPP works

The Unrepentant Old Hippie believes she has a newsflash for me - her retirement, she says, is secured by her smart investment in RRSP as well as 40 years of paying CPP premiums. Well, when it comes to RRSP - great job for achieving that. As for the CPP contributions - well, here's a newsflash for JJ: our CPP is a "pay as you go" program.

Since its inception in 1966 and up until late 1990s, there was no savings component in the CPP. All the premiums collected went towards paying the benefits to those who were already retired. It was believed that once the existing contributors retire, there would be always enough young people to enter the workforce and start paying CPP premiums. That wasn't happening, so in 1987 the premiums started going up (from the original 1.8% - up by 0.1% every year). That's also when the plans to boost annual immigration levels to 1% of Canada's population (from 0.3-0.4% in 1970s-80s) were first announced.

10 years later, in 1996 or '97 it became clear that even doubling immigration levels and increasing the premiums won't be enough to sustain a "pay as you go" system. Only then it was decided to overcharge existing contributors (premiums were raised from 2.8% in 1996 to 4.95% in 2003) so the resulting program surplus could be used to sustain the CPP once it can't be supported by premiums alone.

So for a while the CPP has something that resembles a savings component. But just for a while, until the benefits outgrow the premiums - which is projected to happen in late 2010s. Then the saving component will disappear and CPP will be back to "pay as you go" with every single penny of the premium collected (plus the depleting surplus fund) going towards paying the benefits.

Like it or not, JJ, but lion share of your CPP benefits (let alone all of your OAS) will be paid by those to be employed in 2020s and 2030s. So if you can't respect a mother of 17 and her children as just mother and kids - respect them as taxpayers and CPP contributors.