Business Career College

Ontario has recently passed legislation to bring the Ontario Retirement Pension Plan into existence, and information is starting to become available. There is still a lot of detail to be hammered out; a consultation period is scheduled to begin soon. See https://www.ontario.ca/government/ontario-retirement-pension-plan

At the same page, some numbers are available for ORPP. According to the numbers provided there, a $45,000 income earner can expect to contribute at a rate of 1.9% on earnings between $3500/a and $90,000/a (indexed annually), with the employer matching. (Self-employed are likely not going to be included in ORPP, and those with workplace DB plans will also likely be exempted.) Similarly, a CPP participant will contribute 4.95%, on income between $3500 and $53,600 (2015 baseline, also indexed annually). The employer matches those contributions.

CPP, which has a history going back to 1966 (legislation was introduced in 1965) provides a return on investment (calculated only against the cost of employee contributions) of approximately 3.52%, using the following assumptions:

  • Inflation is ignored
  • 3.5% discount rate to calculate the value of the retirement income
  • Mortality at 90
  • Retirement income starting at age 65
  • 40 years of earnings (39 would be more accurate given the 17% earnings drop-out, but we'll keep it at 40 to give an apples-to-apples comparison to ORPP)
  • Calculated for a $45,000 income earner, one of the test cases provided on the ORPP website

When the employer contributions are added in, the return drops to a paltry .3%, barely a return at all.

Using the same set of assumptions, ORPPs figures indicate that the return will be 5.42% based on employer contributions, and 2.47% based on the combined value of employer and employee contributions.

What does this mean? Is it possible that CPP is so poorly administered, and at such high costs, that ORPP can outpace its performance by such a wide margin? It seems unlikely, especially given that the CPPIB has obtained solid returns (7.1% ten-year return). How much more risk would ORPP have to obtain to generate the promised level of benefits? 

Given, CPP does pay out other benefits (survivor's, death, and disability), but those amounts account for only about 22% of the annual payout requirements of CPP. 

Unfortunately, not much data is yet available on PRPP and how it is calculating its benefits. And as a resident of Alberta, it is unlikely that my input will be welcomed into the consultation period. (I already wrote the sponsoring MPP's office one letter about the plan, and have received no response to date.

Thanks for reading. If you have questions or information, please e-mail me at jason@businesscareercollege.com

Written by Jason Watt — February 11, 2015