136. Canada Pension Plan Loses $22 Billion, Will It Affect Me? | Henry Wong

You are listening to the Wealth Without Bay Street Podcast, a Canadian guide to building dependable wealth. Join your hosts, Richard Canfield and Jason Lowe as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future that you can bank on. Losing $22 billion with the Canada Pension Plan this year. How might that affect you as a Canadian? And what are some of the other things you might want to learn about the Canada Pension Plan system? Well, I'm joined today by my good friend, colleague, and a regular contributor here on the Wealth About BAS repodcast, Henry Wong, our resident CPA expert. And one of the things that Henry and I like to do from time to time. Well, we have these little conversations that turn into, oh, maybe mild rants and we'll see how well we can keep ourselves fixed on our goal here today. But every once in a while, we do share the screen and we bring up some, some numbers to look at, talking about financial statements of large organizations. And today we're going to dig into some of the mystery behind the veil of the Canada Pension Plan. So excited to be with you today, Henry, and we're gonna have a lot of fun here. For everyone who's listening in, I would encourage our listeners, if you're driving, you know, driving on the road or on the podcast app, maybe circle back and check out the YouTube video on this one to look at some of the things we're gonna be digging into today as we go.

Yeah, thanks. Thanks for having me here, Richard. I thoroughly enjoy our conversations and discussions that we actually really get to talk, go into depth into a lot of these things. And one of the things I guess I wanted to bring in terms of our conversation today and share for your listeners is that, you know, there was a very big headline that popped out in around August, which was the Canada Pension plan lost about 22 billion.

In that period of time. And that's a very, very large number. And it kind of dawned on me to look into this and being part of doing the things that we do for all of our clients here. It really made me reevaluate things. And I kind of looked into CPP and what, like Canada Pension Plan. And, you know, the, the common narrative that I'll hear is the whole system will collapse if nobody contributes to the cpb and it, it provides for you. It's free money while you're in retirement. And, you know, on the surface, that sounds really, really nice, but given the amount of experience and things that I've learned Along the way, for myself, I really wanted to look into, well, 22 billion. How big of a number or big of an impact does that have to everyone? So that's what I kind of wanted to jump on board today for us to talk about. Yeah.

And I think what's good maybe to start, because it's familiar in Canada with the Canada pension plan, but maybe familiar only from the standpoint of they see a line on the pay stub of how much money is coming off of each, you know, paycheck, or if you're a business owner, which again, a lot of our listeners are entrepreneurs in some way, maybe you have to pay that as part of your final tax bill because you have to pay the contribution for yourself as an employee of your own business or self employed, plus you have to pay the contribution as the employer. So both, you know, for a lot of people who maybe aren't entrepreneurs, you may not know, but whatever you're contributing as the employee, the employer has to match that. So there's a double funding mechanism, but only one person gets to use some of those benefits later on and that's the employed individual. The, the, the, for, you know, if you have a business with 10 employees and they're paying the, you know, equivalent contributions for all 10 employees, well, they're, they're only one of those people that might be listed as employees. So there's nine other people that they're funding that they don't get to see any benefit on as a business owner down the road. So just keeping that in context, let's maybe start with some of the high level aspects about the CPP that we should know and be aware of. So we're, we're kind of all reading from the same sheet of music as we go.

Yeah, that's, that's really good to share. So like, first to kind of set the stage properly is that the CPP is a legal requirement as if you receive income in the form of a T4 or you are self employed as a T4A, you are legally required to contribute to it. So, you know, just to kind of say it in this way, rules were designed legally that it gets deducted right off the income that you receive and that gets funneled and pooled into another category of buckets. So you've got, when you get a pay stub of a T4, some of that deduction will be for income taxes, but the other portion is cpp which that money goes into that pension plan. But if you are designated or structured as a self employed, you actually have to pay double what you normally have to pay. And as you touched in on that earlier, that employees will contribute from their paycheck, but employers will also deduct it from their paycheck. And so most employees in Canada over the age of 18 contribute either to CPP or in Quebec, the sister plan is called the QPP, the Quebec Pension Plan, and it's jointly managed by the federal and provincial governments. And the key part just to kind of take away is most of us understand the CPP as mainly for the post retirement benefits that you would receive, but there's also components related to disability death, as you mentioned, which is about 2,500. There's also Survivor and children. So there's a whole bunch of other services that it kind of, you know, breaks down into. But a big portion of that is for that post retirement benefits aspect of it.

And when it comes to the pension plan, the CPP works with the federal and provincial ministers of finance to review that state of the financial state, you know, every three years to see whether or not contribution rates are meeting the expectations. And this, this part is also really important to understand. They're reviewing it to meet expectations, but there's actually nothing really written in there where there's a legal guarantee that they will pay you a said some amount when you actually decide to retire. And for most Canadians in Canada is actually 65. So when you decide to retire at 65 and you draw or tap into the CPP post retirement benefits, that is not, you actually don't know what that amount is. And I think it's really important for us to evaluate that today. But you, it's actually not even guaranteed. So that's really what I want to make sure that the listeners are very aware of.

Yeah. And you know, so taking that into consideration, why that matters, the fact that it's not guaranteed, I think, you know, leads to this news article that, that stemmed this conversation is okay if they lost $22 billion and a lot of people have lost money because of the market condition. It's, you know, as of the time of this recording, we're in, you know, September of, of 2022. And of course, you know, the markets have been kicked in the nuts pretty hard in the last few months. Most people are down, there's obviously people who are avid, like traders and they, they play that marketplace and they, they do well in it. But you know, there's a lot of smart people working at the Canada Pension Plan Investment Board and for the most part they've been doing pretty good but boy, that really doesn't seem to be the case based on this recent. I mean, $22 billion is. I wouldn't say that that's something to sneeze at now in the grand scheme of how much money is in the CPP fund. And we'll look at that in a moment, maybe it is a smaller relative amount, but it's not peanuts. And if we lose $22 billion, that's $22 billion of earning potential that we've also lost. They've lost the earning potential on that to help fund future retirements of Canadian citizens. And if we have this system where we got to plug money in from the employed workforce and we've got a bunch of retirees and baby boomers that are retiring each and every year, millions of new baby boomers are retiring or obtaining the age of this theoretical magical age, 65 that everyone's been beating into our heads for most of our human existence about when you should stop working. Well, they're now claiming and receiving these benefits. And so there's thousands and thousands of new people every year starting to make that claim. And so that means the amount of money outflows, outflows happening to feed the Canadian population is going to be on an increasing basis. So if you lose $22 billion, I mean, that's going to be a problem.

Oh, for, for sure. And I think it's really what I want to do is actually kind of share my screen and show structurally how kind of those moving parts of those mechanics look at. At least we should look at it from a conceptual standpoint. So I'm just going to share my screen here. So let's say the CPP is over here.

Okay, so cpp.

I'm just going to denote it like this. So you've got the employees contributing money in, you've got the employers contributing money in. And when it comes up time, you've also got people who are drawing on these benefits. Now the contributions that are coming from the employees and employers, while it's not just going to sit in cash, they end up moving this money to be managed by the CPP Investment board. So they're the ones who put that money, the contributions that you receive into the portfolio to be managed and that's the 22 billion of losses that have recently happened. But what's actually really important to understand, which, you know, it's not really easy to unpack, is, you know, we have a workforce of people coming in, let's say the 18 year olds that are entering and starting to contribute and you have people generally increasing in their compensation as they get more experience. So that's that that amount of contribution is kind of what's, what's going into this pool or fund of money, the cpp. Now, what also ends up drawing on these benefits is people who are actually entering that time of when they retire and their general age that you most often hear is 65. So at 65, this becomes a source of what people use as their retire, quote, unquote, retirement income. Now the question though is that is a very worthwhile question to wonder is, is the age of 65, those people who are now 65 entering this, is that kind of increasing? Well, I think we've heard that the baby boomer population is now entering retirement, so this number is getting quite large. Now the second question is wondering how many contributing members are now entering into this pool. Well, there's also possible exposure that if that pool of people entering is decreasing, so less, less population, then that also creates an issue where if, you know, if there's enough to be funding in the future. But what's really important to recognize is this current base needs to continue contributing, which if the current baby boomer population is quite large, if you look at the subset of ages in the population, if a big chunk of that is now drawing on the CPP fund while in their retirement, that puts a pretty big strain on that fund just to kind of share from there. So that's kind of what I wanted to first lay out in terms of a diagram here.

And I want to add a few things to this diagram, Henry, and I'm going to draw on top of it, if that's okay. So we, we've got positives, hopefully with, with investment earnings over by the CBP investment board. But of course we could have negatives. And so if we have more positives than negatives, well, then we might be able to, you know, the idea is that money's being invested so it can help maintain. It can kind of keep up with the pressures of the people drawing down out of the system. So money's coming out, being drawn down, drawn down. Hopefully we can have investment gains and some cash flows that are, that are greater than that, so that even if we didn't have the same contributions coming in, we could have a sustainable system. The problem is, you know, we're going to show some people here based on some, some quick math that you and I did, that that may not be the case. So if we have big negative losses like just happened here with this $22 billion that magically evaporated into the market due to market risk, then that can can really amplify some of the pressures that might be seen. And here's the other thing. We've got this increasing, you know, baby boom generation at 65 that are starting to take in. So again, just imagine every single day somebody in the country is turning 65. And so whether they're starting to take their CPP or they wait a year or maybe they started taking it early, like there's different times when you might choose to take that. There's an increasing amount of people on a regular recurring basis that are starting the drawdown method. Okay? So it's very important to understand that. Now I want to highlight over here the employers. So the employees can't contribute unless they're gainfully employed. So if we don't have people that are employed because we don't have enough employers who are offering jobs, if we have an issue with, let's say, an increase in unemployment.

Then we could create a real problem. Because now the amount of contributions coming in for people starts to decline. Because if you don't have employers who are automatically taking source deductions off of every paycheck of every employee and the employers themselves are not contributing, now we're going to see a real, real problem starting to take place. So I want to identify this, because without employers being a part of this system to help manage and facilitate the source deductions that are required to fund this machine, we have a major, major issue. So that's why when we see issues in certain areas of the country and it all changes as the economy ebbs and flows, but when there's outward pressure happening to try to kill the business community or to try to make it more difficult for entrepreneurs and businesses to thrive and to strive, and they start taking their investment and their dollars in their businesses and leaving the country and they go set up shop in another country, then we're losing all that contribution power on both of these individuals that the employer and the people that they would hire to be gainfully employed as part of the the citizenry of Canada, and then we're also losing those contributions. So that impacts everybody. So every time that the businesses or the business community is pressured to such a way where their business shuts down, like, oh, I don't know, maybe Covid situation may have caused that for a number of businesses.

We'll maybe touch on that lockdowns two years ago.

Yeah, those lockdowns where people needed people to come to their business and their shop to like buy food and buy, buy things and they couldn't, they weren't allowed in. That sort of, that sort of problem could kill some businesses. Definitely some businesses shut down. Hey, some businesses did better, some, some thrived. But you know, a lot of businesses shut down and those people are no longer employed and they're, they're seeking now new employment. So just recognizing some of the unintended consequences on a larger scale from an economic standpoint and how those overlapping factors now have an impact on the Canadian pension system, which every Canadian is effectively participating in, whether you want to or not.

Absolutely. And again, the main part is you don't get an option to not contribute it. For most Canadians, you don't actually get an option to not contribute into it. And so now I think the next more logical step is, well, if all of the pool of population of people are contributing to the fund, what I did was I put together, you know, I've gone through, combing through some of the financial statements and again this was very eye opening for me personally when I realized.

First of all, I think we can all recognize that you or someone knows of someone who's already drawing on CPP and knows very, very well that the amount that you get is very inadequate.

So they ask you then to put your money into other things, say any government registered, and somehow you take those market risks to supplement the huge shortfall that you get or the inadequacy that you get from the CPP pension that you would get. And that CPP pension by the way is taxable. So as you earn income, that money is added into your income sources and you essentially fall into a specific tax bracket which you get taxed on. So again, this is also another very important thing that as you are contributing to the system, even though you're contributing to the system, you lost money from your source as when you pay receive your income from your paycheck, but also when you end up drawing from it, you still have to pay taxes on the amount that you're drawing for from it. So that, that kind of should open a lot of eyes from that standpoint. But the other part now is what I want to show is walk through some very particular items on their financial statements which I've gone into, you know, the Canada Government of Canada website dive dove into the financial statements and just to highlight for some of the listeners to go through and see. So let me just kind of share my screen here.

So what, what everyone will see is the year end for these financial statements are March 30th and so I put together 2015.

Let me just change my pen color. 2015-2016-2017-2018, all the way to 2020. Now you may be wondering why I don't have anything for 2021 and 2022.

Tell me at all.

I do find it a very, a little bit peculiar that it's currently September 2022 and we don't have 2021's annual report nor six months after don't have 2022's so something's a little bit unusual. Most public companies have specific filing deadlines where things need to be put together. I'm a little bit surprised why something like this is not there yet. So I just thought I would share.

That comment there coincidentally on that. We'll let our, our listeners draw their own conclusions. But there was this giant global pandemic that came sweeping through, you know, the, the world and certainly impacted our nation for roughly speaking, two years. And you know, 2021 was really part of that. So I'm just curious, you know, if that, that may be a cause of why some things haven't been properly reported or have not been officially reported, I guess would be the better statement to use.

Yeah, that's probably it. But so let's kind of dive into some of the numbers and you know, I want to maybe I'll just dive into 2020s first. That's at least the best data that I can share. That's most recent, closest to reasonable that I can share. So one thing I want to highlight is these numbers that I'm sharing with you is in billions of dollars. So in contributions for 2020, the contributions were 56.1 billion. So of all of the working citizens from 18 until let's say 64, they were contributing to the CPP and all of the working population, they contribute $56.1 billion in contributions. Now this is the part that really shocked me was the amount of pensions paid. So it doesn't include all the others, but a huge portion, you know, greater than 70% of that 70, 80% of that is the pensions paid for post retirement. So the pensions paid for post retirement is 48.9%. So there's an excess surplus of 7.2, which you know, is.

Where now that's what surprised me was the amount of contributions that came in pretty closely tied to the pensions paid.

I want to expand on that. So just to recap, so 56 billion of contributions came in 40 or just shy of 49 billion paid out. So 56 in 49 paid out. There's a little over 7 billion, 7.2 billion that's left over. That means there's only 7.2 billion that's available to now go and pay for other things such as other expenses of the cpp. Now they have to operate basically like a business. They have other expenses. They got a building that has to be paid for in utilities and employed staff. So that's got to come out of that. And then whatever's remaining, once that's all done, their net basically, you know, profits or whatever, that's all that'll be able to be shifted over towards additional investment capital inside of the fund. You know, they can only work with what's, what's net, what's left over that they can use to pump back into the fund. So I think that's important for people to understand. And the other thing I want to highlight here, Henry, so again, 56 billion in contributions circling back to what we just talked about, those contributions are coming from two places, employed people and employers. So that means one half of that $28 billion was funded by employers that will never see those benefits, only the employee people. Whoever becomes a citizen that, you know, received a. And again employers often are an employee of their own corporation. But the general rule here is that it's the employed people that are going to receive that money and the employer who funded the money isn't really going to get anything back for yeah, absolutely.

And this was shocking. The part that I want to also highlight why this was shocking to me is the amount of contributions. Now CPP has existed for a very, very, very long time. And I would imagine after existing for that very, very long time, if they are building that surplus, as they say, that surplus should be benefiting that future demographic. And what I'm seeing at least from the 2020 financial statements is the contributions pretty much match the pensions paid. And if I were to say it in a different way, the ones who are contributing 18 to 64 are essentially paying for the 64 to the for males in Statistics Canada, the general age average age is 85 for females is 88. So they're paying for that. That demographic when it comes to the money in is essentially paying for those people of the money out now. And other reference that's also very eye opening for people to realize is the contributors 18 to 64 is how many years is 46 years and the ones who are drawing on it 65 to let's say 85 is 20 years. So that really put into context my, I just wanted to put into context that's how that shocked me first.

And.

I just took a look at it. And so CPP was officially came into force from existence in January of 1966. So as of 2022, that's 56 years in existence. So that is a long time. But in the grand scheme of the nation and just in the thinking of the world that we have, that's only 56 years of contributions and accumulations. It's basically a generation.

Yeah, that's right.

So we, we, we've, we've own. It's own. This whole system is designed really after kind of this, you know, the, the aftermath of the Second World War and then the baby boom generation that was created because of it. And so this whole system was built for the boomers and now the boomers are retiring. And so we're only now really truly starting to see the impact of those withdrawals coming in because we're at that 56 year mark. Like, you know, it's just kind of put this together in your head a little bit. As you're listening, just start to think how, how there might be some possible problems that could be generated if it's not well managed. And if we have a funding issue, a funding problem, they're on the hook for that. Every, the CPP's on the hook to manage to make these payouts. So if we have a funding issue, that means they need more funding. If they can't get it from investment returns because they lost $22 billion, then where can they get it from? I'm pointing to you listener, if you're Canadian, they're getting it from you and your kids and your grandkids. That's how they're going to get it.

Oh, and they did some changes to make sure you got it. And we're going to dive into that in a bit too. But Richard, really, really again really good point that you're raising there. So it's only been for a real full generation that we see how long that's accumulated and it's really built to service for that community. If you actually think of it now, now if you think of it to continue on, I don't know if that would be actually even possible. Now one thing I also want to highlight. You want to know the returns that. So remember they lost 22 billion recently. Let's look at what, how much the investment pool earned at that time. They actually earned 13.4 billion billion. Their net asset pool basically after, you know, their assets less, you know, any obligations or anything, what they have available for payments is $416,000. A billion dollars, sorry, $416 billion. But what I also want to highlight is that investment income, you know, to like you mentioned to your point, they have to have a building, they have employees that they hire, they have all these other services that they service for the amount that they pay for those expenses of 1.97 billion. So where I'm going with that is the investment income was only 3% of the net assets that they generated off of it. And then the expenses that they've incurred was 3% off of that. So you know, that's, that's again just some highlights that, you know, there's, there's money to be paid irrespective of if again, I don't have 2282 as numbers to really talk about and critique it. But that kind of puts into perspective that those expenses, salaries and everything still got to get paid, but it has no attribution to the investment income. I mean, maybe they get bonuses, but there's no club acts if they did perform poorly.

And another way to look at this with a different lens. So again, 56 billion is contributions, 49 billion is withdrawals, people receiving CPP benefits. They have a ginormous fund that is worth as of 2020's numbers, 416 billion. And they were able to generate 3% basically on that pile of money. So $13 billion. So if we stopped contributions and they could maintain generating $13 billion, that would not stack up to the $49 billion that's being paid out very long. And, and the $49 billion that's being Paid out, that was in 2020 and more people retired in 2021. So the actual payout numbers have to rise every year that more people start drawing that the payout numbers got to go up. So if we can't keep pace with what's, we're definitely going to run into some future potential problem here.

Well, those contributions likely have gone down to the contributions. So the payments have gone up, but the contributions likely have come down because of said lockdowns, loss of employers because of shutdowns of businesses contributing, loss of employees because they were not able to be gainfully employed. So contributions have gone down too. Likely. I don't have the numbers to say, but likely.

And if we have more retirees, retirees aren't contributing anymore. They're drawing out. They're not, they're not putting money back in. So you lose their contributions, you kill some employers because of COVID you lose those contributions and all the employed staff There, I mean, there's a, there's a whole ripple effect of things that, that happened here. And, and who knows, maybe, maybe contributions rose because we have new people entering the workforce. That is also possible. However, recognize as new people are renting the workforce. A lot of that is because, you know, again, if you're 18 getting into the workforce, you're probably not, you're usually at a minimum wage type position. So how much contribution is actually happening there for that individual. And then further to that, we have to consider, you know.

What are the changes that are being made to now augment or bolster the system. And I think we're going to get to that in a minute, Henry. But.

We'Re leading up to this point of understanding that if we have a funding problem, we have to solve that funding problem. It's a math problem. And the way you solve that math problem is that you Inc. You know, if it's a funding issue, we've got to increase the funding. If we can't get it from investments, we got to get it from the citizenry. And if the citizen. The way we do that is we make a change in the federal budget to increase how much money is going to come off of your paycheck and we're going to increase how much every employer has to pay. And if we increase how much every employer has to pay, it's going to squeeze them, which might mean they won't hire as many people because they, they don't have as much money. That, you know, if you have a company with 10 employees and you increase the amount of the CPP contribution on all 10 employees, well, that could maybe choose to kill your ability to want to go and hire a new employee because you don't have the funding capacity to do it. So again, these are all unintended consequences, possible ripple factors that are impacting us in ways that we don't necessarily see.

Absolutely. And I think it's really important actually to look at. Well, if we know that their net contributions that they're receiving from 2020 was $7.2 billion, the investment income is 13.4, but they're drawing 48.9. There's upward pressure of that going up, contributions going down. Well, let's look at. So now they have a pool of money left, the 416 billion, how long can they actually survive with that? Well, let's take a look at that. Well, based on this, you know, very simple calculation of how much they have divided by the paid, assuming all of those are zero, those will only last Eight, eight and a half years. I mean, sure, if you get some contributions coming in, you can extend it for an extra 10 or 20 years. But if you look at someone of my age, okay, I still have quite a long time until that system. I, I would tap into that system if, if I would tap into it, I would be worried whether or not the system actually exists for me to tap into.

And additionally I would also be, I'd be asking questions such as how might I look to separate myself from that system? What are some things I might do where I might be able to find a way to claw back, to make a bit of a joke, I guess on a different, totally different pension program of the old age security which they claw back money once you earn too much. But for you to be able to claw back as a Canadian citizen some way, somehow some of that capital that is being forcibly mandated withdrawn out of your, out of your regular paychecks or your regular account balances either, either monthly, quarterly, bi weekly, weekly, annually, however you're getting paid, however you, you paid into the system to be able to repurpose that, to use it in some way that you do have ownership and control over. Now is that going to be possible for everyone, the large bulk people? The answer is no. But if we start asking good questions, our brain starts to figure out a how. We're starting to look for a way that, that how can happen. And I think that part of our, our session today is to inspire people to start being more inquisitive about the things that we see disappearing off our regular paychecks.

Absolutely. And not a shameless plug here as these are some of the things we talk about. And personally for me is working with clients to learn how to disconnect or at least put themselves in a more advantageous position so that they can, they can find ways that better serve them still in the same way, still contributing, servicing the community, but you know, not getting shamed or guilted for. You know, you are making legal choices that you're allowed to. It's just maybe you're not aware about doing it. So the next thing that I want to dive into is now at the individual level. So we looked at it at the CPP level. Let's look at it from the individual level of the quality of what you are getting out of the system as you've contributed over, contributed to it. So again, just sharing my screen and what I want to highlight here is a couple of things. When it comes to the benefit, there's a benefit summary that's in the annual reports and you know, on this CPP website and on that CPP website, they basically have a breakdown of today, if you were to retire, what your retirement pension would be, what your post retirement benefit is, what the survivor benefit is, what the disability benefit and the death benefit is. So the general monthly maximum is, you know, for a retirement pension is $1,253.59 and the disability benefit as an example is 1,464 83. Now the assumption that even Canada CPP puts in there is if you decide to draw it at 65, the general average for most Canadians who, let's say has completely contributed to the system to its maximum for, you know, for quite a while. So you know what's a good representation is if you are drawing on the system, you can Expect as of 2022, the amount of money that you're getting out of it is 727.61 taxable per month. And so the annual amount is 8731. Now I want to really highlight, especially in today's economic times, that you've contributed into a system for quite a long period of time, which I'll dive into a little bit more later. But what you are genuinely going to expect out of it is 8731. And you know, if you imagine it's going to be $40,000 or something in the future, I hate to break to you, based on what we talked about and what we looked at in terms of CPP, that doesn't look very, very likely. So 8731 is kind of what you would get out of it.

And I'll just expand on that for a second. So the maximum that you can do, again, everything's worked out exactly as supposed to and that you've contributed it, this maximum amount for the maximum amount of time, et cetera, et cetera, is 1253amonth, which works out to a ballpark, about 14, 15 grand a year taxable. Okay, but what's happening for most people, according to CBP's own reporting, is that the average Canadian is only getting less than $750 a month taxable, which is again less than $9,000 a year. So who knows where you're going to be on that spectrum. But you know, we can, we can look at the, the current data and we can draw a few conclusions. Now, taking this information in hand and if we think about what does that look like for, for, for Canadians and, and their contributions, if we look at what do they contribute over their lifespan versus what they're getting out. I think that's probably where you're taking us, Henry. Am I on track?

That's exactly so. What I just went through was just the withdrawal. So when you get to that time and you decide to tap into the system, you can expect about, for today's dollars, 8731. Now let's look at it from a contribution standpoint. Now just to again recap. When you earn a salary of income, you are getting some of that money deducted for income taxes, federal and provincial. Then you also get some money deducted for EI employment insurance. And then you also get deducted for cpp. So how much of that money is being withdrawn from your paycheck to pay for cpp? As if you were getting paid in the form of a T4 employee as a T4A or a contractor, you would actually have to pay double that portion because some of that portion, half of it is being contributed or paid for by the employer. Now as the employer, as Richard mentioned, is you, as the employer who is paying your employee in the form of a salary, T4 are contributing that the employee's other half. And you actually don't get any withdrawal for that money. You are just, it is just a straight expense that is coming out of your revenue that you earn in your business and it's getting sent to this fund. So let's look at what the specific thing is. Now if I, you know, click the links to go into the contribution mechanics, what the calculation is. In 2022, the amount that the employee would contribute would be 3,499.8. And the employer's portion would basically be that same amount, 3,499.8. So if you combine those two together, the maximum contributed would be the 6,999, 6 or $7,000. So if I kind of just expand a little bit, that contribution rate is 5.7% as of 2022. And it's based on if you earn 61,400, you essentially are contributing the maximum to the system. You are giving the 3,500. Your employer is giving the 3,500. If you are self employed, you are by yourself giving 7,000. So double that portion into the system. So that brings into that question. Now you've Contributed, you've contributed 3,500. The employer's contributed 3,500. But when you withdraw at the time, let's just push that forward 30 years. Yes, there's going to be, quote, unquote, CPI and yada yada, all that stuff that's going to adjust it. But if we look at those today.

Together, the amount is very, very close. $7,000 in so 50, 50 employer employee, you get 8,731.

That's a bit of a head scratcher. The amount that you put in today is pretty close to what you would get in the future.

Now, talking about the future, that brings up to add some layers of complication here because why not? We're this far down the rabbit hole.

The CPP is also indexed to the Consumer Price Index, the cpi. And so as we see the cpi, the cost of the generalized basket of goods that Canadians need to use and live and thrive in a society, then if that rises, then every January 1st there's an adjustment or a change to the withdrawals. In other words, the amount of money that will be received by Canadian pension plan pensioners. So if you're already receiving Canada pension plan, if there's an adjustment in that cpi, then there would be an increase. If it goes up, there's an increase to how much you receive, which is going to increase the withdrawals coming out of the pool of money. Now CPI ties basically to, to, to inflation and there's that cost of the basket of good things like food and lumber and all that stuff that goes in there. There's been some pretty high inflation in there. Now according to the, I think I was on the bank of Canada's website earlier. No, actually the Canadian government's own website as of August 2022. So last month the CPI measured at 7%. Now I think you and I, Henry, could agree that it's. We, we believe it's probably higher than that based on what we're hearing from our clients and, and Canadians across the board. But let's just assume, yeah, go to the grocery store, you'll think you'll find it. But let's just assume that it's the 7% and that's how they've done whatever measurements they've done to make it that number, then logic would dictate that we're going to see approximately a 7% increase in CPP benefit payouts. So now we go back to our crazy CPP fund where we don't have recent data because they haven't filed the report for two years. Strange, suspicious. Now there's going to be that burden of 49 or basically $50 billion of withdrawal money that's going to Canadian pensioners. Let's just add 7% on that number. So that's, so that's how much more money is going to come out. Plus, they lost 22 billion in the investment fund. So, ooh, that's going to be tricky to keep up pace with inflation a little bit. So big loss in the fund, big increase in the payouts based on how they've designed the system. My logic brain's kicking in here, Henry. I think we've only got one possible solution. We gotta dramatically increase the amount of money being contributed to this fund in order to keep pace with all that stuff.

And it's really interesting that you mentioned that because that's exactly what has happened. So.

Oh, do tell.

Let's dive into that now again from my Canada Revenue Agency website, you can see how much payroll deductions are. Again, you can just search it and find it. And so what I've attached and what you'll see is a schedule of the rates for that CPP rate. And ever since, until 2018, that rate has been 4.95% on, you know, that whatever the contributing earnings needs to be. And beginning in 2019, it increased to 5.1. Beginning in 2020, increase of 5.25. Beginning in 2021, it was 5.45. 2022 is 5.7, and in 2023, it's going to be 5.95. So just a little bit of retrospect going back from 2018 all the way to 2023, so five years later, that whole amount that is deducted from your paycheck has increased a full 1%. Now you must wonder, what does that impact of that full 1% actually mean? And if today's maximum contributory earnings is 61,400, and we apply that same calculation, well, back in 2018, let's say at 4.95% it was what employee and employer would contribute was 3,039. Today it's 3,500. So just a little bit of retrospect and let, let me just. Because it's 50 50, divide it, it's an extra $500 each or $1,000 together.

Now every employee paid $500 more. You know, because of the increased contribution rate since 2018, it's been slowly rising and rising and rising. We're recording this at the end of September. So I don't know when this is going to air. Let's assume that this airs in, you know, October or whatever here or November, let's just say of 2022. So we're only a month or two away from another increase in that contribution rate, which you've got listed on the screen right now, which is 5.9%. So we're, by the time we hit January of 2023, we're going to be a full 1% higher on the contribution rate that's automatically being withdrawn at source deduction level and being funded by, by employees into the CPP mechanism, plus by employers. So we're looking at a $500 increase already right now. And if we add into next year, we look at the projection into 2023, looks to me like we've got about $614 more money per person earning the pensionable maximum.

Per person. And then now add that again for the employer per person. So it's $614 for you as the employed person to pay it, and it's actually $1,228 across the board. When you factor in both employer and the employee combined, that's a pretty. Now just think about how many employed people there are in Canada. Okay, so, hey, I guess the good news is a lot more money is going to be coming into the CPP fund. The bad news is that they're not really being super upfront with all this. All this math is easy to find, but it's not like you're being told when you look at your paycheck, oh yeah, you don't, like, you don't go look through a year's worth of pay stubs and be like, oh, geez, my CPP amount went up and it actually cost me an extra 500 this year than what it used to. Like nobody. You're busy. You're taking a lot of kids to hockey practice and soccer and school, and you're trying to go and, you know, go on vacation, enjoy your life. You're not, you're not looking at those things. So we don't see what's happening necessarily. We know in the background it's happening, but we don't actually get it pushed in front of our eyeballs very frequently, which is what Henry's trying to do here today.

Oh, it's very common. There's an expression, it's called the boiling frog syndrome, I guess you can say, where they're kind of doing a little bit creep by creep, creeping it up bit by bit by bit. And you just won't feel it because it's just going up in this way. So I wanted to give a little bit of a big contrast from when the change happened to where we are today. And you can see it's pretty large.

And I got to add something else in the center that came up for me as you were looking at this. So we're talking about the contribution rate, in other words, increasing the amount of the contribution required by, by the employer and the employee. And the employer. But additionally they've also increased the contribution maximum. So the, so because the, the, the maximum of the contribution level, like so, so imagine you earned a hundred. You've been earning $100,000 a year since 2018. Well, the contribution maximum level where they would stop charging you for CPP was a lower rate back then. Now that they're charging you that amount on a higher amount of your income. So if your income hasn't changed, you're making the same hundred thousand. The actual amount of money that's being taken from you is even higher than the $600 we're talking about because they increase the rate, but they also increase the contribution maximum. So that means the amount of money that they're calculating that rate on is a higher volume than what it was back, you know, number of years ago. And each and every year that creeps up. So it's actually, it's a bit nefarious and it's a bit of a double whammy on how we see that increasing incrementally. Increasing amount.

Yeah. So the base, so back in 2018, that base was 52,400. So the last time 4.95 was in. If we go back to 2010, it used to be 43,700, but if we look at now 2022, it's 61,400. Basically 10,000 more from when the rate increased and 20,000 from when, you know, 10, you know, based on observable data that's provided by the government. So you got the base increase, the rate has increased. So the, the amount of money that's contributing into the pool, it has increased. And one can really wonder, maybe it's conspiracy, but one can really wonder, is the withdrawals going to be more than what's coming in? So they need to find a way to get more of that money in. And just to kind of tie back to Richard, your point about that $614 extra now compared to when that rate increased. Again, we're inclu. If we include just this is just your contribution. And let's say you started at 30 years old and you decide to tap into the system at 35. So 614 times 35 years is basically 21,490, an extra amount of money that is being taken off your paycheck to fund the system that, you know, you could have used in a different way.

That'S going, but it's the total additional new amount moving Forward as of 2023. So if you're 30 and you're listening to this and you've got 35 years of contribution timeframe ahead of you, guess what? You, you're, you're unintentionally and automatically signed up to contribute an extra 21, 22 grand over your working years into the program that you may or may not get back at a later stage of the program. And here's another observation. Talking about the pension maximum going up like we just did, you know, if we look at today, again, we're at about $3,500 is what the employee contributes as of today. Now, again, that's going up a little bit in January of 2023. And if we just shoot back, you know, a few years and we go back to, let's say, 2016, because it's a nice easy number here. So from 2022 to 2016, we're, we're increased basically $1,000 a year. So in, in, in that whole time frame, from 2016 tax year to the 2022 tax year, there's $1,000 more per year for every working Canadian earning the pensionable max that is going to contribute to the CPP system.

And so not only have they changed the rate, they've changed this base just keeps getting bigger and bigger and bigger, which means this number keeps getting bigger and bigger and bigger.

Yeah, it's a bit smoke and mirrors would be a way I would describe it. It's kind of like we're looking at a.

For your benefit. It's for your benefit, Richard, don't look over here and see what we're doing.

Look at all these benefits you've got over here. Hooray. Hoorah.

Now, the next part to kind of really derive and break all this down is, well, what is all of this money that you're legally required that is being withdrawn, extracted away from the income that you're working into being put into the system for your benefit, how much are you actually contributing into it? So what I kind of wanted to put together, what I put together is some really quick math into all of this, where if the combined portion of the employer and employee today is contributing $7,000, and let's use age 30 as an example, from age 30 to 65, you're contributing 35 years of $7,000. Again, you're doing one portion of it, and the employer is doing one portion. If you're self employed, you're doing the both, both of it. So total amount of money going to the system is 244,986. And if we go back into the amount of money that is being withdrawn today that most Canadians at 65 would get is 8,731. They essentially are getting it. It takes them 28 years to get back all of the money that they put in. So if you started at 65, that would mean you are at age 93 before you actually equalize the employer and employee portion of it. Now obviously you'll be like, well, I don't care about what my employer did, I care about what I did. So if you were an employee, then it would take you maybe 14 years to get that money back. But I just wanted to highlight that 93. Well, in Canada, as according to Statistics Canada, the average male age is 85 and the average female age before they graduate and become an angel is 88. So based on that calculation, there's a huge, there's already about a seven to eight years or sorry, five to eight years of a windsaw that they don't have to pay because you've contributed extra into the system. This is not even according to the increasing base and the rate that comes with the contribution to the system, just.

Looking at today's kind of static version of numbers and projecting that static version out into the future. But, and again, I think it's okay to assess the employer and employee and employer's contribution. Even though the employee didn't contribute that capital, it was contributed for their benefit. It was contributed for effectively for their portion of the system. So if we really consider you really think that through, you're, they've designed it so that you don't have to contribute all of it, but the amount that you, you're supposed to be contributed is really all of it. They've just forced the benefit of the contribution onto the employer's back. So that whole 7,000 is really geared for you as the individual and that's the amount you really should be looking to get back out because it was put in there for your ultimately for your benefit. It's based on you as the individual and it's your share of that portion that is calculated to go into the fund so that you can draw down from that fund. And so if it takes you 28 years just to get square, you have to live to at least 93 in order to get the benefit out. Hey, if you live to 100, maybe you did okay, but if you died at if you died at 83. Well, the good news is there's more of that money in the kitty for someone else, I guess. But it doesn't really help you at all.

Well, here, here's I'm. And when you pass away, you get 2,500, which is still not even equal to the amount of money that you put in. But here's the part that I enjoy the most and I mean that tongue in cheek. Legally they require you to contribute it, but the benefit is not legally guaranteed to be there for you. I just want to say that again, they legally have strapped Canadian citizens to contribute to the system, but when you need it or when it's going to be there, there's just, there's no legal guarantee that it'll be there, at least for the minimum of what you put in. I just wanted to put that out there.

Very important. And I want to circle back to 2023 because we're approaching 2023 and there is some discussion and talk that I've been seeing and are hearing, whether it's coming up in my news feed or whatever on social media about some increased payroll taxes. And this is one of those line items that's tied into that. And if we just look at the math that we calculated here, the amount for 2022 versus the amount for 2023, it's another 150 roughly at the pensionable max per Canadian earning. The pensionable max of extra money that you're contributing now, $150 maybe doesn't seem like that much, but it's not just 150 for you, it's also 150 for the employer. Okay, so now expand that over the number of employees that the employer has and think of how much money that employer doesn't have to go and hire a new employee or to reinvest into some other benefit that they could do or, you know, do you know, providing for bonuses for key employees and people that are demonstrating that they are doing a good job. Like think of how much money is extracted before it can even be utilized. Right. It's not like the employer can hold onto that money and pay it at the end of the year. It comes off as source deductions, it happening on autopilot. So there's, there's a ripple effect to that taking place. And at the end result, that extra $150 a year, it's, it's only going to be in more of the year after that. And it's again, it's that boiled frog method that you kind of talked about, because we've seen now just since 2016-2022, there's a thousand dollar increase in your contribution to CPP. Again, if you're earning the pensionable max, according to the chart that we were looking at. So this is, this is not something that's going away and it's only going to get, I would suspect, a bit worse. And you know, yes, you receive the benefit of CPP again, assuming that it's all there and everything continues to work. But you're taking a bit of a gamble on whether or not that benefit amount's going to be there. And you know, if you go on the CPP's website, I think there's several things that indicate just how magically actuarially sound that they are. But it's all predicated on.

The increasing contributions.

Of a workforce that's actually working, which means there has to be jobs. So if we kill the economy, a whole bunch of, bunch of other things, oh, I don't know, printing funny money, rapid increases in inflation, other ancillary factors that seem to be happening outside of our control, and we end up killing the workforce and we have vast spike in unemployment for an extended period of time, 1, 2, 3 years, that's a lot of money that's not going into that system to support its actuarial objectives. And it's, you know, when we put all these things together and we, we kind of stack it all, it kind of, I'm getting a visual picture that's kind of like a house of cards. Henry, based on what you shared with.

Us today, I, I wouldn't disagree more. And you know, the, the best part is looking at the pieces, if we look at the last few years of what ha has happened to our economy, a lot of that has come from government's decisions that, you know, raises a lot of eyebrows from lockdowns to shutting supply chains down for other various government policies. What I hope for people to really recognize is the government plays a very, very big role in your, your ability to generate wealth and retain that wealth. And that now comes for you to really realize or think about is the government system designed completely to serve you or to think about that. And you know, one of the things I wanted to at least share with all of you is we've just put together a very simple design that we work with clients on, just taking the employee contribution portion of it, the 3500, close to it, the 3600 or so. And what does that outcome look like if you were to use that capital in a system that was designed for you and it's independent and it's private for yourself. How does that better serve your family? And so again these are just roughly designed numbers. This is something where we definitely go into a lot more in depth to tie into individuals goals and objectives. But we're talking about the same dollars but just put in a different place. What would that look like?

So example that we're, we're going to do, we're not even going to show again it's just a flat dollar based on today's dollar. It's not even based on anything beyond that. It's just based on, you know, the contribution amount that would happen. You know, for someone today earning that pensionable max at their own individual level.

Yeah. And we just put together 3652. Again this is not including the employer. So imagine if we did the employer's portion of the 7000 or the self employed individual who does the 7000. This is just the individual doing 7000, sorry, 3600 or so.

And so and we ran this starting that same, you know, we've been referencing like an age 30 person today and thinking about a 35 year horizon until 65. So given those same variables, if they funded that same equivalent amount in there basically until age 65 in this example, because we are using an insurance vehicle, we also took into consideration the need of coverage of this person at 30 years old who probably is starting a family, getting married. And so we've even added as part of that same dollar value some additional necessary coverage, some term coverage to support their, their young working life if they were to pass prematurely, which the CPP doesn't provide them. If you die and you're, you're, you've paid into CPP, you're going to get 2500 bucks, that's it. Whereas if you had your CPP contributions back and you could re inject them into a machine, a free contract with other free people, a voluntary insurance contract, you could protect your family with tax free capital in a really effective way and you can build up a capital reservoir. And so what we're going to focus on here is the buildup of that reservoir and then the utilizing of that reservoir as a passive income at a similar retirement stage than that, the CPP would be doing it for you.

And I also just want to highlight this is a properly designed policy that we, you know, as part of our practice methodology we do not advise you designs policies these ways but we kind of take into the consideration of Every client before we design a very customized policy design for them. So again, going back to Richard's point that we've looked into just some general life insurance requirements, but also how much if that money was repurposed in this, this avenue versus CPP as an example. And so this is the part that I want to highlight. So you've contributed from 30 to 35 to 65. So for 35 years, that 3,500amount. Well, let's, we ran it until age 90, until you passed away. Maybe, you know, we can do an earlier age, but that's okay. But what we want to highlight on this particular design and the structure of how we've designed it is this particular individual would be able to access 11,251 tax free.

Compared to that 8,700 ish or so of taxable income, which by the way, to create that 8,700 something from the CPP plan, 7,000 of that was a contribution. We're only using half of that. So if you use the same amount of money going in, you can Double that to 22,251. And again, it's tax free, not taxable. So it doesn't get added into your income. It doesn't impact your benefits. Your government cli. Government benefits as you would get when you retire. For example, Old Age Security, when you earn more than 89,000, they start clawing those benefits, they decrease how much old age security you would get. This has no impact to your old age security benefits that you have here. So we draw that out until age 90. So how much? Well, if you've gone into putting that 3500ish into the system for 30 years, that's 125,000 going in. How much money do you get to use from age 65 to 90 while you are alive? While 281,274, that's a significantly more amount of money than what you put in compared to the current system that you are not able to do. The other part is these contracts are also designed with a contractual guarantee for the purposes of just this recording. We're not, I'm not going to dive into that in too much detail, but this number is very close. There's a mechanism in these contracts in place legally, a unilaterally binding contract that's legally there for you that is going to achieve a specific outcome as opposed to the pension amount that you are not legally going to get guaranteed. So after you spend all that money of $281,275. What still gets left behind is 159,979 that gets paid to your beneficiary completely tax free as opposed to the CPP of $2,500 taxable.

When you add those two things together and you think about, you put, you put in some capital, 125 grand. Those are your inputs. You're going to be doing those inputs anyway, you know, and again, for a lot of people, they won't have an option, a choice here because mandated, it's coming off the paycheck. There's not really a choice for you. Part of this discussion is to start thinking about where can you start to find your choices, where can you make better choices, where can you enhance your options in your financial life. So in this example, you put in the 125, you pulled out 281 tax free, got to spend it, got to use it, and you still leave behind 160. So the total financial impact of value to you is 441. You put in $125,000 and you got to use a whole big chunk and you got to leave behind without anyone getting their hands on it tax free a bunch. So the total financial value output is 441. It's a pretty good differential without having a bunch of market risk. And then, you know, I got to take this one step further. Henry. What we're not saying is the biggest issue taking all that off the table, just removing all those components. The biggest issue I have with the current system that we're forced into is that it gives up the ability to multitask or utilize capital. And so over that entire working timeframe from age 30 to 65 that we've been talking about, because we've, we've isolated that, you know, that, that age gap in our, in our conversation today, that's 3030, you know, $3500 or whatever that amount is that's going into the, the, the CPP system. That's money that you can't use to buy down or pay off any debt. That's money that you can't invest somewhere else for your, for your own future and other things. It's money that you can't use for Christmas gifts. It's money that you can't put, you know, buy skates for your kids to play hockey. It, it's all capital out that you have no control over and you don't even see it.

It's taken off and you just pretty much have forgotten about it completely.

Gone. But imagine you were building and stockpiling that up and then, you know, a couple years, let's just, let's just say 10 years down the road you have access to, you know, $35,000 that you can access and then you could use that to go and let's say pay off a couple of cars that you and your spouse have in your driveway. And there was $1,000 of payments that were going to those car creditors and you recovered that cash flow and you could redirect it back into your system. Meanwhile, the 35,000 that was in your program continued to grow uninterrupted while you did that. You have all the financial control and then there's a whole host of areas where you could do that in your life when you have that control in hand. So we're talking about trying to find ways, trying to ask yourself questions. How can you move yourself from a position where you have no control to a place where you have ultimate control? And that's really the focus of becoming your own banker. It's a, it's a mindset shift. Today we went into a lot of details on, you know, financial statements of the CPP and how money's moving that is being withdrawn from us forcibly without our, our say so. And trying to figure out how you can start asking yourself questions about where or how you might get more cash flow back. You might not be able to get it in the CPP realm. There are people who are maybe self employed or incorporated that have a little bit more potential options there because they can determine how they maybe are able to choose their income at some future point. But for the average, you know, working Canadian, they don't have that option. So you have. But if you start asking yourself these questions, your brain's gonna start to tune in to places that you might be able to harness capital that's flowing through your life so it could be optimized in a more efficient fashion. So that's one of the things I wanna, you know, get our, get our listeners thinking about as we look to close our session here today.

Yeah, and you know, this not to say as an employee, you know, today's session, what I was hoping to highlight was the CPP example. But ultimately maybe there's other aspects of your life that you can bring into control that someone else doesn't have. And this is where the importance of having a real good coach who sits down, whether you're employed, self employed, corporate owner, to evaluate your specific circumstances, how you're structured from an income asset liability standpoint what your journey is today and where you want to be. And that's what we take into full consideration looking at when it comes to doing at this. And you know, as all the complexities and stuff that we've dove into today. If we kind of look at it at a very simplistic standpoint, both people can have the same amount of options. You have the 3500. But the choice that you make and the actions that you take can lead to a drastically different beneficial outcome to you. And that takes and that does start from you taking that initiative to really reevaluate. Is what you're doing the best way that you are getting most control and as the benefit completely towards you.

Yeah. Awesome. Well, Henry, thanks so much for this today. This is a ton of fun. I hope people get a ton of value out of this. I'm sure they will. And we would encourage everyone, of course, as we do every week, and make sure you tune into next week's episode and continue your journey of learning. There's probably a bunch of cool videos just popped up on the screen. You should check out for some of that. And of course we'd always encourage you to go over to 7 Steps CA and download the report like there so you can have a mapped out a method for your journey to learn how to implement this process in your life. Thanks again, Henry.

My pleasure. Lots of fun.