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My mother recently received a letter from the CPP. This letter provided a summary of all of her contributions as well as the benefits she is entitled to if she should choose to retire today.

In order to determine her rate of return a brief review of the history of the CPP is required. It was established in 1966 and for the first 30 years, contributions were used to cover benefit requirements. In the 1990s the government realized the current setup of the CPP was not sustainable given the life expectancy of individuals in the CPP and the demographics of Canada.

The CPPIB was established in 1997 and made its first investment in 1999. Also, the contribution rate from inception (1966) to today has increased by 5.5 times.

Based on the history of the CPP, my mother’s contributions up to 1999 made a rate of return of 0%.

After 1999 her contributions made an annual return of 5.9%. If she were to take her benefits today, she would exhaust her contributions and their returns within eight years. Another way of looking at it is, if she lives to age 88 (the average life expectancy of women in Canada) her rate of return from the CPPIB would be 18.3%, more than three times the actual rate of return and more than five times the rate of return my generation is receiving.

Why are younger generations being expected to fund their parents’ (the Baby Boomers) retirements? The shortfall in the CPP was evident shortly after its inception due to shifting demographics and improvements in life expectancy. Baby Boomers’ families were smaller than those they were raised in and immigration failed to fill in the gap, leaving fewer people to support the costs of the CPP. An increase in life expectancy was evident based on trends and health-care spending.

The CPP provides high returns to those who entered the plan 40 years ago and it provides much lower returns to those entering the plan today.

So, is the CPP a pyramid scheme? Webster’s dictionary defines a pyramid scheme as “a usually illegal operation in which participants pay to join and profit mainly from payments made by subsequent participants.”

I am not a lawyer, but it seems to me that the CPP fits this definition.