Canadian Retirees: CPP Should Be 100% Solvent When You Retire

The concern of would-be retirees regarding the sustainability of their pensions is valid. However, the CPP is 100% solvent and should be able to deliver. Also, the CPPIB has been able to optimize returns on assets like the Canadian Natural Resources stock.

| More on:
Family relationship with bond and care

Image source: Getty Images

Canadian retirees in general and baby boomers in particular, want to know if their Canada Pension Plan (CPP) money is secure and safe in the pandemic. Despite the huge pot of cash, the Canada Pension Plan Investment Board (CPPIB) is managing, will there be enough when retirees begin drawing their pensions?

The CPPIB is the fund manager of billions of dollars that come out from the paycheques of Canadians. The worry is that the government might use the funds for other purposes given the COVID-19 outbreak. CPP contributors, however, should understand the mechanics of the pension and discard the misconception.

Primary rule

The CPP contribution is kept entirely separate from government general accounts. In 1997, there was a rule created by the federal government. Pension benefits must be covered each year by the cash that comes from Canadian employers and workers.

Similarly, the level of contribution rates ensures there’s extra to set aside in an investment fund. The allocation will cover the additional cost of benefits for baby boomers or those who will be retiring until about 2030 and could live for an extended period beyond that.

More important, the fund is arms’ length from the federal government, namely, no party in power can dip its hands in the fund. Every three years, the chief actuary reviews the fund. The goal is that over the next 75 years, at least, there shouldn’t be a shortfall.

Top investment

Some believe they can do better investing personal funds in stocks like Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ). However, it would be difficult to match the high return of investment by the CPP. When the CPPIB invests, the fund is indexed to inflation, whereas your investment is at the mercy of how the market moves.

Nonetheless, CNQ is one of the CPPIB’s top stocks, where the position size as of December 31, 2019, is $827.8 million.  Everyone knows that the energy industry in Canada is in dire straits because of the coronavirus and plunging oil prices. CNQ is an oil and gas explorer and producer.

With the price dropping to $18.78 per share, as of April 3, 2020, from $39.64 (down 53.5%) on January 2, 2020, bargain hunters are catching a falling knife. Even the Mawer Canadian Equity Fund bought more shares of CNQ in the second half of 2019 to increase its position by 8.09%.

For regular investors, owning this dividend-paying energy stock is an advantage. Currently, the dividend yield is a high of 9.72%. Your $25,000 idle cash can produce $2,430 in passive income.

The CPP benefit is modest that it replaces only 30% of an average income. Hence, it makes sense not to rely on the CPP 100%. The pension serves as a base income for retirees such that it becomes important to have other income sources during retirement.

Fulfilling the mandate

The mandate of the CPPIB is crystal clear. This professionally managed investment group must optimize the return on investment and keep the risk profile low.

So far, its track record speaks for itself. Canadians today and the future generation should feel secure that the CPP would be solvent when it’s time to retire.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned.

More on Dividend Stocks

edit Person using calculator next to charts and graphs
Dividend Stocks

Better Buy: Fortis Stock vs Enbridge

Fortis stock and Enbridge are top dividend stocks on the TSX today. Which stock is better buy for safe dividend…

Read more »

Canadian Dollars
Dividend Stocks

How to Make $1,500 in Passive Income 4 Times a Year

Blue-chip TSX stocks such as Enbridge can enable investors to create game-changing wealth over the long term.

Read more »

Dividend Stocks

TFSA: How to Easily Turn $10,000 Into $500/Year of Passive Income

You don't need to be a stock market expert to turn $10,000 into a $500 of tax-free passive income. Here's…

Read more »

protect, safe, trust
Dividend Stocks

Worried About a Recession? 2 TSX Blue-Chip Stocks to Protect Your Capital

If you fear a recession coming on soon, here are two blue-chip Canadian stocks to add to your portfolio for…

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

New TFSA Investors: 2 Top TSX Stock to Create a Self-Directed Retirement Fund

Top TSX dividend stocks are now on sale for new TFSA investors.

Read more »

money while you sleep
Dividend Stocks

Worried About the Market? 2 Dividend Stocks That Let You Sleep at Night

Here's why Restaurant Brands (TSX:QSR) and Enbridge (TSX:ENB) are two top dividend stocks to buy in this uncertain market right…

Read more »

money cash dividends
Dividend Stocks

How 1 Absurdly Cheap Stock Can Generate $100 in Monthly Passive Income

You can generate $100 or more in monthly passive income from one high-yield stock trading at an absurdly cheap price…

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

How I’d Invest $1000 in February to Make Easy Passive Income

Looking to earn some extra passive income in February but don't have much cash? Build an easy portfolio with these…

Read more »