Is the Canada Pension Plan a Ponzi Scheme?

If you’ve watched the Netflix documentary on Bernie Madoff, you likely have a good idea of what a Ponzi scheme can be. You invest 100,000 dollars and are promised a return of 13.5% per year. After one year you start getting exactly $13,500 in income. It continues for decades the exact same amount of money.

It goes on for many years until finally someone asks the question. How is it possible to pay out that amount of money if the stock markets and investments fluctuate each year? The only way is to pay people from other money coming in when investments aren’t providing a return. The classic Ponzi Scheme. New investment money is diverted to pay you your $13,500. That is illegal.

Recently in Canada, the province of Alberta has started to make statements that they want their share of the CPP back. Each employee or private business in Canada must contribute a percentage of earnings to a general retirement fund. It is not small potatoes. The maximum amount of contribution by a self-employed business owner for example is $7,508.90 per year. If you contributed that during your working life, you would expect to receive some $1,500 per month in retirement.

It's a pretty lousy return on all of your money and according to some experts not even necessary.

If you were to invest that $7,508.90 on your own, starting at the age of 30, you would have $837,140 at a 7.5% annual rate of return 35 years later. From that you would be able to receive over $4,000 per month in retirement income. Much better than any CPP payment.

When I began to dig into the CPP annual statements, however, a new very surprising list of concerns hit me. I don’t believe that if Alberta wanted their money out of the plan, CPP has the cash to give it to them.

In the most previously reported year, CPP made 1.3% on their investments. However, they report that 66 billion dollars came from CPP, and 43 billion dollars went into CPP. With a net income of just 8 billion dollars, we must ask, where did the rest of the money come from to pay us old folks getting retirement income?

Well, the answer like in Bernie’s days, from those now working and contributing. Giving retirees income from the actual investments would mean a drastic drop in benefits. CPP can’t do that. So, they are giving us retired folks, money that is gathered from those working today. That I think is a Ponzi scheme. When people stop bucking up, the fund has no money to payout because their investments don’t generate enough income. It’s all mixed up apparently or funds are co-mingled in a confusing way. If everyone stopped working and contributing to their Canada Pension, the fund would have to start selling assets to pay benefits.

When you look at the investments however, CPP is somewhat less than liquid. They have 23% in the stock market, 23% in private companies, 32% in fixed income and 17% in Credit. A scary fixed asset is called Real Assets where most of the investments are in commercial and office properties. It doesn’t take a genius to understand that the plan is in trouble.

So not only is it a Ponzi Scheme for me, but it is also a mess of investments trying to chase high returns by increasing risk. I’m going to assume that in 5 years or so, it’s bankrupt. Mary and I won’t be getting that $1,100 combined anymore from the scheme. If you are retired, I think it would be healthy to assume the same. If you are of working age, you should plan on it being gone as well. In the meantime, thank you for supporting us retirees.

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