How much we pay for retirement every year?

Many articles talked about the benefit we will receive upon retirement. Few articles talk about how much we have to pay for the potential benefit. We will briefly discuss the cost we pay for retirement.

The easiest part to calculate is CPP (Canada Pension Plan) contribution. For people earning $55,000 or higher a year, CPP contribution is over $5000, including the employer‘s contribution. OAS (Old Age Security) benefits come from general tax income. It is not directly connected to your individual tax contribution. As OAS benefits cover everyone and benefit amount is of similar value to CPP, we can estimate our average tax contribution to OAS is at least $5000. With CPP and OAS, an average person pays about $10,000 per year for retirement.

Most companies provide company sponsored pension plans. Total contribution, including employer’s contribution, is about 10% of your income. An average Canadian worker makes about $50,000 a year. His company pension contribution is about $5000 a year. Together with CPP and OAS contribution, we already pay about $15,000 for retirement every year. 

There are many optional retirement plans with tax benefits. It is up to individuals to determine how much one wants to pay. For me, it is much more valuable to spend money when one is young than one is old. We can have one more memorable vacation, one more precious child, and one more beautiful memory when we are old. Why squeeze our youth to pursue a mirage of paradise in old age? 

Finally, we will estimate the efficiency of retirement benefit. Our average CPP and OAS contribution is $10,000 a year. Over 40 years, our total contribution is $400,000, without counting time value. Average Canadian life span is 81 years old. On average, we will receive 81-65 = 16 years benefits. The maximum retirement benefit for a single pensioner from the government is $24000, or $23997 to be precise, in the year 2017. But not every one is a single, and majority have other incomes, such as company pensions. The average payout may be much lower than $20,000. Suppose the average payout is $20,000. Over 16 years, the total payout is $320000, which is much lower than the total contribution of $400,000. Forget about the supposed huge time value over such a huge time span. We can’t even get the principal back.

Given the dismal performance of the government pension system, one might recommend reducing pension contribution. But the contribution has been increasing over time to cover the supposed shortfalls.