Thread by @tammyschirle

Who wants a short lesson on the CPP formula and how subsidies across individuals come about?

The CPP cross-subsidies I’ll look for:
1. To older generations (worked in 70s and 80s)
2. Taking time out for kids
3. Unemployment or education spells

A simplified CPP formula:
Annual benefit =
Replacement rate
x average Earnings/YMPE ratio
x Recent YMPE

Let’s work through these parts!

A spreadsheet example is here, but we’ll put that aside for now: docs.google.com/spreadsheets/d…

From the CPP formula:
The replacement rate is pretty obvious. It used to be 25%. Once the additional CPP is fully phased in, it will be 33%.

The YMPE is our earnings cap - you pay contributions on earnings up to this $ amount & only earnings up to YMPE matter for your pension. In 2019, this is $57,400. It increases with average wages. In the formula, we use a 5 year average of the YMPE.

The average earnings/YMPE ratio is the tricky part, and where all the cross-subsidies are buried. Let’s start with the simplest scenario….

Suppose every year after you turn 18, you earn more than the YMPE. Your earnings/YMPE ratio will be =1 every year. The average ratio is =1. So your benefit is the replacement rate x YMPE. Easy peasy.

In the 1970s and early 80s, YMPE was really low compared to today (in inflation adjusted terms). So, anyone working then more easily got a ratio of 1. That raises the avg ratio that gets applied to today’s higher YMPE in the benefit formula…

The low 70s/80s YMPE effectively resulted in a high avg ratio to achieve a higher benefit, even though their 70s/80s contributions would not have funded that higher benefit. That’s our first big subsidy - to these earlier generations.

Other cross-subsidies are from people with very stable employment (high or low wages) to people who have periods of time out of the labour force. The example I created in the spreadsheet is meant to illustrate those.
docs.google.com/spreadsheets/d…

Child-rearing provisions. In the basic (old) version of CPP calculations, we allow primary caregivers to drop any lower ratios for years with kids under 7. For the added CPP we fill it in with an estimate of what you might have made. ...

Child-rearing provisions… This brings up the average ratio for the benefit formula. Those with more kids and more time out of the labour market will get a bigger subsidy.

Note to self: Traditionally, for CPP the primary caregiver was defined as the person who got the child benefits cheque. Has anyone challenged what to do when both parents spend time as primary caregivers in the same calendar year and both take a hit to income?

Low-earnings drop out provisions. Look through the earnings/YMPE ratios in your work history and drop the lowest 17% (more if you work past age 65). ...

Low-earnings drop out provisions….
This could drop out years unemployed, in school, etc. That raises your average ratio. So this is a big subsidy, and a big incentive for people work at older ages.

So that’s the main subsidies.
1. from younger to older generations.
2. From those with stable employment to those with unemployment spells
3. From everyone who doesn’t take time out when kids are young to those who do

To get further into the details, you can read the CPP Act for the formulas, and there’s always the CPP Actuarial reports that are fun to read!

https://twitter.com/kevinmilligan/status/1195054352504737792