is cpp a good deal?

[cowman]

I am self employed so I pay both sides of CPP.For the last 15 or so years I have paid myself more than the CPP upper limit.The 20 years before that I paid an increasing but less than max amount.I will turn 54 this year.My WSIB is a little over 5%.At what point am I better off taking dividends vs wages  ....I  realize it is complex and situation specific but...I have found that before asking..experts for advice it is good to have a very good understanding of...the basics.My  research tells me that yes delaying CPP earns about 8 percent but you do not actually earn that on what is paid in.Any thoughts,links or perspectives are greatly appreciated!

[cdn5cents]

A few years ago I curious about my own CPP benefit and inadvertently think I might have answered your question...

After getting an estimate for my then CPP eligibility, I calculated scenarios for CPP eligibility based on working additional years.  In each scenario I calculated the PV of the CPP benefit starting at 60, 65 and 70.   The table below shows my results (2020 dollars).

The final column in the table below shows the year over year increase in NPV for working one additional year when taking CPP at 70. 

With the assumptions I used (i.e. discount, mortality), when compared the then total CPP payment,  it showed that there was in fact a positive benefit for paying into the program.  In my case the Net Benefit of OMY was derived from only having to pay the employee portion.  No idea how the calculation could compare today with the enhanced benefit/payment.

Best....
            
Rate   @ 60 Years Old   @ 65 Years Old   @ 70 Years Old  Diff.            
   2020   $150,096.91   $168,073.19   $185,688.71                                    CPP Payment (Employee and Employer)   Net Benefit of OMY
   2021   $155,258.05   $174,941.44   $193,278.36      $7,589.65                                                $5,796                      $4,691.65
   2022   $160,658.68   $182,288.26   $201,395.23      $8,116.87      
   2023   $166,346.71   $190,115.54   $210,042.31      $8,647.08      
   2024   $172,350.87   $198,063.42   $218,821.93      $8,779.63      
   2025   $178,311.93   $205,997.90   $227,588.16      $8,766.22      
   2026   $184,136.47   $213,756.28   $236,160.76      $8,572.61      
   2027   $186,881.09   $221,382.57   $244,585.93      $8,425.16      

[cowman]

OP here if anyone is still listening.

I was hoping for a simple formula to plug in tax rates etc,but I guess there is too many moving parts.

What I did find in the rabbit hole:

DO NOT be confused by the rate of return the CPP board reports and the return you get from your contributions

DO NOT be confused by the increase you get by delaying

If you are born after 1972,you can expect a return of 2.1% on your(and employer)contributions.
If you pay the "enhanced"the return is slightly higher on that portion

After typing that I realize that would be average(median?)return.The longer you live your return would be better,a shorter life would be a lower return.

I think

[daverobev]

There is 'a guy' who I think used to be on the RFD forums who would take all the info and give you answers. Maybe try him (no affiliation, I think the site is https://edrempel.com/)

As you say, too many moving parts. Drop-out provisions, blah, blah... never could get my head round the complexity.

From what I remember... it's not a good deal vs taking the money yourself and investing in a low MER ETF, especially of course in a tax shelter. But the thing is... most people are not smart enough to do that, to pay themselves first, always, over their working life. The 1% effective management fee seems egregious to me. I guess I can understand 'why' the CPPIB picks and chooses what it invests in but I don't really like it.

But still. For the average numpty... it's a good thing that it exists.

[Missy B]

There is 'a guy' who I think used to be on the RFD forums who would take all the info and give you answers. Maybe try him (no affiliation, I think the site is https://edrempel.com/)

As you say, too many moving parts. Drop-out provisions, blah, blah... never could get my head round the complexity.

From what I remember... it's not a good deal vs taking the money yourself and investing in a low MER ETF, especially of course in a tax shelter. But the thing is... most people are not smart enough to do that, to pay themselves first, always, over their working life. The 1% effective management fee seems egregious to me. I guess I can understand 'why' the CPPIB picks and chooses what it invests in but I don't really like it.

But still. For the average numpty... it's a good thing that it exists.

This.
CPP isn't a good deal for self-employed people and market returns... its really a type of annuity. If you compare it to other annuity products you might decide to buy, it actually is a pretty decent product.
Even though I incorporated in part to stop paying CPP (which I deeply resented) about 3 years in I did some calculations and realized that the total tax difference between keeping $ in the corp and paying corp tax taking it out and paying salary tax and CPP, were, at the income level I was paying, not an advantage to me. So the difference with salary instead of all dividends is about 2% more, but I get CPP. That's worth it, so I do it. It's more of a differential at higher income levels, I'm paying myself around 40K. I also use my RRSP and have eligible div that decrease tax.

[afulldeck]

This.
CPP isn't a good deal for self-employed people and market returns... its really a type of annuity. If you compare it to other annuity products you might decide to buy, it actually is a pretty decent product.
Even though I incorporated in part to stop paying CPP (which I deeply resented) about 3 years in I did some calculations and realized that the total tax difference between keeping $ in the corp and paying corp tax taking it out and paying salary tax and CPP, were, at the income level I was paying, not an advantage to me. So the difference with salary instead of all dividends is about 2% more, but I get CPP. That's worth it, so I do it. It's more of a differential at higher income levels, I'm paying myself around 40K. I also use my RRSP and have eligible div that decrease tax.

With the recent budget changes, its even less advantageous to keep retained earning. Its better to pay out in salary to the maximum for RRSP, TFSA, FHSA and CPP. The Canadian Government is  continuing its attack on CPCCs.

[Missy B]

This.
CPP isn't a good deal for self-employed people and market returns... its really a type of annuity. If you compare it to other annuity products you might decide to buy, it actually is a pretty decent product.
Even though I incorporated in part to stop paying CPP (which I deeply resented) about 3 years in I did some calculations and realized that the total tax difference between keeping $ in the corp and paying corp tax taking it out and paying salary tax and CPP, were, at the income level I was paying, not an advantage to me. So the difference with salary instead of all dividends is about 2% more, but I get CPP. That's worth it, so I do it. It's more of a differential at higher income levels, I'm paying myself around 40K. I also use my RRSP and have eligible div that decrease tax.

With the recent budget changes, its even less advantageous to keep retained earning. Its better to pay out in salary to the maximum for RRSP, TFSA, FHSA and CPP. The Canadian Government is  continuing its attack on CPCCs.

If you want to maximize your salary, then don't incorporate, it's a waste of time and money.
(Anyone thinking of incorporating who has RRSP room, TFSA room, FHSA elibgibility and room - do those first. So much easier and cheaper)

Though I did take profits last week on the investments that had cap gains, my plan going forward is that corporate investments will be those companies that have good dividends but aren't likely to appreciate a lot -- some version of a 'value trap'.
The dividends I flow through to myself, and the extra investment income I get from not losing investment $ to higher taxes is making a difference in my traction and speed to fully FI.
It's nice to actually be happy that your stocks are not going up. :)
whatever cap gains there are when I finally melt down the corp will be a bonus and not what I was investing for in the first place.

[Retire-Canada]

Any thoughts,links or perspectives are greatly appreciated!

I have been self-employed since 1996. So I have felt the "paying both sides of CPP" pain. I don't try and analyze the cost vs. index funds for example. I look at it as the only way I can buy an inflation indexed [CPI] annuity product in Canada. That's a very useful thing for a FIRE enthusiast as it provides both longevity and inflation protection.

So I am happy to have paid into CPP all these years. Paying both sides is less awesome, but I have enjoyed being self-employed a lot more than I would have being an employee and I have been paid very well so it's a small pain point.

[CathMsMustache]

Thanks everybody -- a very helpful thread.  I am also self-employed and those CPP payments have really pinched over the years, but this discussion has changed my outlook.