The recent Conservative majority mandate has quieted rival proposals for an expanded or “Big” Canada Pension Plan. Both the NDP and its Big Labou`r constituency and the vanquished Liberals had pushed for a “Big CPP.”
Now comes a paper from the C.D. Howe Institute that suggests a Big CPP would create more problems than its proponents let on. In Don’t Double Down on the CPP: Expansion Advocates Understate the Plan’s Risks, William Robson says advocates of an expanded CPP as a solution to retirement income worries too often promote it as a plan with guaranteed benefits that are fully funded.
The CPP is a gamble, not a guarantee: expanding the plan would raise the stakes on a bet most Canadians do not know they have made.
The CPP may look like a defined-benefit plan, but it is not, adds Robson, who is president and CEO of C. D. Howe. The CPP’s retirement benefits are targets contingent on its financial condition. Those targets can be and have been changed by governments.
The CPP is not fully funded in the normal meaning of the term — i.e. the ability to pay its obligations with assets on hand at a point in time, says Robson. The CPP’s ability to pay currently promised benefits at the current 9.9% contribution rate now depends on investment returns well above those now available on Canadian sovereign-quality debt.
The CPP used to be a pay-as-you-go plan funded from current contributions and later (in 1998) became a partially funded plan. If it were a true Defined Benefit pension plan like most corporate pensions, its contribution rate would have to be 11.3% or more, Robson argues.
The Quebec Pension Plan has been forced to trim benefits and raise contributions because of adverse demographic trends and economics, coupled with low investment returns.
Expanding the CPP would expose other Canadians to a larger risk of similar disappointments, Robson warns.
CPP needs to be shored up, not expanded
As a target-benefit plan (rather than a true DB plan), in principle the CPP may not justifiably match its assets and liabilities, the institute says. Like struggling corporate DB plans or even individuals trying to save in RRSPs, the CPP is “currently relying on future returns significantly higher than those available on low-risk assets,” Robson says.
Therefore, he argues, it’s “misleading to tell Canadians that the CPP is fully funded and could reliably deliver richer benefits on the same basis.”
As I’ve argued repeatedly in this blog and columns, an expanded CPP means putting too many of our retirement eggs in the single basket of “government pensions.” As Robson points out, there are other ways to improve the retirement prospects of Canadians, including saving more in RRSPs and TFSAs, and in professionally managed employer pensions for those lacking them (i.e. the Conservatives’ Pooled Registered Pension Plan or PRPP proposal).
Fortunately, the Tories do not appear to have backed down from the PRPP, and they still plan to double TFSA contribution limits to $10,000 per person once the books are balanced: hopefully a year early, based on the revised Budget released on Monday.
The Tories have not ruled out a “modest” expansion to the CPP. Based on Robson’s take, that would appear to be the prudent path. Let’s make sure the existing CPP is solid and define what we mean by a “modest expansion.”
My view of the latter would be to slowly raise the salary base on which CPP contributions are raised, as Morneau Shepell chief actuary Fred Vettese has argued.
Why major changes to CPP not viable
Fair Pensions for AllBill TuftsP.S. After posting the original version of this blog, I heard from Bill Tufts, of Fair Pensions for All. In this link, he discusses possible changes with Bernard Dussault, former chief actuary of the CPP.
Tufts argues there are too many variables that have to be aligned positively in order for the CPP or QPP to remain viable — even at today’s relatively modest levels of contributions and benefits. They include fertility and mortality rates, labour participation rates, inflation, immigration, unemployment and job creation and rising health care costs.
QPP the canary in the pension coal mine
The canary in the coal mine may be Quebec and its Quebec Pension Plan, which is parallel to but separate from the CPP. Based on the current 9.9% contribution rate, QPP plans will exceed contributions by 2013 and with no adjustments, the reserve will be depleted by 2039. Given that Quebec is now NDP territory and the fact Jack Layton pushed for an expanded CPP during the recent election, the rest of the country should pay close attention to developments surrounding the QPP.
The average retiree gets just over $6,050 in CPP benefits a year, Tufts says, since not everyone paid in at the maximum rate, so even a doubling of CPP or QPP benefits wouldn’t solve the problem of retirement income shortfalls over night. Most seniors will still depend on Old Age Security and the Guaranteed Income Supplement, he says.
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