Uncertainties loom for Canada Pension Plan
C.D. Howe Institute report says it could lead to higher contribution rates or lower benefits
Uncertainties lie ahead for the Canada Pension Plan that could lead to higher contribution rates or lower benefits, says a new report from the C.D. Howe Institute.
In “Sources of Comfort and Chills: What We Can Learn from CPP Valuation Reports,” author Bob Baldwin looks at Canada Pension Plan (CPP) valuation reports and explores the financial sustainability of the CPP under various risk scenarios.
“I have deep-seated concerns that the risks involved in managing the CPP are poorly understood,” says Baldwin. “If unanticipated negative risks materialize, the Plan will be subject to significant political as well as economic risks.”
Assess the long-term adequacy
Baldwin reviews the most recent and past valuation reports prepared by the Office of the Chief Actuary (OCA). These reports assess the long-term adequacy of the legislated contribution rate to the CPP based on best-estimate assumptions about the future. They also provide estimates based on alternative plausible assumptions that provide an insight into the range of possible financial futures for the CPP. Importantly, they also estimate the minimum-contribution rate required from employees and the employers to keep the CPP in good health. Trouble arises if this minimum-contribution rate goes higher than the legislated rate.
“Preparing the valuation is not a small undertaking, as the CPP’s future health depends on assumptions about many variables that are unpredictable in the near future, and even more so over the longer time frames,” writes Baldwin.
On reviewing the CPP valuation reports, with a focus on the latest Actuarial Valuation Report issued December 2019, Baldwin finds:
* On best estimate assumptions, the minimum contribution rate is very close to the legislated rate and exceeds it with variations in most assumptions;
* Over both short and longer term futures, investment returns falling short of best estimate assumptions involve the greatest risk of causing the minimum rate to exceed the legislated rate; and
* CPP history provides interesting examples of the long-term future appearing quite different today than when the CPP was established. Fertility, mortality and wage growth provide examples.
Because the valuation reports imply the need for regular CPP adjustments, Baldwin recommends a review of the legislation that governs CPP to determine what aspects could be moved safely to regulations while maintaining the CPP’s joint federal-provincial character, thereby removing barriers to quick adaption.
Baldwin also recommends the OCA’s valuation reports expand their focus to understand what happens to the whole retirement-income system in the face of varying circumstances, including demographic, labour market, financial and economic influences. The author further notes significant outreach is needed to enhance public understanding of Canada’s retirement-income system through direct engagement with stakeholder groups.