Published On: Monday, 10 April 2017
Young Canadians Put at Risk with CPP Expansion
- The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies through research that is nonpartisan, evidence-based and subject to definitive expert review.
CANADA - Younger Canadians are at a material risk of picking up the tab should the soon-to-be expanded Canada Pension Plan experience investment return shortfalls, according to a new C.D. Howe Institute report.
In “Bigger CPP, Bigger Risks: What “Fully Funded” Expansion Means and Doesn’t Mean,” authors William B.P. Robson and Alexandre Laurin assess the risks of an expanded CPP and suggest how federal and provincial finance ministers can mitigate them.
“Advocates of the expanded CPP call the new plan ‘fully funded,’ and emphasize the security and reliability of its promised benefits,” commented Robson. “Yet those promises rely on assumed returns on investment much higher than actual yields on assets suitable for backing that kind of sovereign-grade pension obligation.”
The authors adapt the assumptions used by Canada’s Chief Actuary in projections for the expanded CPP, and show that a portfolio designed to achieve the aggressive returns the CPP requires will expose the expanded plan’s participants to investment risk.
They point out that the CPP faces a trade-off between the minimum level of benefit it guarantees its participants and the likelihood of being able to pay that benefit. Simulations allowing for fluctuations around the assumed returns show cashflows sufficient to cover 90 percent of benefits in scarcely more than half the scenarios.
Laurin added: “Also unknown at this point is what will happen if returns are too low. The bill to expand the CPP left to as-yet-unwritten regulations how and when benefits or contribution rates would change if the plan does not evolve as predicted.
It is reasonable to worry that disappointments will lead to contribution hikes on future workers to pay for benefits that today’s workers did not, in retrospect, fully fund themselves.”
The authors note that the legislation expanding the CPP left key provisions – how the plan will respond to investment returns different from what it needs – to be determined by regulation.
They recommend that federal and provincial finance ministers ensure that those regulations limit potential contribution-rate increases that would be unfair to younger Canadians, and clarify that CPP benefits above a basic level are contingent, not guaranteed.