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Archived - Annual Report of the Canada Pension Plan 2000-2001
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As joint stewards of the CPP, the federal and provincial ministers of Finance review the Plan's financial state every three years and make recommendations as to whether benefits and/or contribution rates should be changed. They base their recommendations on a number of factors, including the results of an examination of the Plan by the Chief Actuary, who is required under the legislation to produce an actuarial report on the CPP every three years (in the year before the legislated ministerial review of the Plan).
Changes to the legislation governing the general level of benefits, the rate of contributions or the investment policy can be made only by the ministers through an act of Parliament. All such changes require the agreement of at least two thirds of the provinces representing at least two thirds of the population, and come into force only after two years' notice, unless all the provinces waive this requirement. Quebec participates in the decision-making formula, even though it has opted out of the CPP and administers its own Plan. The QPP must be implicated in changes to the CPP if the two plans are to remain parallel.
The Finance ministers' last review of the Plan, in December 1999, was based on the results of the Seventeenth Actuarial Report on the CPP, tabled in Parliament in December 1998. The Report confirmed that the 9.9 percent combined employer-employee contribution rate, which will be reached in 2003, is expected to be sufficient to sustain the Plan indefinitely as larger numbers of Canadians reach retirement age.
During the 1999 review, the Finance ministers agreed to leave the schedule of contribution rates unchanged, as the actuarial report prepared for the review confirmed the financial sustainability of the Plan (taking into account the projected aging of Canada's population). Further information on the 1999 federal-provincial review and previous reviews of the Plan can be found on the CPP Web site: www.cpp-rpc.gc.ca.
During the course of 2000-2001, the Office of the Chief Actuary began work on the Eighteenth Actuarial Report. A series of seminars with experts was organized to discuss the key assumptions to be used in the Report. These consultations respond to the recommendations made by the panel of independent actuaries that reviewed the Seventeenth Actuarial Report. A summary of the panel's recommendations can be found at www.osfi-bsif.gc.ca/osfi/index_e.aspx?DetailID=499.
Since the end of the 2000-2001 fiscal year, the Chief Actuary has completed the Eighteenth Actuarial Report. It was tabled in Parliament by the Minister of Finance on December 10, 2001. The Report, which provides an actuarial examination of the Plan as at December 31, 2000, confirms that the 9.9 percent combined employer-employee contribution rate scheduled for 2003 and thereafter is expected to be sufficient to sustain the Plan indefinitely. The Eighteenth Actuarial Report will be reviewed by a panel of independent actuaries and will serve as the basis for the financial review of the Plan by the Finance ministers in 2002. The Eighteenth Actuarial Report can be found at www.osfi-bsif.gc.ca/osfi/index_e.aspx?DetailID=499.
A Fair Approach to Funding
When it was introduced, the CPP was designed as a pay-as-you-go plan, with a small reserve. This meant that the benefits for one generation would be paid largely from the contributions of later generations. This approach made sense under the economic, financial and demographic circumstances of the time. The period was characterized by a rapid growth in wages and labour force participation and low rates of return on investments.
The federal and provincial governments decided to keep contributions at a reasonable level while beginning to pay full retirement benefits as early as the mid-1970s. This was important - many of the seniors who received benefits at that time had been unable to accumulate sufficient retirement savings because of the Great Depression and two world wars.
However, demographic and economic developments and changes to benefits in the 30 years that followed resulted in significantly higher costs. When the federal-provincial Finance ministers began their statutory review of the finances of the CPP in 1996, contribution rates, already legislated to rise to 10.1 percent by 2016, were expected to have to rise again - to 14.2 percent by 2030 - to continue to finance the program on a pay-as-you-go basis.
This would have meant imposing a high financial burden on Canadians in the workforce during those years, which was deemed unacceptable by the federal and provincial governments. Therefore, in 1997, they agreed, instead, to change the funding approach of the Plan to a hybrid of pay-as-you-go (in which benefits paid to each generation of retirees are financed from the contributions of the following generation of contributors) and full funding (in which each generation pays for its own benefits).
Steady-state financing
Under steady-state financing, the contribution rate is scheduled to increase incrementally (from 5.6 percent in 1996) to 9.9 percent in 2003 and to remain at this level thereafter. Steady-state financing requires that contribution rates be set no lower than the lowest rate expected to ensure the long-term financial stability of the Plan without recourse to further rate increases. (The combined employer-employee contribution rate in 2001 was 8.6 percent, up from 7.8 percent in 2000.)
Steady-state financing will generate a level of contributions between 2001 and 2020 that exceeds the benefits paid out every year during this period. Funds not immediately required to pay benefits will be transferred to the CPP Investment Board for investment in financial markets. The Eighteenth Actuarial Report calculates the value of accrued pension benefits at $487 billion and Plan assets (valued at cost) at $43.7 billion as at December 31, 2000. However, the future financial health of a plan funded along the lines of the Canada Pension Plan is better measured by the evolution of the projected growth rate of assets and liabilities. The Eighteenth Actuarial Report projects total Plan assets are expected to increase from the equivalent of about two to about five years' worth of benefits over the next two decades under the current schedule of contribution rates.
After 2020, as more and more baby boomers retire, and benefits paid begin to exceed contributions, investment revenues from the CPP's accumulated assets will provide the funds necessary to make up the difference. However, contributions to the CPP will remain the main source of funding for benefits.
Plan assets are projected to continue to grow after 2020, at a somewhat slower pace than before 2020 but at least as rapidly as Plan liabilities. As a result, Plan assets are expected to be equal to an increasing number of years of benefits into the foreseeable future. As a result, the Eighteenth Actuarial Report concludes that the pool of assets the Plan is expected to accumulate should make it possible to absorb any unforeseen economic or demographic fluctuations, which would otherwise have to be reflected in contribution rates.
A partially funded CPP is not only a good balance between the two approaches, but also complements the other components of Canada's retirement income system:
the Old Age Security program, funded by general Government revenues, and
private savings, including tax-assisted, fully funded employer-sponsored pension plans and registered retirement savings plans (RRSPs).
As a whole, because it has a diversified funding approach, Canada's retirement income system is less vulnerable to changes in economic and demographic conditions than are systems in countries that use a single funding approach.