February, 2006

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February, 2006
Canada Pension Plan (CPP)An examination of the
1997 reforms
Réal Bouchard International Conference on Social
Security Reform, Washington
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Content
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Canadas Retirement Income System

• Old Age Security (OAS) Guaranteed Income
  Supplement (GIS)
• Guaranteed minimum income for seniors, regardless
  of employment history publicly funded through
  taxes
• Canada Pension Plan (CPP)
• Public plan, partially funded, defined benefits
  and mandatory contributions based on employment
• Tax Deferred Private Savings
• Mixture of mandatory and optional savings, funded
  by individuals and employers

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Proportion of pre-retirement earnings replaced by
OAS and CPP in 2005
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Canadas Retirement Income System
Tax-assisted private savings 43
Old Age Security32
Total 80 billion for 2003
Canada Pension Plan 25
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The Canada Pension Plan (CPP)

• Provides all workers in Canada with a taxable
  basic earnings-related retirement pension indexed
  to prices
• Also survivor, disability and death benefits
• Benefit replaces 25 of average pensionable
  earnings up to the average industrial wage
• Maximum annual benefit C10,135 (2006).
• Financed by
• Mandatory employer/employee contributions split
  equally ( 9.9 ) on employment earnings between
  C3,500 and C42,100 (2006)
• Investment earnings on excess contributions in
  2022 on.

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The CPP Unique Features

• Decision making is joint federal and provincial
  responsibility
• Federal legislation but changes require
  provincial agreement
• CPP revenues, expenditures and assets are not
  part of the public accounts of the federal
  government, i.e.,
• No impact on the financial position of the
  governments in Canada.

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Public Pensions in Canada US (2006 figures)
Old Age Security Max C5,816
No Program Equivalent
Supplemental Security Income (SSI) Max US7,236
Income-tested benefits
Guaranteed Income Supplement Max C7,128 for
single
Old-Age Security Disability Insurance
(OASDI) Max US24,636 if started at age 65 and
8 months
Contributory public pension plan
CPP/QPP Max C10,135 if started at 65
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Content
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The CPP From 1966 to1996

• Pay-as-you go system with a small reserve
• Reserve invested solely in non-marketable
  provincial government bonds below market rates
  (with federal government as default borrower).
• Contribution rates remained modest despite
  benefit enrichments and rising cost pressures
• From 1966 to 1987 combined contribution rate of
  3.6 per cent
• Rose gradually to 5.6 per cent in 1996 well
  below pay-as-you-go (PAYGO) rate (8.3 per cent).
• Future generations were to pay far more
  contribution rates scheduled to rise to 10.1 per
  cent (2016) and projected to rise further.

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1995 Actuarial Report Raised Concerns

• The Actuarial Report projected
• the Plans small contingency reserve would be
  depleted by 2015 i.e., in just 20 years.
• By then, the CPP would be unable to pay promised
  benefits even at the scheduled 10.1 contribution
  rate.
• Costs would continue to rise would require
  pay-as-you-go rate of over 14 per cent by 2030.

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Main problem facing the Plan RISING COSTS

• Shifting demographics, notably a declining ratio
  of contributors to beneficiaries
• Slower earnings growth
• Successive benefit enhancements since inception
  and
• Escalating disability benefit expenditures in the
  previous decade due to looser administration and
  eligibility requirements.

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Consultations

• Sought Canadians views on solutions.
• Broad consensus on
• CPP should remain a public defined benefit
  pension plan
• Contribution rates over 14 per cent unacceptable
  current contributors should pay a fairer
  share of Plan costs
• Some pre-funding desirable provided assets
  invested like other pension plans
• Avoiding significant benefit reductions
  particularly for those already receiving a
  benefit.

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Content
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The Reform Package

• Three-pronged approach to restoring financial
  sustainability
• Significantly, and quickly, increased
  contribution rates to a level sustainable over
  the long term (i.e., 9.9 per cent from 2003
  onward) and that permitted partial pre-funding
• Adoption of a new investment policy with assets
  invested in marketable securities at arms length
  from governments
• Changes to benefits and their administration to
  slow expenditure growth.

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Move Towards Partial Pre-Funding

• Increase contribution rate (from 5.6 per cent)
  to long-term sustainable level - 9.9 per cent by
  2003 - and broaden the contribution base.
• Contribution rate to cover the actuarially fair
  cost of new entitlements plus a share of the
  unfunded burden that has built up.
• Allow CPP to build up a reserve fund equal to 5
  years of benefits.
• Investment earnings to help pay future benefits
  that otherwise would be financed by higher
  contributions.

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New Investment Board and Policies

• CPP Investment Board (CPPIB) established to
  manage assets in best interest of Plan members
• Independent from the federal and provincial
  governments
• Governed by a qualified board of directors.
• Assets invested in a diversified portfolio of
  securities (instead of only bonds) to get higher
  returns
• Subject to similar investment rules as other
  pension funds.
• CPPIB to provide quarterly financial statements
  and annual reports on performance of the
  investments.

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Benefits and Administration

• No changes to benefits already in payment.
• Measures taken to slow the growth of
  expenditures
• Change to wage indexation of retirement benefit
  calculation
• Administration of disability benefits tightened
• Eligibility for disability restricted by
  requiring recent contributions and longer
  labour force attachment
• Death benefit reduced and frozen at C2,500
• Other.
• By 2030, projected expenditures reduced by almost
  10.

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Considered but Decided Against

• Options for reducing growth in retirement
  pensions (consultation paper), i.e.,
• Lower replacement rate (25 to 22.5 )
• Increase in age of entitlement
• Increase in years required for full pension
  through changes to benefit formula.
• Move to partial indexing of pensions
  (consultations).
• Replacing the CPP with Individual Retirement
  Accounts (post consultations).

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Content
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Tough changes made in part by. . .

• The right timing
• A sense of urgency
• Economic and financial context buttressed reform
  resolve.
• Public consultations framed an acceptable/balanced
  package.
• Concrete measures built confidence that the Plan
  would be fixed for good
• New investment policy was key
• Measures to strengthen Plan governance/
  accountability.
• 4) Federal-provincial decision-making held
  agreement together.

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CPP Today

• Financial sustainability restored
• 9.9 contribution rate (since 2003) sustainable
  for at least the next 75 years
• Current/future contributors will receive a
  positive return on their contributions
• Actuarial projections reviewed by an independent
  panel of actuaries and results of their reviews
  are made public.
• CPPIB recognized as a model internationally as a
  model of transparent, arms length and
  professional management of public pension funds
• Assets totalled C92.5 billion (about 7 per cent
  of GDP) at end 2005 with a total annual return of
  8.5 per cent.