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The CPP fix is in so even boomers needn't worry
January 7, 2002
The Globe and Mail
Raise your hand if you think the Canada Pension Plan is in financial trouble. Raise it again if you think you'll collect nothing from it when you retire.
Myths die hard. You're wrong on both counts. The CPP was in financial trouble in the mid-nineties, but it was fixed in 1997. If you've received your first paycheque of 2002, you've probably already noticed that the CPP deduction went up substantially and reduced your take-home pay. That's the fix at work.
There were a few years in the mid-nineties when those regular contributions from workers weren't enough to cover all the benefits to pensioners, but sharp increases in the contribution rate since then have put the plan back into the black. And the latest long-term actuarial projection -- which goes out to 2075 -- says it will stay there.
There are still many Canadians who haven't gotten past the middle of the nineties in their worried perceptions about the CPP. That's probably not surprising. Crises make news and solutions don't, and the crisis in the CPP received plenty of media attention while politicians tried to figure out how to solve it. Parliamentary committees traversed the land soliciting comments, and their hearings were well covered.
The fix to the plan, when it was announced in early 1997, was a one-day story. Since then, the CPP has reappeared in the news only annually, about this time of year when successive higher contribution rates have gone into effect. But the fact that the crisis is over hasn't really seeped in.
The CPP looked to be in fine shape during its early years. From 1966, when it began, until 1982, annual contributions exceeded annual benefits and the plan's assets accumulated to almost $24-billion. Beginning in 1983, though, contributions fell short of benefits. However, the interest on the $24-billion pot of money (lent to provinces) was sufficient to keep the overall CPP in surplus another 10 years. By 1992, the pool of assets had grown to $42-billion.
By 1993, however, even that combination of contributions and interest income couldn't produce enough revenue to cover the stream of pension benefits. The CPP's chief actuary warned that, without changes, the plan would be in very deep trouble, especially after the baby-boom generation began to hit 65 in 2012.
The politicians who run the plan -- the federal finance minister and his counterparts in the nine provinces that take part (Quebec has its own plan) -- moved briskly (for politicians) to act on the actuary's advice. Beginning in 1998, they jacked up the contribution rate in a series of annual increases that is taking the rate from 6 per cent of defined earnings in 1997 to 9.9 per cent in 2003 and thereafter. The rate this year is 9.4 per cent, split equally between employers and employees.
It may have lacked imagination, but the fix has certainly worked. In the first year -- 1998 -- the plan's total revenue exceeded benefits slightly, and by 2000, contributions alone were high enough to cover all benefits. After falling to $36.5-billion in 1997, the CPP's assets were approaching $48-billion at the end of 2001.
Last month, Jean-Claude Menard, the current chief actuary for the plan, said in a report that the CPP is not only "sustainable over the long term," but is also strong enough to weather "almost any unforeseen economic or demographic fluctuations" without any further increases in the contribution rate. A decade from now, he figures, the plan's assets will have climbed to $155-billion. By 2021, when about half the baby boomers will be over 65, the assets will have reached $345-billion.
The investment income on that sum will be needed. There are now about five wage earners for every pensioner because the big boom generation is supporting fewer oldsters. But because the boomers had few children, there will be fewer people -- three earners for every pensioner -- to support them in their retirement years.
In 2021, Mr. Menard calculates, annual CPP contributions will once again fall short of benefits to pensioners, a condition that will persist. However, investment income from the fund will generate enough revenue not only to pay the bills, but to keep adding to the fund itself. By 2029, its assets are expected to reach $545-billion, equal to the Ottawa's debt today.
Such sums are hard to comprehend. One figure is easier to grasp. Today, the fund amounts to about two years worth of benefits; by 2017, it will amount to five years worth of benefits and it's expected to level off in the 2020s at about 5.3 years worth.
Today's higher contribution rates may be painful, but they have one great virtue. The CPP is extracting more money from the boomers -- who will be the main future burden -- during their prime earning years. That's better than leaving all their retirement bills to the baby-bust generation that followed.
The fix is real.