Expanded CPP risks shortfall: report
A new report that looks at the federal government’s blueprint for an expanded Canada Pension Plan warns the larger payouts are predicated on returns that may not materialize over the next 40 to 75 years.
The C.D. Howe Institute in a paper out Tuesday is calling on the federal government to be more forthcoming about the potential investment risk for the plan, suggesting that over the next 40 years the expanded plan will achieve 90 per cent of targeted benefits only 54 per cent of the time based on the current return expectations.
“There are risks and we don’t know whether there (are) going to be enough assets and contributions in the fund to ‘fully fund,’ as we normally understand it, (the CPP),” said Alexandre Laurin, one of two authors along with William Robson of a report titled Bigger CPP, Bigger Risks: What “Fully Funded” Expansion Means and Doesn’t Mean.
At present, the C.D. Howe report says, participants pay 9.9 per cent per year on earnings covered by CPP and the benefit, after 40 years, equals 25 per cent of that covered amount.
Under the new plan, announced in June, the level of earnings being covered will increase: Participants are expected to pay an extra two per cent on currently covered earnings and eight per cent on the newly covered earnings. After contributing for 40 years, participants will receive benefits equal to 33.33 per cent of the higher earnings level.
While the government and other advocates of the expanded plan have used the term “fully funded” to describe it, the C.D. Howe paper says there is a catch: they are not using that term to mean the plan has assets to cover the present value of benefits accrued to date.
The group maintains the rate of return assumed in projections for the base CPP and the expanded plan are “well above the current yields available on the kind of sovereign-quality Canadian debt that people might think appropriate” for the plan.
The report says the chief actuary for the government has plotted a course for a return of 3.55 per cent in real (inflation adjusted) terms over 75 years. It noted the federal government’s real-return bond currently yields 0.7 per cent.