Expanded CPP risks coming up short, report says
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 4075 years.
The C.D. Howe Institute in a paper out Tuesday is calling on Ottawa 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.
Under the new plan, announced in June, the level of earnings being covered will increase: Participants are expected to pay an extra 2 per cent on currently covered earnings and 8 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.
“The return is very important because the new CPP is different than the old. CPP has to be funded through contributions and investment on the contributions so the investment income is important,” said Laurin, adding his group looked at reasonable risks that the fund could not meet its goals.
Over the next 75 years, the paper says the expanded CPP will see 65 per cent of targeted benefits covered 90 per cent of the time. That was based on the 3.55 per cent real rate of return, which the chief actuary said would be established with an asset mix that included 37.5 per cent equities, 37.5 per cent fixed income securities and 25 per cent real asset.
“The base CPP, only a small portion is contingent on returns. Our annual contributions mostly cover the current benefits and it will be the same in the future,” said Laurin.
He says the bill that created the expanded CPP has issues that still need to be resolved, such as regulations as to what happens if there is a shortfall. The report urged Ottawa and the provinces to ensure that intergenerational transfers are not used to fill any such gaps.
“There are really only two options (if the expanded CPP comes up short). Lower benefits if there is not enough investment return or higher contributions and the future generations will pay more than what they get which is already the case with the base CPP,” said Laurin, adding at the very least the government should make it clear an expanded CPP is contingent on financial returns. gmarr@postmedia.com twitter.com/dustywallet