Chronically low investment returns on inadequate saving are making more Canadians worry about retirement. Fair enough – but the bigger Canada Pension Plan many unions and provinces are pushing is a bad response. Durable pension improvements for people currently working must rest on more saving by those same people. Instead, “Big CPP” threatens another wealth grab at the expense of the young.
Advocates for a CPP that covers earnings up to a higher cap or replaces more of those earnings stress that the CPP is mandatory, has low investment costs and offers defined benefits. They typically play down how a bigger CPP would take more from people whose taxes before, and clawbacks after, retirement make them better off outside it, ignore hundreds of millions in federal administration costs and skip over past and potential future benefit cuts.
Critically, they usually also say higher Big CPP benefits will be “fully funded” – which sounds good, but could be the most misleading part of the pitch.
How could “fully funded” mean anything but “properly backed by real assets”? The answer lies in the CPP’s peculiar history. For its first three decades, it was unfunded: a Ponzi game that sent contributions straight out to recipients. By the late 1990s, the prospect of intolerable contribution increases inspired reforms. Governments cut future benefits and hiked contributions to create a modest investment fund.
Since then, the chief actuary’s projections have typically shown that the CPP can run for decades on its current contribution rate of 9.9 per cent – as the reforms intended. But that does not make it fully funded. The reforms aimed only to freeze the intergenerational unfairness, not undo it. About two-fifths of that 9.9 per cent cover not the contributors’ own benefits but past participants who paid too little. And the sustainability of the rate depends on the CPP’s investments earning 4 per cent above inflation indefinitely – no small challenge in an economy likely to grow barely half that fast.
The CPP’s intergenerational unfairness and dependence on as-yet-unearned robust investment returns resembles other defined-benefit pensions, most of which have too little saving, and some of which have already reneged on their promises. But if Big CPP advocates realize this, they’re keeping quiet. Some use models, including Statistics Canada’s LifePaths, in which payments from defined-benefit plans just happen – money from nowhere. Totally unrealistic. In other models, the defined-benefit payments happen because the demographic, economic and investment-return assumptions always work. Better – but still unrealistic.
It’s not just that forecasts will be wrong. Forecasts always are. It is that wrong forecasts affect different people when things go better, or worse, than expected. Optimistic assumptions – as in the CPP’s early days – trigger politically rewarding payouts to current voters. Disappointments hurt their successors.
Presumably, Big CPP means bigger benefits – that’s its main attraction. But what if our surprising longevity further increases the number of seniors per worker? What if age-driven health-care costs – not to mention Big CPP’s higher payroll levies – further depress earnings? And what if the plan’s investments earn not 4 per cent real, but the economy’s growth rate of 2 per cent, or the yield on the federal government’s real-return bond: barely above 1 per cent?
Do Big CPP advocates say that, should things go sour, the early recipients should repay some benefits, or suffer targeted cuts? No: the CPP is a defined-benefit plan. They doubtless assume that, as in the past, any cuts will come at the expense of the young – who will naturally pay the required higher contributions.
Not all who claim that Big CPP will deliver its richer benefits “fully funded” are deliberately misleading Canadians. But they are glossing over the risks and who bears them. Truly funding benefits means saving to back them – dollar for dollar. The CPP does not do that now. And no publicly available Big CPP plan does it either.
Without proper saving, Big CPP is a gamble – and an asymmetrical one. When things go well, as they sometimes will, the old win. When things go wrong, as will also happen, the young lose. Canada has already imposed large burdens on coming generations. Big CPP should not add to them.
William Robson is president and CEO of the C.D. Howe Institute.