Trevor Tombe is a professor of economics at the University of Calgary and research fellow at the School of Public Policy.
At least one in ten Canadian 18-year-olds will live to see the 22nd century. Most will start collecting their CPP benefits in the early 2070s.
Ensuring Canada’s public pension system is sustainable for the long-haul is crucial.
Changing the system is not something governments should do lightly. This is serious business.
And yet, last week Alberta announced it hopes to leave the Canada Pension Plan. It also launched a marketing campaign to convince hesitant Albertans to support the move.
An Alberta Pension Plan could “make life more affordable,” Alberta Premier Danielle Smith said, and “bring more benefits for seniors, higher take-home pay for workers, and strengthen the Alberta Advantage to attract business.”
Sounds great!
The trouble is, their pitch is full of holes. Two are big enough to drive a blue truck through.
First is the idea that the CPP is unfair to Alberta.
“The reality is,” Ms. Smith said Thursday, “since the inception of the CPP, Albertans have been paying much more into it than they’ve gotten back … about $60-billion more.”
It’s not that this statistic is incorrect. In fact, adjusted for inflation, the gap is more like $80-billion. But this doesn’t mean the CPP is unfair. It merely reflects how pensions work.
Young people contribute. Elderly people collect. And Alberta is home to a disproportionately large number of young people. It’s also home to relatively more high-income people, so contributions are naturally higher.
At an individual level, the plan treats each of us the same. An Albertan neither pays more nor receives less than a similar Ontarian. Indeed, in recently released analysis using the latest available data, I show the entire gap between CPP collections and payments in Alberta is due to age, earnings and employment.
A second gaping hole in the idea is the transparently unreasonable interpretation the government adopted around how CPP assets are split when a province leaves.
A separate provincial plan could be eligible for more than half of the CPP assets, according to analysis by LifeWorks, a consultancy Alberta hired (which has since been acquired by Telus Health). Were this to occur, Alberta could sustain a pension plan with a contribution rate of 5.9 per cent of pensionable earnings – four points lower than the Canada Pension Plan’s base rate of 9.9 per cent. Assets in the provincial plan would be so large that investment returns would vastly exceed all benefits that Alberta would need to pay.
This would also weaken the CPP. I estimate contribution rates for Canadians (excluding Alberta and Quebec) could rise by a full percentage point, at an annual cost to workers and employers of up to $315 each.
Luckily, this is not going to happen.
Such a massive estimate is possible because the Canada Pension Plan Act is a vague mess when it comes to determining how much a separating province will receive. One critical step in the formula involves calculating the part of the CPP investment returns that are “derived from” contributions. The trouble is, it doesn’t say how the derivation is done.
Some originally thought it would put a separating province in roughly the same position it would have been in had it never joined CPP. Still others thought it would provide only what was necessary to support future obligations.
Even LifeWorks recognizes this ambiguity. It presented two options and their preferred one aligns with Alberta having never joined CPP to begin with. That may sound reasonable, but it leads to absurd outcomes. If this approach is applied to Ontario as well, then more assets would be paid out than actually exist.
An alternative approach, which apportions returns based on each province’s share of total contributions to the plan, yields wildly different results. My own analysis suggests roughly one-fifth to, at most, one-quarter of CPP plan assets could go to Alberta. This alone eliminates two-thirds of the benefits a separate plan might provide. Instead of a contribution rate of 5.9 per cent for Albertans, I estimate it would need to be roughly 8.2 per cent.
It’s hard to see the Alberta Pension Plan idea as anything but the latest weapon in the political battle between Edmonton and Ottawa over issues like pipelines and climate policy.
This is a very risky strategy. Creating a separate Alberta pension is currently irreversible. While there’s a mechanism to leave the CPP, there is none to join. With so many relying on this stable and secure source of income for retirement, Albertans – and all Canadians – deserve better than politicians playing politics with their pensions.