Thursday, June 9, 2011

From the C.D. Howe Institute ... Expanding CPP is a Risky Bet

TORONTO, June 9, 2011 /Canada NewsWire/ - Expanding the Canada Pension Plan (CPP) is a risky route to addressing Canadian concerns about low incomes in retirement, according to a report released today by the C.D. Howe Institute. In "Don't Double Down on the CPP: Expansion Advocates Understate the Plan's Risks," author William B.P. Robson says advocates of an expanded CPP as a solution to retirement income worries too often promote it as a plan with guaranteed benefits that are fully funded. "The CPP is a gamble, not a guarantee: expanding the plan would raise the stakes on a bet most Canadians do not know they have made," says Robson, who is President and CEO of the Institute.

The CPP looks like a defined-benefit plan, but it is not, says Robson. Its retirement benefits are targets contingent on its financial condition. Moreover, past and upcoming revisions - including lower pensions for those taking them up before age 65 in both the CPP and its sister Quebec Pension Plan - show that governments can change the targets.

Nor is the CPP fully funded in the normal meaning of the term: able to pay its obligations with assets on hand at a point in time, says the author. The CPP's ability to pay currently promised benefits at the 9.9 percent contribution rate now in force depends on investment returns well above those now available on Canadian sovereign-quality debt. Treat the CPP like a defined benefit plan that should match its obligations with appropriate assets - the best match being the federal government's real-return bond - and its contribution rate would need to rise above 11.3 percent, says Robson.

Adverse economics and demographics, combined with disappointing investment returns, are now forcing the Quebec Pension Plan to trim benefits and raise contributions, he points out. Expanding the CPP would expose other Canadians to a larger risk of similar disappointments.

For the report go to:

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