Major changes to CPP not viable

May 16, 2011
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Everyone agrees that changes need to happen with Canada’s retirement system.

The QPP (Quebec Plan) is only viable by adjustments to the penalties for taking an early pension. Much like the CPP changes introduced last year. Quebec made two major changes in this year’s budget. They increased the contribution rate by 8% over the next few years and brought in the CPP penalties for early retirement.

There are too many variables that need to be met for the CPP and QPP plans to remain viable. I had an interesting debate with the Chief Actuary of the CPP about this moderated by Leo Kolivakis’ at his blog Pension Pulse. Bernard Dussault is a very competent and trust worthy advocate for pensions, let hope he is right.

Most notably the large number of variables that have to be dead on for the CPP to remain fully viable include:

* Fertility rates                                                       * Migration and immigration
* Mortality rates                                                     * Working age population
* Labour participation rates                                     * Unemployment and job creation
* Inflation/CPI (flat inflation at 2% forever)              * Earnings assumptions
* Investment returns                                              * Contribution rates
* Bonds                                                                 * Equities
* Private equity                                                      * Asset mix assumptions

Note: In the discussion in the Pension Pulse one interesting fact is the huge spike Canada immigration in recent years. How many are working as caregivers?

Any changes in any one of these variable can upset the apple cart. It already has happened in Quebec. The recent changes to the QPP plan., announced at the last budget, will see rates rise to 10.80% from the 9.9% current rate. A self employed individual would pay almost 11% for a 25% replacement income, up to the YMPE. These changes were made without changing the benefits.

How much more can Canadians pay towards retirement? There is an ever shrinking budget available for “extras” like retirement. Once locked into CPP commitments they will be hard to change.

Lets not forget the healthcare avalanche that is coming.

The most astute thing I heard last year about pensions was from Dwight Duncan at his Round Table on Retirement Security when he alerted us to his concern about the future. He realizes that as a province Ontario will be hard pressed to provide long term care and healthcare for seniors. Especially when long term care facilities cost anywhere from $24,000 to $60,000 a year. The government plans top out at about $15,000.

Do we want healthcare or retirement? It is the old guns vs butter economic debate and Dwight Duncan’s greatest nightmare. We will not be able to have both.

The annual CIHI’s National Health Expenditure Trends very acutely highlights the healthcare side of the scenario.

While Canadians older than age 65 account for less than 14% of the Canadian population, they consume nearly 44% of all health care dollars spent by provincial and territorial governments. In 2008, the latest available year for data broken down by age group, provincial and territorial governments spent an average of $10,742 per Canadian age 65 and older, compared to $2,097 on those between age 1 and 64. Within the senior population, spending varies widely by age group, with health care expenditure on seniors age 80 and older, at an average of $18,160 per capita, more than three times higher than for seniors younger than age 70 ($5,828 per person on average).

We will be able to watch Quebec to see what happens. The Quebec QPP reports shows that the number of seniors over 65 grows by 28% by 2020 at the same time the population is falling by 3.85%. Leaving over 22% of its population past the age of 65 in 2020.

The demographics forecasts look better for the rest of Canada at this time but in Quebec they are dangerous to the sustainability of the QPP:

With the current contribution rate of 9.9%, the benefits paid by the QPP plan will exceed contributions as of 2013. In the short term, the Plan will then have to draw on its investment income and, as of 2023, tap its reserve to fund benefits for retirees.
If there is no adjustment to the QPP Plan, the reserve will be depleted in 2039. It is important to maintain a reserve since it generates investment income that helps maintain a lower contribution rate

Changes to the CPP it will not do much for the average Canadian. One very surprising fact is that the current average retiree on CPP is currently getting a little over $6,050 per year. Doubling the CPP will only give the average Canadian only a little over $12,000 in annual income. Most seniors will still be very dependent on OAS and GIS.

Thanks for sustaining an intelligent the debate on the retirement future of Canadians.

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