CPP enhancement

[Thorin]

Those are good questions that I don't know full answers to.  The employee contribution is matched by an employer contribution, so right now we're paying 4.95% of our paycheque, plus the employer is paying another 4.95% of our paycheque, so total 9.9%.  Those stay matched, so they're both eventually going to be 5.95%, total 11.9%.  Still, you're right, that's 2% out of 9.9% = ~20% increase, while our eventual payout is going from 25% to 33% so 8% out of 25% = ~ 32% increase.

Maybe the actuaries have included the investment return they plan to make on the money that they collect and then invest until it's time to pay out?  I'm sure they've also looked at inflation, to determine how much less valuable the money will be in the future, so the return minus inflation is probably what they're considering.  There's also an increase on the maximum earnings we pay CPP premiums on, as there is every year because it's indexed to inflation, so even if there wasn't an increase to the percentage rate then we'd still pay in a little more.

Ultimately the CPPIB is an independent organization that politicians can't just order around, they've been given a mandate to apply their expert fiscal knowledge to the task of ensuring there's always at least 75 years sustainability in the CPP, so I do trust them as I expect others to trust me in my domain of expertise.  I mean, ultimately they've managed to increase the net assets by 950% from 1998 to 2018, much of that by collecting premiums but a bunch of it also from investing wisely.  It kinda reminds me of the Norwegian Government Pension Fund (their oil fund) in how it's a whole bunch of money that is getting managed very well.

If the politicians ever start talking about taking money out of CPP to pay for other things, though, then we'll have a problem.

[Tom]

So in the late 90s there was a lot of negativity about CPP running out of money.  Deductions withheld from paycheques were increased because the actuaries showed that this could indeed happen, that the plan could run out of money to pay out in 50 years or so (so the 2040s).  People have never forgotten the negativity, and have never really paid attention to whether the situation had been turned around.  CPP is not going to run out of money.

Here's a blog post talking about it in 2011: https://retirehappy.ca/will-canada-pension-plan-cpp-be-there/.  Note that it says the assets in 2009 were about $116bn, up from about $35bn in the 90s.  And here's the latest CPP performance and assets: http://www.cppib.com/en/our-performance/.  Note that the assets are now about $368bn (as of 2018-09-30).  There's clearly a significant increase in the assets, faster than inflation.

Assume the blog post is talking about CPP assets of $35bn in 1998 (I'm not sure what year, so I'm picking that one as I haven't found an easy to find CPP assets per year).  Now, twenty years later, CPP assets are $368bn.  That's $333bn more, or 915% increase in asset value.  Inflation from 1998 to 2018 in Canada was roughly 46% (https://www.bankofcanada.ca/rates/related/inflation-calculator/).  Way faster than inflation.

Now, how much future liabilities (i.e. payments paid to retirees) and future assets (i.e. premiums paid by workers) are there?  And at present, how long does it project out to?  Well, the actuaries working for the CPPIB say it balances out to at least 75 years, and they plan to always keep it viable for at least 75 years, and they revisit the calculations yearly.  The CPPIB has in fact been getting returns on its investments well above what it needs for 75-year sustainability, they're $100bn above where, back in 2012, they thought they needed to be by 2018.

Whew.

That's good to know.

I tend to trust your numbers.

I'm glad the assets have increased so dramatically. I just hope its enough to handle the massive wave of baby boomers and those in between boomers and gen-xers. It's not a small number.

If the politicians ever start talking about taking money out of CPP to pay for other things, though, then we'll have a problem.

I was pretty sure I heard they recategorized it sometimes as general income, so they could just take what they wanted when they needed to. I could be confusing that with something else however. How else did it end up so low in the 90s right?

I think the CPP (and EI) is a necessary "evil" (not so evil really) for various reasons.

[Thorin]

It was a little more insidious than recategorizing as general income.  When the CPP was instituted in 1965, it was set up as a pay-as-you-go fund, so they only kept enough assets to pay out two years' worth of benefits.  Anytime there was a surplus, that money was lent to the provinces at a below-market interest rate to pay for infrastructure (roads, hospitals, etc).

This was fine at first, but as the boomers aged it became obvious that it wasn't sustainable, and still took over ten years to address.  It was, in the mid 90s, on track to have spent all its assets in the mid 2010s; from 1993 to 1997 the assets dropped from $41.7bn to $36.5bn ($5.2bn in four years!  and yes I managed to find a source for numbers that I said I wasn't gonna go look for, but this dry number stuff interests me intensely).  To counter that in a pay-as-you-go fund, contributions would have had to rise to 14% (7% employer / 7% employee).  Paul Martin (federal liberal finance minister) and Jim Dinning (conservative Alberta ?treasurer, I think he was?) got together and decided to fix it, if I remember right.  I've always said Paul Martin would have done great things for Canada if we'd kept him longer as Prime Minister.  He understood highly detailed financial information and could innately see the future finances and how they'd play out if things were done this way or that way or the other way.

Anyway, one of the big changes to the CPP was that it went from a pay-as-you-go fund to a hybrid partially-fully-funded fund, where it was allowed to accumulate assets for future expenditures, and provinces were no longer allowed to borrow any of the surplus.  By the way, I'd heard that some of the provinces had reneged on some of the loans, but I can't find any proof of that, so maybe that's not true.  The federal conservatives fought it tooth and nail, saying it was just another tax grab and that the "liberal dictatorship" (Diane Ablonczy) would screw it up, and that it would be horribly mismanaged.  And now here we are, twenty years later, with a wholly independent CPPIB that is known around the world as one of the great public pension success stories.

Hope you enjoyed learning a bit of pension finance history

[Tom]

Hope you enjoyed learning a bit of pension finance history

I did!

History is one of my "guilty pleasures". I used to sit and read ahead in my school text books when I was bored. lol.