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Normally the actuarial reports on the Canada Pension Plan prepared by the Office of the Chief Actuary (OCA) come out in the fall in time for me to write a commentary before year-end.  Last year the 2021 report showed up a little later than usual, so I put it in the pile to read over the holidays and write about in the new year.  Then crazy happened:  three new clients used up all my time at work and a little more (that isn’t a complaint – I love new clients since they are the lifeblood of a business that regularly says goodbye to wonderful clients that have wound-up their DB plan).  So, for those that rely entirely on me to be sure that the CPP is on track, here is a belated look at where we are with our most valuable social program in Canada.

As you may recall, I have written reviews of the 26^th, 27^th, and 30^th Actuarial Reports on the CPP.  You can find them here (2012), here (2015), and here (2018).  This new report is the first to look at the additional CPP which took effect on January 1, 2019.  There is more information in the report than can reasonably be summarized in a short commentary – so I am going to just pick out a few things that seem interesting to me.

Growing Old

By 2050, contributors are expected to grow by 27% while retirees collecting benefits under the program are expected to grow by 65%.  I am not worried too much about the sustainability of CPP – but having our population continue to age means that there will be fewer and fewer workers paying income taxes to support Canada’s aging population.

What does this mean for corporate and personal income tax rates? What does this mean for the affordability of health care?  Most critically, what does this mean for our long-term care industry which is a mix of public and private sector providers taking care of the ever-growing population of elderly Canadians that cannot take care of themselves any longer?

The Mother of All Nest Eggs

At the end of 2021 the invested assets in the CPP being managed by the Canada Pension Plan Investment Board (CPPIB) is $544 billion which is more than triple the $175 billion reported 9 years earlier when I provided my first review.  By 2050, the assets will continue to grow again by a factor of four to an estimated $2.2 trillion.

One of the arguments against a large government plan was the concentration of investment decisions in the hands of a few.  The CPPIB has a 12-person board that is charged with setting the direction for the hundreds of staff that do the day-to-day investing.  The resume of each member of the board is impeccable, but it is still a concern that such a small group might fall into ‘group think’ and lose divergent opinions.  The CPPIB has committed to ‘net zero by 2050’.  I am not sure if that is a marketing tactic or a thoughtful goal, but everyone else is doing it which worries me.  My life experience has been that when everyone is doing the same thing it is because people stop thinking about what they should be doing and just copy what everyone else is doing.

Contribution Stability

The OCA reports that the ‘required’ contribution is a fraction less than the 9.9% that we contribute to CPP and a fraction less than the 2%/8% that we contribute to ‘additional CPP’ or ‘CPP2’.  That is good news on the sustainability front.

The OCA also does a series of sensitivity tests to evaluate what would happen if assumptions were not quite right.  All the testing shows incremental increases and decreases in the rates of contribution but nothing concerning enough to recite the results.

It should be noted that historically, the stability of contributions was a function of an investment fund that was a fraction of the total plan liability, with current contributions fully funding current benefits.  As the fund grows and cashflow turns negative, the risk grows that volatile investment income will have a material impact on the contribution rate.  It is a little too early to worry about this – but it is something that the CPP overlords need to think about because politically it is very hard to change the contribution rates for CPP (harder than amending Canada’s constitution) and like so many maturing pension plans in the public and private sector, investment risk may need to be dialed back as the population ages.

As a side note, this is one of the causes of the private sector largely abandoning DB plans.  As the assets and liabilities grow, the impact of swings in contribution rates on the sponsor’s cashflow grow.  At the same time, as the plan membership ages, economic theory encourages reduced investment risk.  In the end, if you have a pension plan fully funded with bonds or insured annuities, the price can be much higher than earlier decades where a younger group of workers had their pensions funded with equity and other growth-oriented investments.

Life Expectancy

Future changes in life expectancy positive or negative are not a big factor.  In fact, life expectancy isn’t the number that matters.  It is life expectancy at age 65 (or thereabouts).  The fact that we get better and better at saving the lives of babies born pre-maturely doesn’t have the impact on the cost of CPP that curing all cancers in the elderly would.  That said, I am betting that we are at peak life expectancy at age 65.  My cohort is heading to retirement and I see the way most of us eat and drink and carry extra weight that was less common 50 years ago.  The retirees from 25 years ago are the ones on which life expectancy is being calculated today – not the retirees of today – and their life expectancy is driven by the choices they made 50 years ago and longer.  Either way, this is not a big deal to funding the CPP, but it does open questions for individuals debating early or postponed CPP.

Downside risk

In my review of the 2012 report I said “There are two key worries that I have about the future that I think we need to be talking about now.  First, economics – what is the future for our children and grandchildren in terms of employment and wages?  Second, what is the future for our children and grandchildren in terms of life expectancy and having babies?”

I have repeated these worries in subsequent reviews.  Well, my concerns seemed to have been heard, this new report tackles the subject of downside risk and postulates three scenarios that might worry Canadians.  The first is slow wage growth for low earners (and kudos to the OCA for the clever design of this scenario), the second is economic stagnation with higher inflation (stagflation) and the third looks at potential impacts of climate change.  Perhaps good news, the scenarios reveal a big nothing.  Contributions rise with negative scenarios, but not enough to even worry since it is speculation about the world decades in the future.  Perhaps bad news, we don’t really have a sense of what scenarios would be a problem in terms of material contribution increases.

Complexity

The reports on the CPP are the most complicated that I have ever reviewed.  As I have noted in the past, the OCA seems to leave no stone unturned and has built a robust model and system to perform its calculations.  It is impossible from the outside to say the relatively happy results presented aren’t reasonable.  I sometimes wonder the amount of resources it takes to produce these reports and I wonder if the OCA is pressed for time and budget or if it is a relatively calm three year cycle, collecting data, vetting assumptions, and ‘running the numbers’.

To get a better view, this year I offered to be an official reviewer for the CPP Actuarial Report.  I have published a review on the last three actuarial reports for free, so I figured why not get paid.  I was also interested in the learning that would come from being an ‘insider’, so I offered to participate at one-third my billable rate for this type of work.  Unfortunately, I didn’t get the job.  I doubt money was the issue, so I would have to think that my reputation for being stubborn and vocal when I see things I don’t like was part of the decision, although in fairness the actuaries chosen for this work all have great resumes so maybe I just finished in voting outside the top 3.  For now, I am on the record of saying the work is well done for a decade now.

In retrospect I realize that the post-publication review of the report isn’t the right role for me.  For me to be helpful, the OCA is going to have to hire me before the work is completed to vet some of the downside risk scenarios.  Five years ago, I probably would have done this for free because the work is interesting to me but now that I see all the money that the government is spending on consultants I may as well ask for a piece of the pie.  My friend Rick says that “free has no value” and I have discovered that I have lots to do.  Money can help prioritize the things you turn down which frees up more time to say yes to the things that matter to you and to the important people in your life (I have four golf trips booked for 2023).

There are many more nuggets of gold in the 2021 report if you have the ambition to open it up.  I would be happy to hear your thoughts.