The Canadian Institute of Actuaries has made several recommendations outlining the steps the government should take if it decides to expand the Canada Pension Plan (CPP). One suggestion is to stagger contribution rates so that younger workers do not subsidise baby boomers, which is currently the case.
The CIA's comments were published on June 9; they are strictly practical and avoid the political. "While it is not the role of the actuarial profession to advocate for any particular position on the merit or lack thereof of any program, the CIA wants to help policymakers consider implications regarding the potential expansion of the C/QPP," reads the introductory message.
Maximum covered earnings
How much income should the CPP aim to provide? The CIA recommends that the CPP should aim to give retirees a pension equal to 15% of their indexed average earnings above a minimum threshold, and this minimum should be equal to 50% percent of the year’s maximum pensionable earnings (YMPE). The maximum covered earnings should be 150% percent of the YMPE.
As for contributions, the CIA says they should be shared equally not only between employers and employees, but that the burden should be distributed evenly between generations. As both the Chief Actuary of the Office of the Superintendent of Financial Institutions and the Fraser Institute have noted previously, baby boomers and older generations currently receive more from the CPP than younger generations. The CIA recommends that contributions be made on an actuarial basis so that there is an appropriate compromise between stability of contributions and risk transfer between generations.
Significant subsidy from younger workers
"Since current older workers could obtain a significant subsidy from younger workers if their contribution rate is the same, consider a fairer approach where the contribution rate varies by age, such as 0.9% below age 40, 1.9% from 40 to 50, and 2.9% from age 50, although the rate could be fixed at 1.9 percent at all ages for the employer portion," says the CIA.
In order for the CPP to remain self-sufficient, the actuaries suggest that new benefits be fully funded and that the plan should allow for adjustments in benefit levels. "Benefits may not be fully indexed to inflation," concludes the report. "This is unavoidable so that the plan be fully funded, that a transfer of increased costs to the next generation is minimized, and that assets are invested in a diversified portfolio with uncertain and volatile returns."
These are just a few highlights from the paper. The full document is available on the CIA web site.
As published in The Insurance & Investment Journal by Andrew Rickard June 14, 2016 11:30 a.m.
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