CPP bankruptcy?

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
Money101
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CPP bankruptcy?

Post by Money101 »

Hello forum,

This is my first post and I think this is a great forum, which I discovered in a financial magazine article earlier this year.

Here's my question...

Is there any validity to the claims that the CPP/OAS fund will be bankrupt in the next few decades or so? I've noticed that many MLM type companies are claiming this, which I take with a large grain of salt. At first glance, it seems plausible considering that demographics suggest there will not be enough of the younger, working population to support the proportionately larger retiring boomer population.

I wanted to see if and how the Canadian government is addressing this and found this page on the Government of Canada website:

Will public pensions be there for me?

The latest actuarial report on the financial state of the Canada Pension Plan, released in December 2001, confirms that the Plan is financially sound and will remain so for the next 75 years. Actuarial reports are released every three years. The next report is due in December 2004. The Government of Canada pays OAS benefits from general tax revenues. As the population ages, OAS costs will continue to grow in the coming decades, but at an affordable rate. CPP and OAS provide a modest base on which to build for your retirement and can be supplemented with income from other pensions and personal savings, such as RRSPs.

http://www.hrsdc.gc.ca/asp/gateway.asp? ... tml&hs=cpr

So, according to the government , the CPP/OAS funds are not expected to be depleted any time soon. Is this a done deal?

I would love to hear the forum's views on this issue. Thanks.
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yielder
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Re: CPP bankruptcy?

Post by yielder »

Money101 wrote:So, according to the government , the CPP/OAS funds are not expected to be depleted any time soon. Is this a done deal?
To the extent the the actuaries are correct, the statement about CPP is correct. There's nothing to suggest otherwise. OAS cannot be depleted because it comes from general tax revenues. It competes for tax dollars just like every other gov't tax-based programme. Therefore, it could be cut.
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Post by patriot1 »

Just to clarify, OAS does not have a "fund", but is PAYG. The quote you included says this of course. What will keep OAS going is the political clout of retirees, which will increase in coming years.

CPP does indeed have its own assets and it's my assumption it's in good shape, as the quote also says. But I'm not an expert.

The real question is not will CPP/OAS be around, but how well can you live on them alone, and the answer is not very well. The corollary to this is if you have put enough aside to live well on your own resources + CPP/OAS, you'll have enough to more than get by without them.
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Post by yielder »

patriot1 wrote:and the answer is not very well.
Depends on the individual(s) and depends on how you define "well". A number of us here (some single & some couples) live on around $30K. Two people with maximum CPP/OAS benefits would have $31,901 to live on. According to Walter Harder & Associates income tax estimator, they would pay $1,350 in taxes and get a $382 GST credit.
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Re: CPP bankruptcy?

Post by George$ »

Money101 wrote:.... Is there any validity to the claims that the CPP/OAS fund will be bankrupt in the next few decades or so? ...

Will public pensions be there for me?

The latest actuarial report on the financial state of the Canada Pension Plan, released in December 2001, confirms that the Plan is financially sound and will remain so for the next 75 years. ...
Welcome to the forum!

In discussing future pension promises I think one must distinguish between the following three possible sources of the promise

(i) Government. They can print money - so their pension plan need not go broke. But printing money is theft via inflation from the public. So yes, they can keep their promise - if necessary - by taxing the pension plan members (all of us).

(ii) Non-profit public institution (universities, teachers, civic employees, etc). They cannot print money. To keep their pension promises - (if they get into trouble) they can only reduce costs by reducing salaries or increasing workload by not hiring replacement staff.

(iii) Private companies (like Ford, Stelco, etc). - They have shareholders and private assets. If their pension plan gets in trouble they can stop dividends to shareholders or reduce unit costs via layoffs or more productivity. If all else fails they go bankrupt and slug it out as to who gets first divs on assets.

The statement about 75 years sounds very foolish to me. Nobody can predict anything on that timescale. And I don't trust actuaries very much. To a large extent they do the bidding of those who pay their salary or sign their invoices.
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Post by blonde »

The real question is not will CPP/OAS be around, but how well can you live on them alone, and the answer is not very well. The corollary to this is if you have put enough aside to live well on your own resources + CPP/OAS, you'll have enough to more than get by without them.
Unlike most 90%ers and wannabees, 10%ers aim to be wealthy with an excellent cash flow to support their lifestyle with the finer things in life. There is nothing better than being WEALTHY/RICH. Mega-Money is a darn good thing.

In this day and age...a retiree with C$1000K saving (liquid assets) is considered to be in the 'poor-person' club. For these 'poor-persons' it is all about -- Hi Risk, LO Reward...

Govt programs are designed to keep their clients as slaves...Real-Slaves. For alot of slaves it is all about -- NO Risk, HI Reward...Milking the system works well for those who are process focused and 'use' the system.

BTW, I do not lie... trust me, believe me.
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Post by 83_gemini »

The tax increases of the last decade has kept the CPP and such solvent. Ultimately, however, PAYGO pension plans are determined by the ongoing fiscal situation; any actuarial statements are merely accounting fictions.
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Re: CPP bankruptcy?

Post by Bylo Selhi »

George$ wrote:I don't trust actuaries very much. To a large extent they do the bidding of those who pay their salary or sign their invoices.
I'm a bit taken aback by that comment, George. The actuary in this case is the Chief Actuary for Canada.

Would you also argue that reports from the Auditor General shouldn't be trusted because "to a large extent [auditors] do the bidding of those who pay their salary or sign their invoices"?
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Post by Money101 »

Thanks for the great replies so far everyone.

Is there reason to not believe the government and actuary reports? Have the reports been shown to not be accurate or poorly researched? Are there any conflicts of interest that may bias them (for example, the same way drug company-funded clinical studies can be biased, manipulating data presentation to produce results in their favor etc)?

So Bylo, do you agree with Patriot1 in that the CPP will be around, but how adequate it will be is a question mark?
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Post by AltaRed »

Since the CPP is supposedly self-funded by worker bees, the plan is supposedly currently in good shape, and the plan has a broad investing mandate, I am pretty confident I will see all my entitlement until I am pushing daisies.
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Post by 83_gemini »

It helps, of course, that one would not really want to retire on the CPP alone (not necessarily a bad thing for a pension system to demand). By contrast the European systems and even Social Security are far more generous, but thus, far more fragile.
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Post by George$ »

Money101 wrote:Is there reason to not believe the government and actuary reports? Have the reports been shown to not be accurate or poorly researched?
It's not accurate because you are making assumptions about the future - as much as 50 years into the future, as to what inflation will be like and what real return the CPP investments will generate over that time period.

The best read I have found about these difficulties is the Ontario Teachers Pension Plan annual reports.

In the OTPP 2005 report they point out that a 1% actuarial change in the assumed real return rate tchanges the actuarial pension liability by 20%.

Does anyone know what the real return rate will be for the next 10 or 20 or 30 or 40 or 50 years (never mind the 75 year claim)?
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Post by Springbok »

AltaRed wrote:Since the CPP is supposedly self-funded by worker bees, the plan is supposedly currently in good shape, and the plan has a broad investing mandate, I am pretty confident I will see all my entitlement until I am pushing daisies.
I feel the same - The CPP invests in more or less the same things we do in our other retirement accounts - If the CPP does not do well, then we probably won't either.

I suspect that any future Canadian government will prop up the CPP/OAS if need be, by using other tax revenue rather than let it fail.

It's a nice safety for those of us funding our own retirement. Between my wife & I, we get about $30k in OAS/CPP at present - certainly buys the groceries!
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Post by brucecohen »

Money101 wrote:Is there reason to not believe the government and actuary reports?
Money101, let me join those offering a hearty welcome to the Forum.

The CPP's triennial valuation is reviewed by three independent actuaries. Those actuaries are selected not by the Canadian govt but, under arrangement, by the British Chief Actuary's Office.

Claims that the CPP was going "bankrupt" were always specious but reflected a projection done in the mid-90s. That projection found that, without change, the employer-employee contribution rate would have to rise above 14% around 2014, as I recall. This was considered too high a level and an unfair burden on tomorrow's workers. That triggered a serious of very responsible reforms.

Thanks to higher contribution rates, CPP now takes in more than what it needs to pay today's benefits. The surplus is invested all over the world. The plan does not expect to have to touch this reserve this fund until 2021. IIRC, by 2050 the reserve fund will still be covering just 29% of the benefits payable.

Currently, the reserve fund is running ahead of its investment return target. The target was set with the goal of making it possible for the plan to maintain the current 9.9% contribution rate. The investing is done by by the CPP Investment Board whose unique governance structure has been hailed by the World Bank as a model for national pension plans.

While a 75 year prediction does seem ridiculous, that's the legislative requirement and is based on some demographic considerations that I forget. The 75-year timeframe is far less important than the requirements that 1) the plan be valued every three years, 2) each generation must now pay for its own benefit improvements and 3) there are worst-case criteria that require the finance ministers to raise the contribution rate and/or reduce benefits starting with inflation indexing -- I forget the details.

The bottom line is that CPP is rock solid. For reasons noted in previous posts, there is less certainty as to OAS but a couple retiring on $60,000-$70,000 in today's money likely has little to fear from cutbacks.
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Post by Money101 »

Thanks for the warm welcome!

Great info Bruce.

So... the CPP is funded by each generation's OWN contributions, known as Pay As You Go, (which is then invested by the Canadian government for growth), as opposed to being funded by the PREVIOUS generation, a la pyramid scheme? Or is it partially funded both ways - the retiring generation's contributions and current workforce (taxes)?
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Post by brucecohen »

Money101 wrote:So... the CPP is funded by each generation's OWN contributions, known as Pay As You Go, (which is then invested by the Canadian government for growth), as opposed to being funded by the PREVIOUS generation, a la pyramid scheme? Or is it partially funded both ways - the retiring generation's contributions and current workforce (taxes)?
No.

1. CPP is currently an inter-generational transfer. Today's workers and their employers fund the benefits for today's retirees. This inter-generational transfer will continue for benefits as they now stand. BUT any improvements in those benefits -- aside from inflation adjustments -- will have to be funded by the generation that gets them.

2. The CPP reserve is not invested by the Canadian govt. It is invested by the Canada Pension Plan Investment Board. CPPIB was established by Parliament as an arm's length crown corporation. It has a unique governance structure that allows it to function like any private sector money manager, but also requires it to meet public sector accountability standards. As a result, for example, CPPIB discloses more information about its portfolio than any other money manager or pension fund. IIRC, the chair of CPPIB's board is named by the federal finance minister. The other directors are named by the CPP stewards -- the federal finance minister and the finance ministers of the provinces that jointly sponsor the plan. The CBBIB's president and CEO is hired by the board of directors and can be fired only by the board of directors -- the finance ministers get no direct say. The CPP reserve fund is held separately from the government's.

Under the current projection, CPP will always be a PAYGO plan involving an inter-generational transfer* but starting in 2021 the reserve fund will be used to subsidize the plan so that the current 9.9% contribution rate and current benefits are maintained into the future. If the CPPIB does really well at investing, the CPP stewards would have the option of lowering that rate but that's all a big IF. (Right now the portfolio is ahead of target so the rate could be trimmed a bit, but they're instead building more of a cushion.)

*Unwinding the inter-generational transfer would cost too much money since the value of all promised future benefits would have to be commuted and paid as a lump sum.
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Post by 83_gemini »

Notice the main assumption; there has to be enough workers to support retirees (the plan was put in place in an era of high birth rates and high real wage growth, an ideal situation for PAYGO funded programs, also the hope was people would be dead sooner). Depending on how you spin the numbers dependency ratios can be scary or not. In Canada there's no reason to worry really, save that the rest of the developed world's PAYGO systems are likely to be in deep trouble without the kind of reforms Canada put in place in the last decade. The results could do nasty things to the plan.

But it could be worse; European payroll rates are currently at 14%!
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Post by tidal »

Maybe this should go in a seperate thread, but this one of only two that came up when I searched on CPPIB...

CPP to assume active role with $5-billion fund Investment arm to take minority stakes in some companies, work with management.
The CPP Investment Board is moving from its roots as a passive investor to take an active role in companies, as the $99-billion pension fund takes a hands-on approach for the first time.
Interesting... note that they indicate that the entire $5billion to be invested in just 6 or so companies... ~$1billion per... so at 10% ownership, their hunting ground is $10billion plus... of which there are only 40 or so in Canada...

So, CPP buys Loblaws and gets involved in the turnaround? It will be interesting... Even if you are a "passive hardcore", you still have to note that Saint Jack Bogle has been pressing the pension plans, etc., the "owners" of the companies, to behave more like owners... which this CPPIB initiative definitely will accomplish...

On the other hand... who are these turnaround geniuses? Paul Tellier? Richard Currie? :wink: As quoted in the article "There are very, very few people in the world who can be good at these kinds of investments". Maybe we should automatically disqualify anyone who ever was named "CEO of the Year"! :wink:
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Post by brucecohen »

tidal wrote:On the other hand... who are these turnaround geniuses? Paul Tellier? Richard Currie? :wink: As quoted in the article "There are very, very few people in the world who can be good at these kinds of investments". Maybe we should automatically disqualify anyone who ever was named "CEO of the Year"! :wink:
CPPIB has the desire and the bucks to recruit from all over the world. Last year's hires included pros from the US, Australia and South Africa. Their VP-Private Investments, Mark Wiseman, used to be at Ontario Teachers, which the article has been doing this for some time. In any event, it's a 5% stake.

What wasn't mentioned in the article (I think) was that CPPIB has joined a number of Canadian and international good governance groups whose members are committed to using their clout to improve governance and disclosure in companies in which they're big investors.
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Post by Shakespeare »

Tory view of CPP as asset sparks worries
"It's important to keep ... the assets and liabilities of the government and of the Canada Pension Plan separate," Robson said.

"The money we are piling up in the CPP is to meet the liabilities in the CPP ..." he said. "So we want to preserve that and use it for that purpose and not start looking at it out of the corner of our eyes. The feds ought to focus on their own debt as that's what they control. The funds in the CPP are not collateral for federal government borrowing."
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Post by yielder »

Shakespeare wrote:Tory view of CPP as asset sparks worries
"It's important to keep ... the assets and liabilities of the government and of the Canada Pension Plan separate," Robson said.

"The money we are piling up in the CPP is to meet the liabilities in the CPP ..." he said. "So we want to preserve that and use it for that purpose and not start looking at it out of the corner of our eyes. The feds ought to focus on their own debt as that's what they control. The funds in the CPP are not collateral for federal government borrowing."
Yep. This is not part of the gov'ts assets. If the camel gets his nose into this tent, CPP is screwed.
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Post by Shakespeare »

Don't forget that the Reform approach is basically to starve the central government so it can't fund programs. I'm sure Harper hasn't forgotten that. :?
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Post by cardhu »

yielder wrote:If the camel gets his nose into this tent, ...
There's an expression I haven't heard before ... I like it.
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Post by brucecohen »

An update of the CPP's valuation was tabled today. It reflects the impact of proposed legislation that would make disability benefits available to more people.

The Chief Actuary of Canada projects that the plan needs a "steady state" employer-employee contribution rate of 9.79%. It's currently 9.9%.

So, the plan appears to be running ahead of expectations. That said, the executive summary adds that by 2050, plan assets are projected to be
$29 billion lower than projected in the last full actuarial report and the asset to expenditure ratio is 6.2 or 0.1 lower than the previously projected asset to expenditure ratio of 6.3. I haven't read the full update -- only the summary -- and assume the decline in projected assets reflects higher costs for disability benefits as more people qualify.
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Post by Tanstaafl »

Shakespeare wrote:Tory view of CPP as asset sparks worries
"It's important to keep ... the assets and liabilities of the government and of the Canada Pension Plan separate," Robson said.

"The money we are piling up in the CPP is to meet the liabilities in the CPP ..." he said. "So we want to preserve that and use it for that purpose and not start looking at it out of the corner of our eyes. The feds ought to focus on their own debt as that's what they control. The funds in the CPP are not collateral for federal government borrowing."
Isn't most of the so called assets(taxes by any other name)of the CPP invested in government bonds? If so, the plan is to keep them separate is a bit late.

If most of the assets of the CPP fund is made up of the liabilities of the Federal and provincial governments then the statement made can be considered ??? :roll:
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