# CPP expansion confirmed to be actuarially fair



## andrewf (Mar 1, 2010)

Here's an article summarizing the Finance Minister's testimony at the finance committee. The bottom line is that benefits will be phased in over 40 years, and those near retirement today will receive little or no increase in benefits. In other words, the expansion is actuarially fair and there is no inter-generational transfer.


http://www.cbc.ca/news/politics/cpp-hike-morneau-committee-1.3769025


----------



## AltaRed (Jun 8, 2009)

That is good news for a change.


----------



## sags (May 15, 2010)

It is a good start providing those in the distant future with additional benefits, but I still contend the CPP is vastly overfunded and the actuarial assumptions are based on far lower returns on investment than the CPP fund has been receiving. 

The fund today is already much larger than the actuarial forecasts of the past stated it would be..........which proves their actuarial calculations were wrong.

I have found no time in the future 75 year actuarial forecast where the actual fund is ever expected to contribute to benefit payouts.

The forecast is that benefits will be paid from premiums for some period of time, and then part of the return of investment will be needed.

It is quite like how insurance companies work with the combined ratio (premiums + investment returns) to pay out claims.

A combined ratio of less than 100% means the premiums are paying all the liabilities and expenses.

A combined ratio of more than 100% means the premiums are not enough and some of the investment returns are needed to pay claims.

Insurance companies have built up huge surpluses with this method in the case of mutual companies and profits and dividends for public insurers. It is a very profitable business model of making money with someone else's money........"the float" as described by Warren Buffet.

Interesting to note the CPPIB has been buying insurance assets because the business model is so profitable.

The CPP combined ratio is well below 100% today and will be for some decades or so. After that the combined ratio will climb to over !00% but will never require anything more than some of the investment returns. The fund apparently continues to grow forever.

Current benefits could and should be increased, in addition to providing the higher benefits for future generations they are funding.

Basically, the CPPIB is receiving a higher return on capital from contributions than they are paying out to the beneficiaries.


----------



## Daniel A. (Mar 20, 2011)

Totally agree sags, I'm about to apply for mine now I've waited for a higher amount the estimates say I should receive around 900.00 a month.

The major free gains were when the plan started we paid theirs, our kids are not going to need to pay ours.


----------



## andrewf (Mar 1, 2010)

Daniel A. said:


> Totally agree sags, I'm about to apply for mine now I've waited for a higher amount the estimates say I should receive around 900.00 a month.
> 
> The major free gains were when the plan started we paid theirs, our kids are not going to need to pay ours.


If you were working prior to the CPP reforms in the late 1990s, you got something of a free ride. Only those whose entire career is post 1997 are paying full freight. Actually more, because 40% of the current contribution level is to dig CPP out of the whole it is in in from earlier generations.


----------



## andrewf (Mar 1, 2010)

sags said:


> Current benefits could and should be increased, in addition to providing the higher benefits for future generations they are funding.
> 
> Basically, the CPPIB is receiving a higher return on capital from contributions than they are paying out to the beneficiaries.


If the CPP has excess funding, it should be used to reduce the 4% of the current 9.9% that is being paid to cover previous undercontribution. There should be no unfunded increase in benefits until that 4% goes away.


----------



## NorthernRaven (Aug 4, 2010)

sags said:


> It is a good start providing those in the distant future with additional benefits, but I still contend the CPP is vastly overfunded and the actuarial assumptions are based on far lower returns on investment than the CPP fund has been receiving.


You'll have to slug it out with the Fraser Institute, which thinks CPP is vastly _underfunded_, since they argue they should be using the government bond rate to discount the future liabilities... 



sags said:


> The fund today is already much larger than the actuarial forecasts of the past stated it would be..........which proves their actuarial calculations were wrong.
> 
> I have found no time in the future 75 year actuarial forecast where the actual fund is ever expected to contribute to benefit payouts.
> 
> The forecast is that benefits will be paid from premiums for some period of time, and then part of the return of investment will be needed.


The actuarial report's base scenario is that CPP is open-ended, so even after the 75-year forecast window it will need a portfolio and the returns it generates out to infinity. You can't eat that seed corn unless you are winding the fund down. It looks like the asset-expenditure ratio goes from 5.4 in 2025 (roughly when net contributions go negative) to 5.9 in 2075 under the current 9.9% contribution rate, but you can only get down to 9.84% before it flattens at 5.3%. Doesn't sound like a lot of excess available, but they can tweak the contribution rate down or increase the death benefit if it turns out they have something to play with.


----------



## sags (May 15, 2010)

I agree that lowering the contributions would be fair, but people are going to need retirement funds so I think it would be more prudent to give them higher benefits.

Someone collecting the "average" CPP and full OAS will collect about $15,000 a year.

The OAS costs about $40 billion and is estimated to rise to more than $100 billion per year.

We could raise CPP benefits and continue at current contribution rates or lower CPP contribution rates and raise taxes to fund the OAS.

Which would be preferable ?


----------



## sags (May 15, 2010)

NorthernRaven said:


> You'll have to slug it out with the Fraser Institute, which thinks CPP is vastly _underfunded_, since they argue they should be using the government bond rate to discount the future liabilities...
> 
> 
> 
> The actuarial report's base scenario is that CPP is open-ended, so even after the 75-year forecast window it will need a portfolio and the returns it generates out to infinity. You can't eat that seed corn unless you are winding the fund down. It looks like the asset-expenditure ratio goes from 5.4 in 2025 (roughly when net contributions go negative) to 5.9 in 2075 under the current 9.9% contribution rate, but you can only get down to 9.84% before it flattens at 5.3%. Doesn't sound like a lot of excess available, but they can tweak the contribution rate down or increase the death benefit if it turns out they have something to play with.


Isn't the asset-expenditure ratio 5.3% of the "investment returns" ? 

Even in 2075, the other 95% of investment returns will continue to build the fund.

At least that is the way I have understood their report.


----------



## sags (May 15, 2010)

I contributed the maximum into the CPP from the first year it started until 2006...........39 years.

CPP is set up like whole life insurance. They win.........you lose.


----------



## NorthernRaven (Aug 4, 2010)

sags said:


> Isn't the asset-expenditure ratio 5.3% of the "investment returns" ?
> 
> Even in 2075, the other 95% of investment returns will continue to build the fund.
> 
> At least that is the way I have understood their report.


No, I believe that ratio is the total assets against the next year's expenditures. So if contributions stopped, they'd run out money to pay the benefits in around 5 years.


----------



## Daniel A. (Mar 20, 2011)

andrewf said:


> If you were working prior to the CPP reforms in the late 1990s, you got something of a free ride. Only those whose entire career is post 1997 are paying full freight. Actually more, because 40% of the current contribution level is to dig CPP out of the whole it is in in from earlier generations.


I've contributed to CPP since 1972, I can tell you that in the nineties I was paying almost 44% of my pay to the government in one form or another at that time.
In my working career I paid almost 700,000.00 in taxes alone to support many others as I sure did not receive anywhere near this in benefits.


----------



## AltaRed (Jun 8, 2009)

I disagree with Sags' assessment/view of CPP. NorthernRaven has provided the best explanation. CPP has to be open ended in perpetuity since Canada and Canadian workers are not going away unless everyone leaves and last one out shuts off the lights. An enhanced CPP is the way to go provided contributions pay for it ad infinitum.

I am violently against any increased general revenue funding of OAS. That is a 'social welfare' program and should be re-cast and re-packaged with GIS as an income supplement program. That is what it is really meant to be in the first place. Start it at a lower age (lots of people become physically unable to work before age 65), increase the top payment to make it more meaningful for the genuinely poor, and agressively clawback for those wealthy 'senior families' with high middle class incomes.


----------



## NorthernRaven (Aug 4, 2010)

Daniel A. said:


> I've contributed to CPP since 1972, I can tell you that in the nineties I was paying almost 44% of my pay to the government in one form or another at that time.
> In my working career I paid almost 700,000.00 in taxes alone to support many others as I sure did not receive anywhere near this in benefits.


Well, unless you are clawback territory, at current rates an annuity paying out the OAS rate is worth something on the order of $120K at 65... 

*Later*: Oops, that's the unindexed rate. Probably closer to $150K if you could get a CPI indexed annuity.


----------



## sags (May 15, 2010)

NorthernRaven said:


> No, I believe that ratio is the total assets against the next year's expenditures. So if contributions stopped, they'd run out money to pay the benefits in around 5 years.


Well okay,.........but that is like saying if an auto insurance company with millions of customers didn't charge any premiums and gave out free policy coverage for 5 years they would be bankrupt.


----------



## sags (May 15, 2010)

NorthernRaven said:


> Well, unless you are clawback territory, at current rates an annuity paying out the OAS rate is worth something on the order of $120K at 65...


I started work in 1966 and I believe the CPP started in 1967.

I retired in 2006, so I paid 39 years of maximum contributions as did my employer.

If my annuity is worth more $120,000 or more............I will take it in cash rather than the $700 a month I currently receive.


----------



## sags (May 15, 2010)

Anyways, not to argue with you Northern Raven because from your posts I am sure you know a lot more about it than I do :smile:


----------



## NorthernRaven (Aug 4, 2010)

AltaRed said:


> I disagree with Sags' assessment/view of CPP. NorthernRaven has provided the best explanation. CPP has to be open ended in perpetuity since Canada and Canadian workers are not going away unless everyone leaves and last one out shuts off the lights. An enhanced CPP is the way to go provided contributions pay for it ad infinitum.


Actually, the actuarial workup on CPP included alternate calculations on a "closed" basis - either closing CPP to new entrants but having existing ones continue to contribute, or closing it completely to new contributions and paying out obligations (until they are all dead, presumably). As of 2012 the latter would require filling the gap with the current equivalent of over $800 billion. 



AltaRed said:


> I am violently against any increased general revenue funding of OAS. That is a 'social welfare' program and should be re-cast and re-packaged with GIS as an income supplement program. That is what it is really meant to be in the first place. Start it at a lower age (lots of people become physically unable to work before age 65), increase the top payment to make it more meaningful for the genuinely poor, and agressively clawback for those wealthy 'senior families' with high middle class incomes.


Of course, there's something of an implicit bargain with those footing the current OAS costs, so increasing the clawback is effectively steepening the progressively of the higher tax brackets, retroactively.


----------



## NorthernRaven (Aug 4, 2010)

sags said:


> I started work in 1966 and I believe the CPP started in 1967.
> 
> I retired in 2006, so I paid 39 years of maximum contributions as did my employer.
> 
> If my annuity is worth more $120,000 or more............I will take it in cash rather than the $700 a month I currently receive.


I was using *OAS* ($570/month), which is paid from taxes. CPP would annuitize to much more, but it isn't coming out of taxes, but those CPP contributions. And actually, a CPI-indexed OAS annuity would probably be more like $150K.


----------



## sags (May 15, 2010)

Thanks for your insight.

This all gets pretty complicated when you lift up the hood and look around.

I have been doing some research on the allocation of benefits for an insurance company demutualization.

When I finally found some models the actuaries use........lol.....my high school math doesn't cut it.


----------



## bass player (Jan 27, 2016)

Daniel A. said:


> I've contributed to CPP since 1972, I can tell you that in the nineties I was paying almost 44% of my pay to the government in one form or another at that time.
> In my working career I paid almost 700,000.00 in taxes alone to support many others as I sure did not receive anywhere near this in benefits.


What you paid in taxes is no different than what many others also pay. But, in addition to CPP, your taxes also fund roads, infrastructure, hospitals, schools, policing, clean water, sewage treatment, reliable heating, electricity, etc. Obviously, we all could pay less and waste can be reduced, but, don't overlook the quality of life that you enjoy from all those things that your taxes have paid for.


----------



## Daniel A. (Mar 20, 2011)

According to government figures over the years less that 10% of the population were in my tax bracket, so yes it is much different than most.

Many of the things you sight are paid by other taxes that I have not included.


----------



## peterk (May 16, 2010)

Daniel A. said:


> I've contributed to CPP since 1972, I can tell you that in the nineties I was paying almost 44% of my pay to the government in one form or another at that time.
> In my working career I paid almost 700,000.00 in taxes alone to support many others as I sure did not receive anywhere near this in benefits.


Ha! Well Dan, even if you over paid, at least you got the experience of growing up in a thriving country during a golden age of plentiful opportunities, liberal freedoms, lots of new infrastructure, free and functional medical systems, a social system congruent with raising a healthy family, and all the benefits of an efficient market-driven, progress-supporting economy and government that, while somewhat corrupt and dysfunctional, still had a clue.

I'm paying the same insane taxes as you did (also above 45% I'm sure) and get the privilege of living in an age of dwindling opportunities, waiting months for a simple surgery, governments and social institutions that are hostile to freedom, progress, entrepreneurship, starting a family, and purposefully over inflated prices for absolutely everything (housing, stocks, bonds, groceries, etc.)

In the grand scheme, you could've been worse off.


----------



## sags (May 15, 2010)

It is unfair that we have more income in retirement, than the people who replaced us in the workforce earn as wages.

Jerry Dias of Unifor, recognized this describing the GM settlement, when he said they had workers who were earning less than retirees.

He was wrong if compared to strictly the GM pension, but right if including the CPP and OAS benefits.

His solution as a union leader? Raise worker wages and leave pensions where they are.

It isn't that pensioners earn too much. It is workers earn too little.

So they negotiated to raise all worker wages and to move 700 workers from temporary to full time wages.

The hybrid DB/DC pension was also changed to a pure DC pension. That was claimed as a victory by the pension hating crowd.

But what they don't understand is it was also a victory for union members.

They no longer have no control over contributions by GM to the pension fund. 

Now they can negotiate the companies contributions to ensure the contributions are made weekly or monthly.

No more "contribution holidays" unless the union agrees with it.

Freezing the pension plan in 2008 hurt retirees including myself. We have lost over $4000 in COLA benefits.

But sometimes you have to appreciate that you have enough already and be willing to share.


----------



## olivaw (Nov 21, 2010)

peterk said:


> Ha! Well Dan, even if you over paid, at least you got the experience of growing up in a thriving country during a golden age of plentiful opportunities, liberal freedoms, lots of new infrastructure, free and functional medical systems, a social system congruent with raising a healthy family, and all the benefits of an efficient market-driven, progress-supporting economy and government that, while somewhat corrupt and dysfunctional, still had a clue.
> 
> I'm paying the same insane taxes as you did (also above 45% I'm sure) and get the privilege of living in an age of dwindling opportunities, waiting months for a simple surgery, governments and social institutions that are hostile to freedom, progress, entrepreneurship, starting a family, and purposefully over inflated prices for absolutely everything (housing, stocks, bonds, groceries, etc.)
> 
> In the grand scheme, you could've been worse off.


Each generation has had its advantages and disadvantages. When I was raising a young family in the late 70s/early 80s, there was no such thing as the child benefit. We had a trivial variant of the baby bonus. Effective tax rates were 45%. Mortgages hit 17% (21% briefly), the National Energy Program helped destroy the economy in my province, our house declined in value by 25% and banks forced half my neighbours out of their homes, doctors extra billed, school fees continued to increase, arge numbers of seniors lived in poverty etc. etc. etc. 

Eventually things got better. Interest rates came down, the economy came back, Paul Martin paid down the debt, our house (finally) appreciated. 

For the most part, I think Canada is better off now and it is still a great country - except for health care. Somehow that has declined and it is annoying as heck.


----------



## sags (May 15, 2010)

Yea, I forgot all that stuff. 

We got caught in the 21% interest rates in the early years of buying a home. 

Many co-workers were walking away because the payments were ridiculous for the homes they were buying.

I believe that Canada Trust got into trouble with people defaulting on mortgages and were absorbed by TD Bank around that time.

It wasn't all great times for sure, but we didn't have the access to debt there is now and I think that has made a big difference.

My buddy paid 30 years of mortgage payments and when he passed away he owed 7 times the amount the house originally cost.

Thank goodness for his widow, he put life insurance on his last re-mortgage.

Easy credit has driven up the price of homes and cars and created an illusion of financial security.


----------



## janus10 (Nov 7, 2013)

sags said:


> My buddy paid 30 years of mortgage payments and when he passed away he owed 7 times the amount the house originally cost.


Wow! :disturbed:

Makes me think of Greek mythology and Sisyphus.


----------

