CPP financially sound until at least 2050

(December 9, 2004) The Canada Pension Plan is in no danger of running out of funds, according to the federal government’s latest actuarial report, with assets expected to rise to $1.5 trillion by 2050.

The report assumes an annual contribution rate of 9.9%, divided between employees and employers. Total assets are expected to grow from $68 billion at the end of 2003 to $147 billion by the end of 2010.

“The results contained in this report confirm that the legislated contribution rate of 9.9% in 2004 and thereafter is sufficient to pay for future expenditures,” says chief actuary Jean-Claude Menard. “These are indicators that the plan is sustainable over the long term, as it is projected that there will be more inflows than outflows to the plan over the entire projection period.”

Ottawa is gradually shifting CPP assets to the CPP Investment Board (CPPIB), a process which started in May 2004 and will take three years to complete.

CPP contributions are projected to exceed expenditures until 2021, when investment earnings will be required to pay for part of the plan’s expenses. The actuarial report assumes a conservative real rate of return on investments of about 4% over the next four decades.

By 2050, it’s estimated that 29% of investment earnings will be needed to pay for benefits. At the same time, those investment earnings will represent 32% of CPP revenues by 2050.

“This clearly illustrates the importance of investment earnings as a source of revenues to the plan,” says Menard.

“Canada is one of the few countries in the world with a rock-solid public pension system,” said Finance Minister Ralph Goodale, who presented the report on Wednesday. “Canadians can therefore continue to have confidence in the Canada Pension Plan and can count on it as an important part of their retirement savings.”

Earlier this year, CPPIB president John MacNaughton called on the investment industry to help dispel what he called “the unsettling myth that the CPP won’t be there for Canadians.”

“As financial planners and investment advisors to millions of Canadians, they’re ideally positioned to deliver this important message,” he said.

Bruce Cohen, a pension expert and author of The Pension Puzzle, agrees, adding that for many middle-income Canadians, government benefits will be an essential component of their retirement plan. “I believe advisors will find clients more, not less, willing to invest when they’re shown that a reasonable retirement is achievable when you use the government programs as a base and then build up,” he told Advisor.ca earlier this year.

The next CPP actuarial report is scheduled for release in 2007.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com