Newsrelease

June 16, 1998
Edmonton, Alberta

"Bill C2, related to Canada Pension Plan reform, was a step in the right direction, not a panacea. It doesn’t solve the funding shortfall and intergenerational inequities that are eating away the confidence our youth have in the CPP. We can’t ignore it - it’s our responsibility to correct those problems. Canadians are depending on us to fix it."

Alberta Reminds Federal-Provincial Finance Ministers CPP Reform is Unfinished Business

Provincial Treasurer Stockwell Day urged his counterparts at the Federal-Provincial Finance Ministers Meeting in Ottawa yesterday to seek better solutions for the problems plaguing the Canada Pension Plan (CPP). This request, along with a discussion paper Next Steps to CPP Reform that includes input from an Alberta committee on the CPP, represents Alberta’s initial contribution toward the next review of the CPP.

Day reminded his colleagues that time and resources need to be identified soon in order to find the right combination of solutions to make the CPP fair and viable in the long-term. "People keep telling me ‘this is not fixed’ and I agree. I’m worried that we’ll miss an opportunity to fix the CPP before its problems become unmanageable," said Day.

Alberta struck a committee on the CPP in December 1997 to look at the equity issues raised by Albertans. Next Steps to CPP Reform reflects the committee’s evaluation of options and includes a set of principles to help guide future CPP discussions. "We wanted to have good information to bring to the table for this round of the CPP review," said Day. "We really need to look at this beyond the reforms in Bill C2."

Alberta’s Treasurer put seven principles from Next Steps on CPP Reform on the table for provincial and federal finance Ministers to consider as a starting point for the next CPP review. These principles are:

• The plan’s universality and full portability should be preserved.
• The funding basis must be credible and reliable, and must minimize the intergenerational transfer of debt.
• There must be a readily discernible relationship between what people pay and what they get. Contributors should be demonstrably better off by being members of the plan, as a retirement and general insurance scheme.
• Contribution rates must leave room for individual/private initiatives for retirement savings.
• Where possible and appropriate, individuals and employers should be given the flexibility to design equivalent or better benefits.
• All generations should in some way, share in the cost of dealing with the CPP’s problems.
• Plan governance must be cohesive and accountable.

"Maybe I hear it more often because we have more youth in Alberta than anywhere else in Canada," said Day. "They are deeply concerned about having to pay the lion’s share of the cost of the CPP’s unfunded liabilities, and question whether it will be there for them when they retire.

"The importance of the CPP to Canadians cannot be overstated. This issue must stay on our agenda until the right solution is found, a solution that will protect seniors and be fair to Canada’s youth," said Day. He added that while there is no quick fix solution, Alberta is ready to work with the other governments to pursue other reforms to the CPP using the principles laid out in Next Steps to CPP Reform.

For more information, please contact:

Trish Filevich
Director of Communications
Alberta Treasury
Telephone (780) 427-5364
e-mail: webmaster@treas.gov.ab.ca

Backgrounder: Canadian Pension Plan reform: A Chronology

First Review of CPP:

• CPP reform began in response to the Chief Actuary’s 15th Report concluding that the CPP account would be exhausted by 2015.
• During federal/provincial negotiations, Alberta took a leadership role, calling for real change that would help to fix the CPP permanently. This new legislation, Bill C2, is a step in that direction.

Bill C2, An Act to Establish the Canadian Pension Plan Investment Board and to Amend the Canadian Pension Plan and the Old Age Security Act:

• Bill C2 took effect January 1, 1998. It amended CPP legislation and created an independent investment board for CPP funds. This legislation is based on a February 1997 federal-provincial agreement.
• The highlights of this legislation are:
  1. contribution rate increases are limited to 9.9 per cent of pensionable earnings, instead of ultimately rising to 14.2 per cent as forecast by the CPP’s actuary,
  2. an arms-length, non-government investment board, appointed with input from the provinces,
  3. a new default mechanism that will automatically trigger benefit reductions if CPP costs overtake maximum contribution rates,
  4. a small reduction in benefits,
  5. a new investment policy aimed at getting higher returns for the CPP fund,
  6. reviews every three years instead of five,
  7. strengthened accountability and more public disclosure.
• By accepting the deal, the participants will:
  1. lower the growth of the CPP unfunded liability,
  2. show that benefits can be reduced,
  3. institute a new governance structure for CPP investments,
  4. take immediate action towards making the CPP viable.

The Current CPP Review:

• The federal and provincial governments began this review of CPP in 1998.
• Alberta prepared for this review by establishing a CPP committee in December 1997. This committee put forward the discussion paper Next Steps to CPP Reform.
• During this review, Alberta wants all other governments to consider options that focus on:
  1. further reducing CPP costs,
  2. redistributing the burden of CPP reforms more fairly across generations,
  3. assessing the merits of turning the retirement component of the CPP into mandatory, individual RRSP style accounts,
  4. mechanisms to reduce intergenerational inequities, and
  5. other options which may be introduced by groups consulted.

Report: Next Steps to CPP Reform

Honourable Stockwell Day
Provincial Treasurer, Alberta
June 15, 1998
Federal/Provincial/Territorial Finance Ministers’ Meeting
Ottawa, Ontario

Next Steps to CPP Reform

Importance of the CPP to Canadians cannot be overstated. However, Canadians have a poor understanding of its funding and benefit structures and continue to have serious doubts about the plan’s long-term viability.

Young Canadians are concerned that they are being expected to pay more into a plan that may not be there when it is their turn to collect. Moreover, despite the recent changes to the CPP, too great a share of the burden for the accumulated debt (the unfunded liability) of the CPP, estimated at $460 billion as of December 1996, is being passed on to future generations of Canadians.

We need to find other ways of sharing the cost of paying for the past unfunded liabilities among Canadians and lighten the load on our youth. This is particularly important given the urgent need to reduce the persistently high unemployment rate among young Canadians. In 1997, unemployment averaged 16.7% among Canadians aged 15 to 24. High CPP rates can only impede employment growth at the entry level.

The sound budgetary situation of Canadian governments generally and Canada’s strong economy present a rare opportunity for us to address some of the outstanding issues facing the CPP. We must inform and consult with Canadians to give them greater understanding of the issues involved and the need to continue to work on changes to the plan. Federal and provincial governments have recently taken some significant steps to deal with the challenges of the CPP. The establishment of an arms length Investment Board, a commitment to prevent future benefit improvements without proper funding, and the requirement to review the CPP more frequently are all positive steps. Now we need to build on our successes and strengthen all Canadians’ confidence in the long-term future of the CPP.

Principles for Next Steps

Next steps to the CPP’s reform review should reflect the following principles:

• The plan’s universality and full portability features should be preserved.
• The funding basis must be credible and reliable, and must minimize the intergenerational transfer of debt.
• There must be a readily discernible relationship between what people pay and what they get. Contributors should be demonstrably better off by being members of the plan, as a retirement and insurance scheme.
• Contribution rates must leave room for individual/private initiatives for retirement savings.
• Where possible and appropriate, individuals and employers should be given the flexibility to design equivalent or better benefits.
• All generations should, in some way, share in the cost of dealing with the CPP’s problems.
• Plan governance must be cohesive and accountable.

Further upward adjustments to the contribution rates are not possible, let alone desirable. Therefore, the solutions must be found in an alternate way of funding the past service unfunded liability and/or changing the benefit structure.

We should consider the following approaches.

1. A major effort should be made to inform and consult with Canadians about the plan and its future.
2. The CPP’s governance and management structure should be patterned after the best practices of large, successfully run, pension plans. Responsibility for managing the CPP retirement and related benefit components should be moved to a single, arm’s length agency. The ‘one-roof’ agency should be clearly accountable for all aspects of the program, including benefit administration, investment management, and administration of the agreed-to schedule of contributions. In addition, the agency should be responsible for making recommendations to federal and provincial finance ministers for changes to the plan’s benefit and funding levels.
3. There must be a recognition of the accumulated debt under the CPP, even though the estimates of the unfunded liability can fluctuate widely as they are dependent on a large set of assumptions about the future, including the rate of return on largely absent assets. The latest estimate of the unfunded liability as of December 1996 was $460 billion.
4. Under current funding arrangements, much of this debt will have to be funded by future contributors. Are there ways to help reduce this intergenerational transfer of debt? Can steps be taken now to reduce this unfunded liability (such as increasing the retirement age)? Are there more equitable ways of funding the past service unfunded liability?
5. The cost of paying for the past service unfunded liability and the cost of paying for the benefits being earned must be clearly separated, so that Canadians understand what they are paying towards the past, and what is being set aside for their future.
6. As a minimum, the components of the CPP -- retirement benefits and post-retirement spousal benefits, disability, and life insurance (death, orphans’, and pre-retirement spousal benefits) -- should be treated separately, to enhance transparency, management, and accountability.
7. The disability component of the CPP requires intensive, ongoing management. Given that provinces run work-place disability (WCB) and other programs for the disabled, could responsibility for managing the disability component of the CPP be delegated to the provinces? This would facilitate a co-ordinated approach to all public disability and rehabilitation programs.
8. The CPP has a complex structure and offers a myriad of benefits. Many of the benefits introduced over the years may no longer be relevant. Others may be better offered outside the CPP, where social assistance objectives can be better managed. We need to modernize the CPP’s benefits to meet the evolving needs of Canadians, and to make the CPP more of an ‘earned’ program rather than an ‘entitlement’ program.
9. And finally, perhaps it is time to re-examine ways to provide greater flexibility to employees and employers in the provision of retirement and related benefits mandated under the CPP. For example, is it possible or desirable to set up individual accounts for future retirement benefit accruals? Should employers who sponsor registered retirement plans that exceed minimum CPP benefit levels be given some special recognition in the CPP program? Can we give this sort of flexibility to individuals and employers and still maintain the positive features of universality and full portability?

I propose that our officials be instructed to begin discussions with these principles and goals in mind, and to report back to us regularly on their findings.

Return to: Alberta Treasury News Releases - | - Alberta Treasury Home Page - | - Government of Alberta Home Page