I’ve written before on the raw deal Canadians are getting on the CPP, and it isn’t pretty. I estimate that by being forcefully enrolled in to the Plan, Canadians are losing out on potentially earning an additional million over the course of their careers. The Plan was initially established in 1965 as a Ponzi Scheme with no assets at all. Benefits were paid out of current contributions, which amounted to 3.6% of an employees gross earnings up to a yearly maximum.
By the 1990′s it became apparent that this Ponzi Scheme was going to collapse unless significant changes were made. The contribution rate increased to 9.9% and the yearly maximum pensionable earnings was also drastically increased. Another initiative was to actually begin funding the Plan.
We are now told that the CPP is fully funded and guaranteed to be stable for the next 75 years. For now, the officials say, there is nothing to worry about. What you need to know about these statements is that they rest solely on an accounting trick; the Plan is not even close to funded and is transferring massive amounts of debt accumulated by the Plan’s early participants on to the younger generations.
Just how much debt are we talking about here? The answer is buried in a report published by Canada’s Chief Actuary on January, 2012. Section IV attempts to calculate the status of the Plan by considering different cohorts within it. They divide their analysis in to three groups:
- Closed group without future accruals
- Closed group with future accruals
- Open group
The first group assumes no new entrants to the Plan. Of those people remaining, all further contributions are terminated and the Plan continues to pay out the benefits everyone is qualified to receive. This methodology provides an excellent snapshot of the Plan’s status in the immediate present as well as what current and future contributors can expect to absorb due to inadequate funding by the current group of beneficiaries.
The second group lightens the load a little. It still cuts off any new entrants to the Plan but the extant contributors continue on as they always have paying in to the Plan throughout their careers and then receiving their benefits. What this does is estimate the cost (or benefit) of the CPP that will be foisted on generations yet to come.
If this were a normal pension plan this would be the end of the valuation assessment but through the magic of State violence we get to the third option. The last group is the method you will always hear about in the media and politics. It assumes that that CPP can carry on as it always has, continually sucking each successive generation of Canadians in to its maw, for better or for worse. It completely ignores the inter-generational effects of the Plan and relies more heavily on the steady growth of the economy than either of the previous two methods.
What we see is a staggering inter-generational transfer of a debt so large, it stands head and shoulders above the reported national debt of the federal government ($600B). Current beneficiaries have left current and future contributors a bill of $748 billion and everyone currently in the Plan will pass along $509 billion to the young and unborn.
Hold on to your wallets, because we aren’t done yet.
The actuaries project that by 2019 the shortfall of the first group will have grown to $1.051 trillion, the second group to $721 billion, and the open group to $12 billion. Having to take on this much debt is simply catastrophic for younger generations and means that our true debt-to-GDP ratio is much, much higher than that cozy 35% that is officially reported.
It takes quite a stretch of the imagination to actually call this a “funded” Plan. Being funded would mean that the invested assets meet or exceed the present value of the Plan’s liabilities, this is how it works in the private sector. In a feat of accounting magic, the CPP counts future contributions of people yet to be born as their assets. They euphemistically call this the “Pay-as-you-go” portion of the Plan. The reality is that this is simply Ponzi financing.
Only 8% of the Plan is funded according to the actuaries, showing no significant signs of improvement in the future.
Part of how the CPP is going to survive is by paying participants an abysmally low yield on their contributions. In the 26th Actuarial Report on the CPP, the Chief Actuary of Canada calculates what kind of yield Canadians can expect to get out of their CPP contributions depending on what decade they enroll in. They do this by calculating the internal rate of return, a valuable financial statistic that determines the sweet spot where the present value of your contributions equals the present value of the benefits you will receive. That number is your true rate of return on the cash you put in to an investment vehicle.
The returns don’t look good. Anyone enrolled from the 1970′s-on can expect very little for their contributions. It’s quite possible to earn triple this rate of return simply by investing in equity indices. Long-term studies have indicated that real rates of return of 6.5% and higher are within reach of the average investor.
The CPP has been a heinous crime since the beginning. Under no circumstances would a private enterprise be able to operate their own pension plan in the same manner, nor would they be able to count the contributions of future employees as part of their current assets. A proper accounting of the Plan reveals that it is carrying an unfunded liability of over $0.5 trillion. It was poorly-conceived and accomplishes the exact opposite of what it was intended to do, namely provide for a more financially secure retirement. It should be ended as quickly and simply as possible by closing the plan and using its existing assets to pay benefits to only the truly distressed.