This was originally a commented I wrote in response to: http://michaeljamesmoney.blogspot.com/2012/02/tax-fairness-would-decimate-old-age.html

CPP is Canada’s public pension plan. When it was introduced, it was paid from general revenues. This “pay-as-you-go” basis means the first recipients may have only paid in for a couple months, before retiring and receiving a full pension for life. Current recipients receive a pension that is funded from general tax revenue.

The Government of Canada realized in 1998 that there would be a problem due to demographics and the large number of baby boomers who will all be looking to retire around the same time. At the time, the CPP carried a small surplus and could be considered about 7% funded. The government increased the contribution rate to 9.9% to improve the stability of the fund. By the end of 2009, CPP was 14.5% funded, with a goal to improve that level to 20% funded by 2020. (http://www.hrsdc.gc.ca/eng/oas-cpp/reports/2010/page06.shtml)

Starting in 2021, current benefits will be augmented by investment returns from the CPP investment assets. This is intended to create a steady state, where demands on current government revenues remain stable despite increasing payment requirements. After the “hump” of baby boomer retirees, the funding level of the CPP is projected to rise to 30% by 2070.

This seems to me to be a fair balance between making the CPP sustainable, but also not penalizing current taxpayers in favour of current CPP recipients. It’s encouraging to note that any additional benefits added to CPP must be fully funded. Although the entire pension isn’t fully funded, it should remain viable despite demographic fluctuations. OAS doesn’t have that benefit.

CPP is not a funded pension plan

2 thoughts on “CPP is not a funded pension plan

  • February 2, 2012 at 2:59 pm
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    “The Government of Canada realized in 1998 that there would be a problem due to demographics…”

    Actually it was known since the CPP started that there was a problem with the demographics. There were years of alarm bells and government discussions leading up to the changes in 1998. It finally became clear to the boomers MPs and voters at the time that if they didn’t foist some of the costs of their CPP benefits on future generations they likely would be getting far less back than they put in. The other thing that happened (a good thing) is the end to using CPP funds as a government slush fund- lending them out to government organizations at less than market rates to buy votes.

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    • February 2, 2012 at 3:03 pm
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      Thank you for clarifying. It seems that few people realize that CPP is less than 20% funded. At the same time, steady state funding seems like a remarkably appropriate way to address the issue. I’m surprised that more corporate DB pensions haven’t moved to steady state funding, rather than trying to jump from unfunded to funded (usually at the urging of unions). Or perhaps I’m just not aware of them.

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