The Quebec Pension Plan (QPP) is facing a crisis and it is the economic and social responsibility of the federal government to use the Canada Pension Plan (CPP) to avert disaster, according to a retired federal bureaucrat.
Due to a steadily declining birth rate and a lower number of immigrants, the QPP reserve fund will most likely run out by 2051, according to the plan’s 2007 actuarial report. Meanwhile, the Office of the Chief Actuary projects the CPP reserve fund will continue to grow without any changes to contribution or benefit levels.
Given the CPP’s projected health, the federal government should lend a portion of the reserve fund to the QPP once its reserve runs dry, said Edward Tamagno, author of the Caledon Institute on Social Policy’s report
A Tale of Two Pension Plans
If nothing is done before the fund runs dry in 2051, the only other options would be to dramatically increase contributions in Quebec from 9.9 per cent of pay to 12.6 per cent or to drastically cut benefits, said Tamagno, a retired director general of Human Resources and Social Development Canada.
“Since the two plans began in 1966, one of the foundation stones of policy at both the federal level and the provincial level is that the two plans should have the same contribution rate,” said Tamagno. “If you’re paying the same retirement pension, but you’re charging some workers in Canada more than others, there’s a sense that it’s not fair.”
This drastic increase in contributions might also make some employers leave Quebec for a more economically friendly province, he said.
If benefits, which currently account for about 20 per cent of retirement income for Canadians, were cut in Quebec, many workers might leave the province to qualify for CPP benefits instead.
Until recently, both funds were thought to be sustainable indefinitely, without raising contributions or lowering benefit levels. This was due to changes in 1997 to increase contribution rates for both plans to 9.9 per cent of pay, freeze the year’s basic exemption at $3,500 and begin investing the CPP’s reserve in equities and stocks just like the QPP had been doing since 1966.
“Since then, a number of things have intervened that have changed the projections for the CPP to the better and the QPP, unfortunately for them, to the worse,” said Tamagno.
Because the QPP had been investing its reserve with the Caisse de dépot et placement de Québec since the creation of both plans, the majority of the fund was invested in stocks and equities when the tech bubble burst in 2000. As a result the QPP, like most private pension plans, lost a lot of money, said Tamagno.
However, only about seven per cent of the CPP reserve was invested in stocks and equities in 2000.
“The CPP was lucky, it was just starting to invest in stocks,” said Tamagno.
In 2006 the QPP reserve had rebounded and was at the levels predicted in 1997, but those projections hadn’t foreseen the demographic challenges Quebec would face.
From 2005 to 2051, the number of working-age people (aged 20 to 64) in Quebec will decline by six per cent. This is due to lower birth rates and lower immigration rates compared to the rest of Canada. Also, life expectancy is expected to increase, so retired people will be collecting benefits longer, further depleting the reserve fund.
In the rest of Canada, the Office of the Chief Actuary predicts the number of working-age people is expected to grow by 20 per cent in that same time, mostly due to immigration.
The CPP, conversely, has done better than projected in 1997. In fact, the CPP would be sustainable at a contribution rate of 9.8 per cent, a 0.1-percentage-point drop from current levels that represents a substantial surplus over time, said Tamagno.
“The CPP is not only doing well, it even has a bit of a cushion,” he said.
It’s that safety net that makes Tamagno’s proposal for the federal government to lend part of the CPP reserve fund to the QPP feasible. The Quebec government, in turn, would use government bonds as surety.
However, this solution means the Quebec government will still have a debt once the QPP fund runs out, said David Burke, retirement practice director at Watson Wyatt in Montreal.
“It’s probably more of a Band-Aid solution than a long-term, permanent one,” he said.
To run a healthy pension program, the cost should be in sync with benefits, he said, so when contributions no longer cover benefits, you either have to increase contributions or push back the retirement age.
“It’s true for the QPP, it’s true for the CPP and it’s true for any private, corporate plan,” he said.
Another, politically controversial, solution is to merge the CPP and QPP, said Burke. One of the main reasons the plans were created separately was because Quebec wanted to invest its reserve in the market but the rest of Canada did not. Now both funds are partially invested in the market, so there’s less reason to keep them separate, he said.
However, there would probably still be a shortfall and contributions would still need to be increased, said Burke.
“Even if you were to merge the QPP and CPP together, you’re diminishing the problem because it’s now amongst a much bigger plan, but it’s still there,” he said.
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