The CPP Is Sustainable, But There Are Uncertainties

The 31^st Actuarial Report on the Canada Pension Plan (CPP)[1] was released to the Finance Minister on November 14 and tabled in Parliament on December 14, 2022, as required by law, every three years. It is an important and comprehensive overview of Canada’s vital economic statistics from which to project the sustainability of the CPP.  What’s interesting about this report is how the uncertainties ahead may affect our rate structure and what a wealth of economic news it brings.

This report anticipates rates of fertility, life expectancy, net migration, labor force participation, employment and unemployment, real wages, retirement, CPP disability instances and rates of increases in prices.  Together with the rates of real return on CPP assets, it gives an excellent analysis as at December 31, 2021. 

Here's how it compares with the last report tabled three years ago[2]:

• The number of CPP contributors were expected to grow from 14.5 million in 2019 to 18.4 million in 2050.  This new report anticipates the number of CPP contributors to grow from 15.2 million in 2022 to 19.3 million contributors in 2050.
• Base contributions were expected to increase from $52 Billion in 2019 to $165 Billion in 2050. Now, we are expecting base contributions to grow from $61 Billion in 2022 to $177 Billion in 2050.

• The additional CPP contributions were expected to increase from $1.6 billion in 2019 to $43 billion in 2050.  Now, we expect those contributions to increase from $9.3 Billion in 2022 to $45 Billion in 2050.

• In the case of the base contributions, amounts paid were projected to be higher than expenditures up to the year 2021 inclusive; this report confirms the base contributions are expected be higher than expenditures up to the year 2025 inclusive. The additional contributions paid were projected to be higher than expenditures up to the year 2057 inclusive; this report confirms that projection.
• The number of retirement beneficiaries receiving benefits from the base contribution was expected to increase from 5.6 million in 2019 to 9.9 million in 2050, and the distribution of their benefits was expected to grow from $49 billion in 2019 to $188 billion in 2050. 

The new report now states that the number of retirement beneficiaries is expected to increase from 6 million in 2022 to 9.9 million in 2050 (unchanged) and expects that total expenditures from $56 Billion in 2022 to $197 Billion in 2050.  

• The number of retirement beneficiaries receiving benefits from the additional contributions was expected to grow from 0.2 million in 2019 to 8.9 million in 2050. The distribution of their benefits was projected to grow from $0.1 Billion in 2019 to $28 Billion in 2050.

The new report projects that those receiving benefits from additional CPP will increase from 0.8 million in 2022 to 8.9 million (as projected earlier) in 2050. Expenditures will grow from $0.3 Billion in 2022 to $29 Billion in 2050 (slightly higher that projected earlier). 

Notably, the 30^th CPP Actuarial Report assumed a nominal average 75-year rate of 5.95% for the base CPP and 5.38% for the additional CPP. The 31^st report anticipates this rate to be 5.79% for the base CPP and 5.37% for the additional CPP.

But within its uncertainty forecasts is a new section that looks at three emerging trends: earnings distributions, stagflation and climate scenarios.

• Earnings distribution:  The same increase in earnings is assumed going forward in this report until 2045, which will result in total contributory earnings in 2050 that are 7% lower than under the best estimate scenario.  That would trigger a minimum contribution rate increase to 9.88%; 4% higher than the current best estimates.
• Stagflation:  The assumption in this report is that current high inflation is temporary.  It notes that elevated inflation over a long period can lead to stagflation – both economic stagnation and high inflation and high unemployment, together with lower investment returns* and real-wage growth.  This scenario would result in the MCR raising to 9.85% - 3% higher than under the current best estimates.   
• Climate Scenarios:  Here the report focuses on differences in GDP growth based on three adverse hypothetical climate change scenarios, each of which could increase the MCRs to a high of 10.06%. 

*Taking just one of these scenarios into account, consider how will lower investment returns affect future contribution rates to the CPP.   The 30^th reported noted that a decrease of 1% in the assumed nominal average annual 75-year rate of return would result in a minimum contribution rate increase of the base premium to 10.62%.

The new report notes that if lower average returns are assumed (4.20% for the base CPP and 4.17% for the additional CPP) the minimum contribution rate would increase from 9.54% to 11.22% for the base rate and the First Additional Minimum Contribution Rate (FAMCR) from 1.9% to 2.86%. 

However, if higher average returns were assumed (7.89% for the base CPP and 6.5% for the additional CPP) the rates would decrease to 7.89% and 1.38% respectively.    

The best-estimate assumptions of this 31^st report is that the Minimum Contribution Rate at the next valuation on December 31, 2024 is expected to be 9.55% and the FAMCR is expected to be 1.97%. That’s good news, at least for now.  So is the fact that the CPP appears to be healthy and sustainable.

But the reality for Canadian workers and the self-employed is the following: changes to the CPP premium rates translate into real premium increases already scheduled for 2023 and 2024 under the new enhanced CPP introduced in 2019.  And by next year, the rate increases will be more substantive yet for middle and high earners. 

Bottom Line:  The 31^st CPP Actuarial Report should be reviewed with interest by all stakeholders to the CPP, especially our Parliamentarians.  The rules already in place are complex and need to be understood and evaluated to anticipate their effect on remaining available funds for other retirement savings, especially by the self-employed.  

Evelyn Jacks is Founder and President of Knowledge Bureau, holds the RWM™, MFA ™, MFA-P™ and DFA-Tax Services Specialist designations and is the best-selling author of 55 books on tax filing, planning and family wealth management.  Follow her on twitter @evelynjacks.

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