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Global solution to the chronic pension issues:
A Full-Scale Expansion of the CPP
Bernard Dussault BSc. Math., FSA, FCIA
1992-1998 CPP Chief Actuary
[email protected]
Acronyms
CPP
CPPIB
DB
DC
GIS
ITA
OAS
RPP
RRIF
RRSP
YBE
YMPE
Canada Pension Plan
CPP Investment Board
Defined Benefit (pension plan)
Defined Contribution (pension plan)
Guaranteed Income Supplement
Income Tax Act
Old Age Security
Registered Pension Plan
Registered Retirement Income Fund
Registered Retirement Savings Plan
Year’s Basic Exemption (CPP)
Year’s Maximum Pensionable Earnings (CPP)
Pension landscape: main issues
1.
Sustained failure of working Canadians to save enough
for a proper level of income replacement during their
retirement


about 2/3 of workers and 1/3 of seniors are not covered
by a RPP;
about 1/3 of workers use only about 6% of their RRSP
room, most of which is withdrawn before retirement
2.
Chronic solvency problems affecting DB plans and
recurring investments losses affecting DC plans and
RRSPs
3.
Current trend of conversion of DB plans into DC plans
Pension landscape: main concern
High level of seniors’ poverty
• Statistics Canada: 4%
• GIS average take-up rate: over 35%
• GIS recipient’s total annual income:
$14,000 to $19,000
Criteria of a proper solution
to the chronic pension issues
1. National mandatory coverage under one or a
series of universal pension plans
2. Defined Benefit vs. Defined Contribution plans
3. Covering all employment earnings
(i.e. no basic exemption)
Deficiencies of DC plans & RRSPs
Retirement income security under DC plans & RRSPs
1. Yield on investments lower than with DB plans
2. Annuities: high cost
3. RRIFs: Amount and duration of income are not guaranteed
4. Income is not indexed to inflation
5. No defined survivor benefits
Ideal solution to the pension crisis:
a full-scale CPP expansion
1.
2.
3.
4.
5.
6.
7.
8.
9.
CPP: a mandatory fully portable indexed DB plan
Lower cost, shared equally by employers & employees
Employer not involved in the administration of the plan
No issues of coordination of DB plans with CPP
No surplus ownership issues
Accrued credits not affected by employer’s bankruptcy
CPP provides defined disability and survivor benefits
No marriage date-related restriction other than 12
months (eligibility to surviving spouse pensions)
Gradual reduction of poverty among Canadian seniors
(reduced reliance on GIS)
The two dimensions of
a full-scale CPP expansion
A- $80,578 increase in the YMPE, i.e.
– from $47,200 (YMPE for 2010)
– to $127,778 (RPP-related ITA limit for 2010)
B- 45% increase in the retirement benefit rate
– from 25% (maximum annual pension: $11,210)
– to 70% (maximum annual pension: $84,972)
Expanded CPP
Full-scale CPP expansion
retirement pension %
70%
60%
50%
Expanded CPP
- 70% (benefit rate)
- $127,778 (ITA limit)
40%
30%
20%
Existing CPP
25% (benefit rate )
$47,200 (YMPE)
10%
0%
1
15
29
43
57
71
salary ($000)
85
99 113
Full-scale CPP expansion: extravagance?
• About 30% of Canadian workers are
already covered under a DB pension plan
• An all-embracing CPP is much less
expensive than a CPP/RPP combination
(about 5% of salary for the federal public
service plan)
Cost estimate of the full-scale
CPP expansion
Existing CPP: 9.9% of salary from YBE to YMPE
ADDITIONAL contribution rate (full-funding basis)
for the CPP expansion:
• 9.9% of salary up to YMPE (no YBE)
(pursuant to the 25% to 70% benefit rate increase)
(NB: coincidence with the existing CPP 9.9% rate)
• 15.4% of salary from YMPE to ITA limit
(pursuant to the 0% to 70% benefit rate increase)
Expansion implemented in two steps
• Increase in benefit rate
1st step:
from 25% to 50% (of salary up to YMPE)
from 0% to 50% (from YMPE to ITA limit)
2nd step: from 50% to 70%
• Increase in contribution rate
1st step: 5.5% (up to YMPE), 11% (YMPE to LIR)
2nd step: 4.4% (up to ITA limit)
spread over 5 years for each of the two steps
Transition from RPPs (discontinued)
to CPP expanded portion (new plan)
EXISTING PENSIONS & ACCRUED BENEFITS
WOULD NOT BE AFFECTED
1. Contributions
– To RPPs and RRSPs: discontinued
– All future pension contributions now go to CPP (full funding)
2. Pension accruals
– Existing RPPs: discontinued
– All new CPP pension credits accrue gradually over 47 years
(even if the 45% benefit rate increase is immediate)
3. Commencement date of retirement pensions
– RPPs: generally under age 65
– CPP: normally at age 65
Main issues of (& solutions thereto)
a full-scale CPP expansion
1. Future accruals: normal age (65) of pension commencement is generally
higher under the CPP. (A- Bridging benefit B- Consistent with increasing
age at which workers entry & exit the labour force, and die)
2. Amount of CPP pension: possibly lower than under RPP (average vs. final
salary: fair. CPP costs < than a typical RPP & provides disability benefits)
4. Huge fund (to be fragmented among provinces, CPPIB not involved)
5. All pension eggs in the same basket (fund fragmentation; most individual
plans are anyway affected to quite same extent by market fluctuations)
6. Shrinking of the private pension business (a good portion of additional
CPP contributions could be invested by financial institutions)
7. Increase in business costs for non RPP sponsors (global compensation:
lower salary increases, consistent with increased savings)
8. Deferral of tax revenues of about $4 billion annually (net, accounting for
effect of reduction in OAS & GIS benefits and in RRSP contributions)
9. CPP contributions are subject to 15% tax credit while GIS benefits are
financed though progressive taxes. (reduced reliance on Robin Hood)
What should be done in the meantime?
• 14 June 2010 agreement in principle by the federalprovincial finance ministers for a modest CPP expansion
• Contribution holidays under DB plans
– Are the main reason for DB plans solvency problems
– Should be fully prohibited, while emerging surpluses
and deficits should be amortized over a uniform
period of at least 5 years
Prohibiting contribution holidays &
amortizing surpluses and deficits
• optimizes the stability of the RPP contribution rate
• prevents major RPPs’ solvency problems
• prevents at any time the RPP from becoming overly
underfunded or overfunded (the amortization of
emerging surpluses and deficits would normally prevent
the pension fund to exceed at any time 25% of the RPP
liabilities)
• avoids the need to maintain any distinct earmarked
contingency fund within or outside the pension fund
• optimizes intergenerational equity among successive
cohorts of contributors