The Canada Pyramid Plan continues to crumble
By Walter Robinson
web
posted July 24, 2000
Canada's public pension scheme is back in the news but the headlines are anything but rosy for the feds. To recap, the Canada Pension Plan (CPP) is the taxpayer and employer funded pyramid scheme which is supposed to help us in our old age. Set up in 1966, it was based on the pay-as-you-go principle where tomorrow's pension benefits are paid from today's tax collections.
In 1966, we had eight taxpayers for each retiree collecting benefits. The government collected more in CPP payroll taxes than it paid out in actual benefits. Now, 30 years later this situation has changed dramatically. Today we have five taxpayers for each retiree with this ratio dropping to three to one by 2030 so higher pension payouts will be funded by fewer taxpayers.
Already, the CPP pays out more in benefits than it collects in premiums (read: taxes) from Canadians. From 1966 to 1986, Canadians (employees and employers) paid 3.6 per cent of their earnings to the CPP. From that point forward, the rate started to climb yearly until it reached 5.6 per cent in 1996. A year earlier, the CPP's chief actuary direly predicted that the CPP would be broke by 2015 unless changes were made to the plan.
In response, Ottawa and the provinces decided to hike CPP taxes by 73 per cent over six years. Today's CPP rate is 7.8 per cent, it will by 9.9 per cent by 2003. The government calls this state of affairs, steady-state financing. According to the feds, the CPP's new contribution rates combined with a new market-oriented investment philosophy (see Investment Board below), ensure that public pensions are now on a stable footing.
But, according to a poll conducted for HRDC by Ekos research, Canadians are skeptical of this claim. Ekos polled 1,940 Canadians in November 1999 and found that 76 per cent "believe that future generations will receive a smaller return than those retiring today, or nothing at all" according to the Ottawa Citizen. Many respondents cited government mismanagement of the fund – most CPP funds are invested in low-yield government bonds – as their primary reason for such an alarming lack of confidence.
And this lack of faith has increased by 10 per cent in the last three years alone. In 1997, Maclean's magazine reported that 66 per cent of Canadians were "not very confident" or "not at all confident" that the CPP would be there for them when they retire.
This concern is highly justified. In 1966, government actuaries told us that the combined employer-employee contribution rate would never rise above 5.25 per cent. Moreover, they predicted that the rate would only be at 5.1 per cent in the year 2025. They told Canadians that these projections factored in the strains of an aging population and accounted for the most likely scenarios of economic growth.
In response to public anxiety about the management of the CPP fund, the legislation enabling the 1997 to 2003 CPP tax hike, also gave birth to the CPP Investment Board. The board was set up to invest CPP funds in the stock market. And in its first year of operation, 7 per cent of the CPP or $2 billion in assets were "passively invested" in a stock market portfolio of Canadian and foreign equities and earned an impressive 40 per cent return.
All this leads us to pose two fundamental questions. First, why should
Canadians believe the government when it assures us that the CPP is on
a stable footing when its 34 year record is one of bad math and bad management?
And given the first-year returns earned by the CPP Investment Board, why
is it acceptable for Ottawa to invest CPP money in the market but not
acceptable for Canadians to opt-out of the CPP and invest this money individually
in the market? 
Walter Robinson is the federal director of the Canadian Taxpayers Federation.