The 27th Actuarial Report on the Canada Pension Plan provides some fascinating reading about Canada’s demographics and economy over the next 75 years, to 2090.
The average annual real rate of return on the fund is expected to be 3.9% in that period, and the report reassures that the current legislated contribution rate of 9.9% will be “more than sufficient” to cover expenditures to 2020, with up to 26% of investment income making up the difference between CPP contributions and expenses by 2056.
Under the current 9.9% contribution rate, this means contributions will grow from $47 Billion to $66 Billion in 2025. Assets in the plan, meanwhile, will accumulate to 6.5 times annual expenditures by 2025: $476 Billion. These assets are projected to grow rapidly in the near term to 2020. A slow pace of growth is projected out to the year 2050, but by 2078 the ratio of assets to the following year’s expenses is expected to be roughly the same as it is now.
The report notes that the number of contributors to the plan will grow from 13.8 million in 2018 to about 15 million in 2025. And so, despite an increase in the number of beneficiaries receiving benefits (from just over 5 million in 2016 to 10.2 million in 2050), the plan will be able to meet its obligations throughout the projection period.
In the meantime, the current government’s recent push to sweeten the pensions of Canadians by increasing CPP premiums as soon as 2019 has not been taken into account here. This will need to be factored into the next report.
The goal under the much-heralded reform proposals, is to replace one-third of the taxpayer’s pensionable earnings up to a maximum of $82,700 , which is a 14% increase in the upper earnings level over inflation adjustments. Under current rules, the CPP replaces 25% of pensionable earnings up to a maximum of $51,400 ($54,900 less a basic exemption of $3500). Currently, the required premium, the employer and employee each paying half, is calculated at a combined rate of 9.9% (4.95% each).
The proposed new premium calculation is complicated:
- In addition to the regular CPP contribution rate on lower earnings, both the employer and the employee will pay a separate contribution rate of 4% on those top pensionable earnings.
- A new 1% premium will be phased in over five years, starting in 2019, increasing the lower premium rate to 5.95% by 2023.
- By the year 2025, the annual combined (employee/employer) contribution for taxpayers earning the maximum pensionable earnings of $82,700 will be calculated at a rate of 10.9% for pensionable earnings under $72,500 and 4% for incomes above that, up to $82,700.
- This results in a total contribution of $9,027 ($8,211 plus $816), $4,513.50 paid by the employee and $4,513.50 by the employer).
- That’s an increase of 77% over 2016 levels. Regular inflation increases would have accounted for $1,742 of that increase, so the changes add an additional $2,196 or 43% to the premiums payable annually in today’s dollars.
It’s a long period of prepayment for future retirees’ pensions. Under the proposed changes, CPP premiums will become much more expensive soon, with the increased pension benefits resulting from those changes not taking full effect until 40 years after the changes to premiums take effect—in 2065.
 2025 levels after inflation and proposed increase. A basic exemption will be applied to this figure.
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