Canadians: Your CPP and QPP Cheques Will Keep Coming

Canada’s public pension programs are sturdy and should ensure that pensioners will continue to receive their payments whatever economic conditions prevail.

In the OECD area, pension assets, which stood at 59% of OECD GDP in 2001, rose to a 105% share at the end of 2021, reports the OECD. In Canada, pension assets represent 166% of GDP, which puts it in sixth place after Denmark (233%), Iceland (218%), the Netherlands (213%), the U.S. (174%) and Switzerland (171%). In certain OECD countries, asset share is dismal: in Italy, they stand at 12.7% of GDP, in France, at 12%, in Germany, at 8%, at par with Kenya (12.9%) and India (9.2%).

The overall evolution has been quite positive for retirees, observes the OECD report. Average incomes have grown faster for older people than for their respective total populations. In Canada, income for those over 65 comprised 88% of the entire population’s income in 2000, and it rose to 92% in 2021. In the U.S. and the U.K., it has increased dramatically, from 83% in 2000 to 93% in 2021, and from 72% to 82% in 2021, respectively.

The Canadian Programs that Make Our Pensions Possible

Income for retirees, of course, includes everything from pension programs, public and private. Canada’s two public pension programs (Canada Pension Program, and Québec Pension Program), with their combined asset bases of $642.6 billion, cut out a 26% share of Canada’s $2.48 trillion 2022 GDP. CPP’s capital amounted to $539 billion at the end of March 2022, with QPP’s at $103.6 billion at the end of 2022.

“About 20 years ago,” recalls Travis Shaw, Senior Vice-President, Global Sovereign Ratings at DBRS Morningstar, “there were concerns for the burden of provincial finances, notably in Québec, Saskatchewan and Newfoundland. Unfunded obligations were quite significant, but with successive years and adjustments, their position has improved. Unfunded obligations are not a concern anymore.”

Projected Pension Returns Expected to Decline

Indeed, both the CPP and the QPP now appear quite healthy. Over the past five years, both programs have produced annualized returns of 10% in the case of the CPP, and 9.8% for the QPP, well above the country’s GDP growth. Projected returns, however, are expected to dial back substantially. For the next 75 years, a nominal rate of return of 5.79% is anticipated for the base CPP, and 5.37% for the additional CPP. For the base QPP, nominal rates of return of 6.1% and 5.8% are projected over the next 50 years for the respective regimes.

Although presently quite modest, the differences between the base and the additional regimes will come to be quite substantial. The base regimes, which go back to 1966, are mature with stable levels of contributions and benefits, their rate of contributions capped at 9.9%, split between employee and employer. The additional regimes, launched in 2019 and which address the future generations of retirees, have slightly increasing rates of contributions up to 2025. For example, the CPP will see contributions increase to 11.90% with an earnings ceiling increased to $79,400. Once mature, the enhanced regimes will increase the maximum CPP and QPP retirement pension by about 50%, as well as increase survivor and disability pensions.

In their present form, both public regimes are meant to supply about 25% of a retiree’s yearly revenue, with the other portions that round out retirement revenue coming from the Old Age Security (OAS) program, private pension plans and personal savings, explains Jean-François Therrien, Chief Actuary for the Régime des Rentes du Québec. “The aim is to raise the share of the programs to 33% of revenue,” he says.

There Will Be a Tipping Point
For the base regime, contributions are expected to increase from $61 billion in 2022 to $177 billion in 2050, while they will grow from $9.3 billion to $45 billion for the additional CPP. Contributions are expected to be higher than expenditures up to 2025; but after that, benefit payout will overtake contributions. Given the growing base of retirees and the dwindling base of supporting workers, does such a tipping point mean that benefits will slowly whither?

Not at all. This is when returns on the capital reserve will kick in. “When benefits grow more than contributions, we will still not touch capital reserves, only returns on that capital,” Therrien explains. That’s why total assets in the CPP are projected to grow from $544 billion at the end of 2021 to $2.2 trillion by 2050 when investment income is expected to represent 42% of revenues. On the QPP side, total yearly expenditures will rise from $16.9 billion in 2022 to $99.8 billion in 2071, but the capital reserve will still have grown to $846 billion.

Of course, projections are not reality. Actuaries need to make dozens of assumptions about factors such as future economic growth, inflation, demographic evolution, and changing retirement ages. In view of all these uncertainties, both pension programs have given themselves a reasonable amount of wiggle room. While the minimum contribution rate of the base CPP is 9.9%, the effective rate allowing projections to pan out is 9.56% until 2033, and 9.54% thereafter. That leaves a cushion of about 35 basis points to absorb shocks to the regime.

Meanwhile, the Office of the Superintendent of Financial Institutions (OSFI) recognizes that reality can cause projections to go awry. If average returns, for example, came in at 4.2% instead of 5.79%, then the contribution rate would need to be hiked to 11.22%. However, if returns clock in at 7.39%, the effective contribution rate would be pushed down to 7.89%.

In view of all these actuarial considerations, the CPP plan “is well funded and should meet its promises,” says Travis Shaw. “It’s healthy and viable in the long term.”