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Last month I posted a short advisory on LinkedIn saying that I would take a serious look at the math around Canada Pension Plan benefits and the merits of taking the benefit early vs postponing to a later date. 

Lots of people take CPP as soon as they can, and in many cases, it is probably not the optimal strategy for lifetime financial security.  However, at the other end of the spectrum, many actuaries are prone to saying “you should postpone CPP to age 70” and when pressed they will admit that decision depends on a whole bunch of factors but the message in the media is not nuanced and that messaging is allowed to persist since its likely good advice for many – but for sure not all.

I am so convinced that it’s a highly personalized decision – but also a very complex decision – that I committed to building out a spreadsheet to help evaluate the right answer for Team Nunes.  I didn’t get too far down the road before I came to discover that after contributing at the maximum for 37 years that I am not currently entitled to the maximum benefit.  I will hit the maximum sometime in between now and 2028.  On principle, I am not starting CPP until I get to the maximum, so I have some time to do the math.

Boom, Bust and Echo

Anyone remember the book? 

Anyway, someone on LinkedIn jumped in commenting on my post to say that it didn’t matter when I decided to take CPP because the whole program was “going bust”.  I thought that comment was a little over-the-top, so I nudged back to ensure that no one in my ecosystem mistakenly thought it was true or that I supported that view.  Much to my surprise, Dr. Doom doubled down on his opinion citing some demographic data, while accurate, is fully understood by Canada’s Chief Actuary and therefore already part of the well-planned funding of our collective CPP benefits.

I pushed back again and several of my colleagues who saw the conversation/debate/argument jumped in with facts and support for my view.  The bottom line is CPP is not going bust.  CPP benefits and contributions may see incremental adjustments over time because we must be honest that if we are making assumptions about how the next 75 years will go, we are bound to be wrong in a multitude of ways. 

But the way we fund the Base CPP has a long-term self-correcting mechanism, and it is improbable that we would see significant contribution increases like the ones we phased in starting in 1987 and with the significant benefit increases that phased in starting in 2019, it is unlikely that any elected official will want to reduce benefits to backtrack on that strategy/commitment.

Long-Term Planning

One thing for sure – the funding of the CPP is monitored closely with any adjustments to benefits or contributions carefully considered.  I have been reviewing and writing about the funding of the CPP since 2013.  My commentary on the 31^st (link), 30^th (link), 27^th (link) and 26^th (link) actuarial reports are still available on our website.  For those keeping score – the 28^th and 29^th reports were in support of the recently expanded CPP and I didn’t put them under the microscope.

Just before the holidays, the 32^nd Actuarial Report on the Canada Pension Plan was released.  As usual, it’s a lengthy report considering every important angle on how things might go for the next 75 years.  Let me start by hitting the highlights for Base CPP for those of you that don’t want to spend the time reading the report:

• The number of retirement beneficiaries are expected to increase from 6.4 million in 2025 to 9.5 million in 2050
• Contributions are expected to be higher than expenditures up to and including 2030
• The minimum contribution rate is 9.21% through 2033 and 9.19% thereafter
• The long-term fertility rate is assumed to be 1.35% and immigration is assumed to be 0.72%
• There are many scenarios considered and depending how the world unfolds, contribution rates might slowly rise or fall by a few percent of covered payroll.

Let’s look at each of these a little closer

Beneficiaries – it has taken us 60 years to get to 6.4 million beneficiaries and in another 25 years we will add another 50%.  Considering that we are pushing the baby boom through retirement I don’t find those numbers startling.  More interesting – if we go back to the 2012 report, we were expecting 10.2 million beneficiaries by 2050.  On one hand, the projection to 2050 remains steady – on the other hand why is the projection 7% lower? 

I wouldn’t expect higher mortality expectations reducing our collective futures and surely all the 2050 beneficiaries were born by the time the 2012 report was issued.  Could the message about deferring CPP past age 65 be making an impact?  I don’t think this is anything to worry about and the variance is probably good news for continued affordability of the program – to me it’s just an interesting question for the actuaries in the crowd.

Contributions – in the 2012 report, cashflow was expected to turn negative around 2022 – in the most recent report, cashflow doesn’t turn negative until 2030.  I am not sure of the explanation here either, but it seems consistent with the slower rate at which we expect to add beneficiaries.

MCR – or ‘minimum contribution rate’ for those not part of my nerdy world.  Here is the idea – we are committed to contributing our 9.9% between ourselves and our employers – but the ‘actuarial contribution rate’ is going to move around as experience unfolds and assumptions about the future change.  It doesn’t make sense to change contribution rates all the time – so as long as the minimum contribution rate is less than the 9.9%, we are good to go.

The long-term MCR in 2012 was 9.84 and by 2024 it has fallen to 9.21 – my guess it is the result of good investment performance for 10+ years and evolving assumptions about the future.  In theory, at some point if the MCR keeps dropping then governments can step in and reduce the 9.9%.  I think the probability of that happening is close to zero.  More likely, if things continue to go favourably, governments will likely get together to improve benefits one way or another.  The National Institute of Aging wants to introduce “money back guarantee” for those deferring CPP to eliminate the ‘loss aversion’ that drives many to take CPP ‘as soon as they can get it’.  I have said many times that if you add a benefit you have to take a benefit away or increase contributions – but maybe a declining MCR is the free lunch for which the NIA is looking.  I am not saying I support this change – I am saying it should be on the list of changes to be studied as things unfold.

Fertility and Immigration – These are the assumptions that often gets overlooked.  This really is the domain of actuaries and at the heart of long-term projections in terms of people – both contributors and beneficiaries.  In the 2012 report long-term fertility was assumed to be 1.65% and net migration was assumed to be 0.6% of the population.  Now 1.35% and 0.72% means we are expecting fewer babies and more immigrants to help maintain the balance.

Statistics Canada reported the fertility rate at 1.25% in 2024 – and as I have said before – this is probably the assumption I wonder about the most.  For a whole host of reasons, women are finding legitimate reasons to not have children – or maybe have only one child.  I am not sure how far this rate can fall.  But I am not panicked, because with a sound immigration policy, we can bring into Canada young workers to fill the holes left by the babies that we aren’t having.  And fewer workers overall will mean fewer beneficiaries in the long-term.  What really matters is how quickly these changes happen because in some part the current generation of retirees is depending on the current and next few generations of workers to help keep the CPP properly funded.

Scenarios and Uncertainty – by now you may have seen headlines saying ‘everything is fine with the CPP’.  That is largely true.  But we shouldn’t forget that ‘fine’ is determined based upon a bevy of assumptions and only time will tell if we have the contribution-benefit balance right or if we need to tinker in one direction or another.  My version of fine is that I don’t see anything that has me in panic mode.

CPP2

There is an entire set of supplemental reporting around how the ‘additional CPP’ is being funded.  The funding program for CPP2 is different and intended to be a ‘fully funded’ model rather than only partially funded with reliance on future generations as is the case for Base CPP.

I had thought that I would provide a review of this newer component of CPP – but as you can see from the length of this commentary – that is an exercise for another day.