How CPP is weathering the market storm
With stock markets around the world taking a bath this year, your RRSP has probably shrunk dramatically. Thanks to some foresight by former prime minister Paul Martin and some rare cooperation by provincial premiers during the mid-1990s, you’ll at least have a solid Canada Pension Plan to fall back on.
In 1997, then finance minister Martin and provincial premiers did something about it, boosting premiums and allowing the excess to be invested in the stock market by the newly created CPP Investment Board. Last year, the CPP Fund managed by the CPP IB grew by 16 per cent to $153 billion. In the last six months, in contrast, the TSX S&P Composite Index has fallen almost 15 per cent. According to the Chief Actuary of Canada, that means there will be enough money in the fund to pay out CPP benefits for at least the next 75 years.
Without that investment income, we’d all have to be digging a lot deeper to pay for our grandparents’ and parents’ pensions (the average retiree gets $512 a month from the CPP, but it can go as high as $960; Old Age Security and Guaranteed Income Supplements, paid out of general government revenues, can add another $900). And that’s just what Martin was hoping to avoid when, as federal finance minister, he pushed for reforms to the Canada Pension Plan in 1997.
“We had a bit of a magic moment here,” he said of the reforms, which were implemented following a rare degree of cooperation between the provincial governments. “To be quite honest, the provinces rose to the occasion.”
What Martin proposed, and what eight out of 10 provinces accepted, was an increase in premiums to 9.9 per cent of a person’s income, and a small cut in benefits. The resulting excess in premiums was allowed to be invested in the stock market, with the goal of boosting the CPP’s money to the point where it didn’t need to rely as much on current premiums to pay out benefits.
By and large, the strategy has worked, says professor James MacKinnon, head of the economics department at Queen’s University.
“What they did at that time greatly strengthened the CPP. . . The higher contribution rates and more market-oriented investments were a substantial move away from pay as you go,” said MacKinnon. “I don’t see any reason to use the world insolvency and the CPP in the same sentence.”
While some critics at the time suggested it was reckless to have a national pension plan subject to the vagaries of the stock market, Martin still insists that the decision was the right one.
“Look at the alternatives. The status quo had brought the CPP almost to its knees. The second alternative was to individually invest in pension plans, and that would be even more vulnerable to the market,” Martin said.
Besides, says the former prime minister, the proof is in the pudding. The pudding, in this case, being a report from the Chief Actuary of Canada projecting that the CPP Fund will have enough money to pay out pensions until at least 2086.
“It’s actuarially sound for the next 75 years, which is as far out as they go,” said Martin.
How CPP is weathering the market storm - Moneyville.ca
With stock markets around the world taking a bath this year, your RRSP has probably shrunk dramatically. Thanks to some foresight by former prime minister Paul Martin and some rare cooperation by provincial premiers during the mid-1990s, you’ll at least have a solid Canada Pension Plan to fall back on.
In 1997, then finance minister Martin and provincial premiers did something about it, boosting premiums and allowing the excess to be invested in the stock market by the newly created CPP Investment Board. Last year, the CPP Fund managed by the CPP IB grew by 16 per cent to $153 billion. In the last six months, in contrast, the TSX S&P Composite Index has fallen almost 15 per cent. According to the Chief Actuary of Canada, that means there will be enough money in the fund to pay out CPP benefits for at least the next 75 years.
Without that investment income, we’d all have to be digging a lot deeper to pay for our grandparents’ and parents’ pensions (the average retiree gets $512 a month from the CPP, but it can go as high as $960; Old Age Security and Guaranteed Income Supplements, paid out of general government revenues, can add another $900). And that’s just what Martin was hoping to avoid when, as federal finance minister, he pushed for reforms to the Canada Pension Plan in 1997.
“We had a bit of a magic moment here,” he said of the reforms, which were implemented following a rare degree of cooperation between the provincial governments. “To be quite honest, the provinces rose to the occasion.”
What Martin proposed, and what eight out of 10 provinces accepted, was an increase in premiums to 9.9 per cent of a person’s income, and a small cut in benefits. The resulting excess in premiums was allowed to be invested in the stock market, with the goal of boosting the CPP’s money to the point where it didn’t need to rely as much on current premiums to pay out benefits.
By and large, the strategy has worked, says professor James MacKinnon, head of the economics department at Queen’s University.
“What they did at that time greatly strengthened the CPP. . . The higher contribution rates and more market-oriented investments were a substantial move away from pay as you go,” said MacKinnon. “I don’t see any reason to use the world insolvency and the CPP in the same sentence.”
While some critics at the time suggested it was reckless to have a national pension plan subject to the vagaries of the stock market, Martin still insists that the decision was the right one.
“Look at the alternatives. The status quo had brought the CPP almost to its knees. The second alternative was to individually invest in pension plans, and that would be even more vulnerable to the market,” Martin said.
Besides, says the former prime minister, the proof is in the pudding. The pudding, in this case, being a report from the Chief Actuary of Canada projecting that the CPP Fund will have enough money to pay out pensions until at least 2086.
“It’s actuarially sound for the next 75 years, which is as far out as they go,” said Martin.
How CPP is weathering the market storm - Moneyville.ca
