About those “unfunded liabilities”

When it comes to the Canada Pension Plan, a major talking point from the right is that the CPP has “unfunded liabilities”, with the implication that is not affordable and financially unsustainable. This is nonsense, a scare tactic based on an accounting fiction that counts only future expenditures but does not count future revenues.

For example, John Robson writes in the Ottawa Sun just the other day:

An even bigger reason for worry [about Canada’s debt] is soft unfunded liabilities for things such as the Canada Pension Plan and the Canada Health Act. In 2006 the Chief Actuary of Canada formally estimated the unfunded liabilities of the CPP at $620 billion.

For starters, there is a certain amount of laziness on Robson’s part. The most recent report from the Chief Actuary of Canada was released in December 2010. It makes an estimate of “unfunded liabilities” of $748 billion, so Robson could have upped the scare factor just by using Google.

But what’s missing from this horror movie is that this is an artifact of CPP being a mostly pay-as-you-go plan. The report calculates all future payouts to beneficiaries, less current holdings of financial assets, but ASSUMES that all CPP contributions from workers present and future ceased. It is as if the CPP closed shop and took in no more premium revenues and simply paid out its legal obligations. On this basis, my telephone connection is an unfunded liability running thousands of dollars because I do not have that money in the bank to pre-fund those future phone bills.

In the real world, we have to consider both income/revenues and expenditures, particularly since the CPP is “intended to be long-term and enduring in nature,” according to the Chief Actuary. So the Chief makes a second calculation that does include future contributions from workers, and this basically wipes out the “unfunded liability”, though not entirely. By this second estimate there is still a shortfall of $6.9 billion, but this is over the coming 75 years and amounts of 0.3% of the CPP’s liabilities.

The gist of the Chief Actuary’s report is that the CPP is financially sound for at least the next 75 years. There was a time when this was not the case, and payouts exceeded contributions. In the mid-1990s, fixing the CPP was on the agenda and led to an increase in premium rates. This has meant that since 2000 contributions from workers have exceeded benefits paid, averaging about a $6 billion per year surplus in recent years.

This situation is not expected to last due to retiring boomers, so surpluses are being accumulated and invested in financial markets. A decade from now, those surpluses will be depleted and expenditures will exceed contributions, with the difference made up by income from accumulated assets. Those CPP assets are currently worth $143 billion and are anticipated to continue to rise, even amid negative cash flow from premiums less benefits. That is, only a share of investment income will be needed to keep payments up, and the rate of return on CPP assets would have to drop big time for the plan to start drawing down its capital at all.

So when the right cries “unfunded liabilities” do not panic. They are either mis-informed or deliberately trying to mislead you.

11 comments

  • On Robson’s line about the US debt-GDP ratio passing 100%, it’s worth noting that a third of this debt is held by the Social Security Trust Fund. Debt that the US government owes to someone other than itself is more like 70% of GDP.

  • There is an additional problem when discussing funding of retirement schemes. The issue is really about what percentage of real output (GDP) to devote to the elderly cohort. This does not require funding at all. The unfunded liability issue is a red herring served up by those that want to eliminate public plans. The income could be provided by a greatly enhanced pay as you go OAS. Nonetheless, having retirement income PARTLY dependent on work history is likely a good idea to encourage people to work – presumably some CPP/QPP-like arrangement for benefits based on lifetime income and years of work.

    However, the accumulation of financial assets by the CPP Investment Board amounts to pointless speculation. Again, the issue is about what share of output (GDP points) to direct to the elderly at any point in time.

    Currently we have a system that is excessively dependent on private savings (pension plans and individual savings). It is unnecessary and constitutes a subsidy to the financial industry. Surprise, surprise!

    An additional problem with the private system is that it removes large quantities of financial assets from the national income stream thereby reducing aggregate demand. The reduction in aggregate demand reduces economic activity and increases the necessity for more spending by the federal government to offset it.

  • Re Erin’s comment:

    As of March 2011(in trillions of $);

    outstanding US gov’t debt: 14.3
    held by US gov’t accounts: 4.6
    held by Federal reserve banks: 1.4

    A total of $6 trillion was held by US government agencies in March 2011, or 42% of the total.

    Source: http://www.fms.treas.gov/results.html?cx=014540195463098743471%3Aa6dxixgppgu&cof=FORID%3A11&q=ownership&sa=Search&siteurl=www.fms.treas.gov%2Findex.html#1043. Click on Ownership of Federal Securities.

    In any case the US debt issue is a farce. The US (and Canada, the UK, Japan, etc, etc) can always create whatever money it needs to pay its debts or any spending. For instance Alan Greenspan last week: http://www.cnbc.com/id/44051683

  • Ironic you should write this today Marc. I was just out at the local convenience store and the failings of dealing with retirement hit me square in the face- kind of really hit me right between the eyes.

    There I was buying some milk and while I was at the cash an older gent I would say in his mid 70’s walks up to the slushy machine, and starts messing with it. I thought at first, how funny it was for an old guy like that to want to pour himself a slushy, and I kind of had a laugh. BUt then I realized he was starting with a brush to clean the machine. I then realized he was not a retired old gent enjoying a mid summer treat, but an older gent trying to make ends meets. It looked given the simple brushes and rags to be a bit of a lower skilled job and given it was Macs, I am sure the pay was minimum wage.

    Not the first story, but seeing older gents men and women doing such work in the late parts of life to me is a real sign of social failings. But it is a sign of things to come, given where the right wants to take CPP reforms.

    Sure I can hear all the naysayers, going on about how this guy may actually enjoy doing something/ he should have saved for retirement/ (every tea party excuse but the truth). As a civilized society human beings at some point we should be allowed to get out of the machine. Just another in the long attack on the working class.

    I am all for senior’s enrichment and developing a physical and cultural infrastructure for allowing citizens to enjoy their golden years, but cleaning out a slushy machine for minimum wage in my mid 70’s is hardly reaching towards that goal.

    Reserve army of labour is more like it.

  • Keith: There is also a good gender argument for a general transfer to seniors (i.e. valuing non-market caring work). I agree on the financial speculation part of the CPP inv’t bd. The rationale for it is that otherwise pay-as-you-go rates would chart up to 11.4% — though not until 2085!

  • Leanne MacMillan

    Excellent rebuttal!

  • ps.There is no unfunded liabilities in taxpayers cpp plan because it is not a government defined plan.If the cpp plan runs out of funds that that.It is only defined plans which are monolipized by FEDERAL AND PROVINCIAL employees plans that have current unfunded ongoing liabilities.So let”s have a debate on where are we going to find those billions of dollars.

  • Shirley, you are correct that federal and provincial public service pension plans is a different matter from CPP, but your concern that these plans represent unfunded liabilities is misplaced.

    In the case of federal, the actuarial report shows that there is currently an excess of assets over liabilties, i.e. the feds do not have any unfunded liabilities.

    Here is the report:
    http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/reports/oca/PSSA08_e.pdf

    In fact there seems to have been some controversy that Chretien raided the surplus in the fund back in 2000. Not sure of all the details but this article speaks to it:
    http://www.canada.com/business/Public+service+unions+continue+pension+fight/4734879/story.html

    Provincially, I’m no expert but I checked on BC and its plan too appears to be more than fully funded:
    http://www.bcimc.com/publications/Default.asp

  • Marc:
    Quite right regarding gender.

    With respect to the issue of increases in transfers over time or inter-generational issues, it still all comes down to how much output is devoted TODAY to the elderly cohort. No real resources such as oil, titanium, or food are being stored and used in 20, 30, or 40 years time. Setting aside financial assets ahead of time does not change that in the macro sense so the share of output might as well come from general federal government spending TODAY.

    There is also a problem setting aside financial assets today for the future. It constitutes a drag on current aggregate demand and reduces incomes and jobs to the current working cohort, in particular the young. It would be best to maximize current output, investment and education so that the output that needs to be distributed in the future is as large as possible.

  • Marc.If my understanding of government unfunding lialiabilities is misplaced.Please explain why Ontario taxpayers keep topping up the Ontario teachers PENSION plan every year to the tone of 1.5 billion dollars when they have 115 billion dollars under assets.THANKS

  • The article says: “On this basis, my telephone connection is an unfunded liability running thousands of dollars because I do not have that money in the bank to pre-fund those future phone bills.”

    This is so irrelevant. With your phone bill, if new technology came out and you chose to no longer use a phone, you would not have to pay anything. Your future phone bill is not a debt.

    However, all Canadians who have paid into the CPP program are entitled to a pension. That is a liability.

    If the CPP is not funded, then it is really just seniors welfare program. Let’s start calling it what it is. Along the same lines, our CPP payments are really just a tax.

    If we want to call it a pension, then it must be funded, and we must insist that the $700,000,000,000 unfunded liability get repaid.

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