The Canada Pension Plan: Looking Back at the Recent Reforms

James E. Pesando looks at the 1998 package of reforms to the Canada Pension Plan (CPP) that the federal government and the provinces implemented after extensive consultation. Most significantly, these reforms included: a sharp increase in the combined employer-employee contribution rate, from 5.85 per cent in 1997 to the steady-state rate of 9.9 per cent in the year 2003 and beyond, which will result in a much larger reserve fund — estimated to rise to about five years’ worth of benefits; and the establishment of an independent, trusteed CPP Investment Board with a mandate to invest in marketable securities, including equities, in order to obtain a higher rate of return on the enlarged CPP reserve fund. The benefit reductions in the 1998 package were relatively modest. Pesando argues that the case for the 1998 CPP reform was made entirely in terms of intergenerational equity. Surprisingly, efficiency arguments played virtually no role in the debate. Pesando questions whether the actuarial assumptions with respect to inflation and rates of return that underlie the reforms are overly optimistic and whether additional increases in premiums or reductions in benefits will be required. In his view, the next round of debate on the reform of public pension programs is already under-way in other countries like the United States. He expects that the issue will soon resurface in Canada and that policy options like benefit reductions, raising the retirement age, and partial privatization of benefits, which were dismissed in the last round, will once again be on the table.