Evidence of meeting #45 for Finance in the 45th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was subamendment.
A video is available from Parliament.
Senior Director, Income Security, Department of Finance
I believe you're referring to the real return rate of assumption for the investments.
Senior Director, Income Security, Department of Finance
The chief actuary assumes, as part of making her analysis for the financial health of the plan, a real return rate of 4.05% for the investments.
Conservative
Philip Lawrence Conservative Northumberland—Clarke, ON
My understanding is that if that number were to drop to 3%, it would become unsustainable if that was over the prolonged period.
Senior Director, Income Security, Department of Finance
I can't speak to the 3% rate. What I can say is that, in the 32nd actuarial report from the chief actuary, there are estimates with regard to having lower average rates. The chief actuary, in her report, provides assessments or scenario analyses, including if there are lower average returns. I'm on page 11 of the 32nd actuarial report. It notes some scenario sensitivity analysis if average rates are at 2.45% for the base CPP, and then it models what the assumed minimum contribution rate would be in that scenario. That would be for the entire length of the 75-year horizon that the chief actuary is looking at. There's also sensitivity analysis for if returns are higher than the 4.05% rate assumed.
Conservative
Philip Lawrence Conservative Northumberland—Clarke, ON
I am also pretty sure that in my research I saw—and correct me if I'm wrong—that in four years' time, there will be more payments out than contributions to the CPP. Is that correct? Right now, there are more contributions going in than there is money going out. Is that correct, Mr. Stuart?
Senior Director, Income Security, Department of Finance
That is correct. The current state of the plan is that there are more contributions coming into the plan than there are benefits going out, but in the near term that will flip. Contributions will be slightly lower than benefit payments, but we also have the investment income that will supplement the contributions.
Conservative
Philip Lawrence Conservative Northumberland—Clarke, ON
At 4.05%, which I agree is a relatively conservative projection, it is sustainable for the next 75 years, but it gets back to my point that if it were to drop, it could become unsustainable. That is not—I'm going to guess what your response is going to be—the historical record of the CPP. I believe the investment rate is more like 9% or 10%. What would be the historical rate of return on the CPP? Just broad strokes is fine.
Senior Director, Income Security, Department of Finance
I have it in my notes, but I think, on average, we're at about 8% for the investments from the Canada Pension Plan Investment Board.
With regard to your question about contributions, I will note that in the 33rd actuarial report, which was tabled yesterday by the Minister of Finance and prepared by the office of the chief actuary, “contributions are projected to be 4% lower” if Bill C-30 is approved or if the rate reduction is put forward and approved. Contributions would be lower than benefits “four years sooner” with the proposed rate reduction.
Conservative
Senior Director, Income Security, Department of Finance
I'm sorry. I'll make that a bit clearer.
In the 33rd actuarial report that was tabled and published yesterday, contributions, if Bill C-30 is approved, “are projected to be lower than expenditures four years sooner” than if the plan had not been made.
Senior Director, Income Security, Department of Finance
I'll restate that, with this change, we would have about 30 basis points of a buffer between the minimum contribution rate and the legislated rate, which would be higher than what we've had over the last 25 years, when the buffer has averaged about 10 to 15 basis points.
Conservative
Philip Lawrence Conservative Northumberland—Clarke, ON
Okay.
Let me be clear about something. I don't think there is a crisis in the payment of CPP in the near term—and I don't think any right-thinking person thinks that—but I do think it merits at least a bit of discussion. I'm not even saying that it's necessarily an issue, but I think Canadians should be aware that the cushion has been reduced.
I would like to go over a couple of the numbers so that Canadians can be aware of the impact of the reduction. In my research, I became aware of a concept called “assets to expenditures” or, in other words, how many years the assets of the CPP could fund its liabilities.
Underneath it previously, with the 9.9 to the 9.5, it was predicted to be 14 in 2050. That comes down to 13. By 2100—I certainly won't be around in 2100, but I hope my children will be—it was predicted to be 20.7. That moves down to 14.5, significantly reducing the cushion, as I've said. This isn't in the near term but is more for other folks' children. As Chief Carr of the Hiawatha people told me, a leader should always be looking seven generations ahead.
Are my numbers correct there in terms of the impact or are they just broad strokes?
Senior Director, Income Security, Department of Finance
Your numbers would be correct. These are laid out in the 33rd actuarial report on page 14. It provides a chart showing where the assets over expenditures ratio would have been and where it would be projected to proceed to if Bill C-30 is approved.
Conservative
Philip Lawrence Conservative Northumberland—Clarke, ON
Do you backdate the numbers in the actuarial assessment against historical events? If we were to see COVID happen again—God forbid—or the great financial crisis, would you know what impact that would have on CPP?
Senior Director, Income Security, Department of Finance
I would say that in fulfilling the chief actuary's duties to assess the financial health of the plan, the chief actuary looks at events and models different scenarios and analyses to give a sense of what the impacts would be on the financial health of the plan.
In the 32nd actuarial report, there are sensitivity analyses provided that would show different modelling scenarios or what adverse economic effect could happen on a plan.
Conservative
Philip Lawrence Conservative Northumberland—Clarke, ON
My understanding is that a prolonged recession of, say, four years—granted, this would be out of the norm.... We've basically been in a per capita recession for the last decade. With immigration levels slowing, that could be just a straight recession, if the last 10 years are any example.
If we go for more than four years of an economic contraction—and for three of the last four quarters, of course, this economy has contracted—I don't think it's completely out of the realm of possibility that this would actually put us to an MCR of 9.56, which then would put us to the point where we're unsustainable. I'm not asking you to do that math right in front of us. I just want it in broad strokes.
By the way, Mr. Stuart, you've been great. Your testimony has been awesome, and I think it shows you...very well.
Just in broad strokes, could you answer? That's my final question.
Senior Director, Income Security, Department of Finance
I would refer again to the 32nd actuarial report, which has different scenario analyses for economic growth. I'm looking at the summary of highlights page: page 11 of the 32nd actuarial report. There is a scenario presented for, if economic growth is assumed to be lower, what the impact would be on the MCR. The figure I have here is 9.58. I believe that's the same modelling scenario you're referring to.
Conservative
Philip Lawrence Conservative Northumberland—Clarke, ON
Thank you very much.
At this point, I'd like to move a subamendment.
As I hope my questions have demonstrated, although the work by the chief actuary has been excellent and they have an excellent representative here, I think it does merit a review to see the impact of the reduction from 9.9 to 9.5, but I don't think it needs to be done necessarily.
I will, of course, put this in writing, Madam Chair, but where I would put an amendment is that if in fact there is a technical recession of two or more years, that would trigger an automatic review of the impact of the reduction from 9.9 to 9.5.
Liberal
Conservative
Philip Lawrence Conservative Northumberland—Clarke, ON
Following Mr. Turnbull's example, we will not be giving UC.
Liberal
The Chair Liberal Karina Gould
Okay, we will briefly suspend while we await that written subamendment. Once we have it translated, we'll send that to everyone.
Thank you very much.