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The Canada Pension Plan Is Unfunded

The Canada Pension Plan (C.P.P.) should not be considered a pension plan. Typical pension plans are fully funded, and may even have a surplus. That is not the case with the C.P.P.. The C.P.P. is operated as a pay-as-you-go scheme. Or, as the Canadian government would describe it,
"the C.P.P. differs from a typical employer sponsored pension plan in that it is only partially funded." (p. 116)

Describing the C.P.P. as "partially funded" is being generous at best. Using the actuarial benefit method to determine the actuarial liability of the C.P.P., only 12% of C.P.P. liabilities are covered with assets, leaving an unfunded liability of $516.3 billion dollars.

The following table shows the C.P.P. predicament as at December 31, 2003:


Amount % of Liability
Actuarial Liability
$583.9B 100.0%
Market Value of Assets
$  67.6B 12.0%
UNFUNDED LIABILITY
$516.3B 88.0%

(Source: Actuarial Report, Canada Pension Plan as at Dec. 31, 2003, p. 116, Table 74.)


In other words, the Canadian government will have to make up a pension deficit $516.3 billion. It can legislate a lower value of actuarial liabilities. Typical ways of doing this are to increase the age at which pensions are drawn or to decrease everyone's pension income. Or, the government can increase your "contribution" - which has occurred to some extent with increased pension plan contributions. Yet another alternative would be for the government to increase the debt by $516.3 billion. None of these alternatives are acceptable.
Unfunded Pension Liabilities Matter

What about private companies who have unfunded pension liabilities? Do unfunded pension liabilities represent real future expenses? Yes.
Bulow, Morck and Summers (1987) conclude that companies with unfunded pension liabilities are penalized by the stock market with lower share prices. An unfunded pension liability will eventually have to be paid.

There is no free lunch. Either the government will have to decrease the payout due to current and future pensioners, or they will have to increase the funding for it. Increasing funding can be accomplished by raising contributions or underwriting debt. Decreasing the payout can be accomplished by changing actuarial assumptions or raising the retirement age.

A Partial Solution: the Alberta Pension Plan

Withdrawing from the C.P.P. to create an Alberta Pension Plan could offer the same benefits at a lower cost. It would also give Alberta control over the investment fund. According to the Fraser Institute, replacing the C.P.P. with an Alberta Pension Plan would save around
$530 million.

As noted by prominent Progressive Conservatives Ted Morton and Ed Stelmach, the creation of an Alberta Pension Plan would likely see the rapid development and growth of an Albertan wealth management industry, as such growth occurred when Quebec the Quebec Pension Plan.

The C.D. Howe Institute confirmed the results. Bill Robson, wrote that pension savings would be made because:
"[Alberta is] a high income province, a relatively young province, and because it's a province where people are less likely to tap into benefits on the disability side."
A Better Solution: the Alberta Pension Plan in an Independent Alberta

An Alberta Pension plan solves several problems. It solves the problem of Albertans' pensions being unfunded. It also creates a level of separation between the Canadian and Albertan government. In essence, it helps to protect Alberta as mentioned in the Alberta Firewall.

What it does not do is protect Albertans from Canadian government schemes to increase one time funding of the C.P.P. through taxes (as opposed to C.P.P. contributions) or by underwriting debt. The federal government is guarantor of the C.P.P., so it is quite possible that such an action could take place. If Alberta was an independent country, this could not happen.