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The Canadian Approach to finance retirement: A diversified approach based on fairness, solidarity and responsibility. Presentation to the Financial Management Institute of Canada, Ottawa. 23 November 2005. Presentation. Mandate of the Office of the Chief Actuary Canadian Aging

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slide1

The Canadian Approach to finance retirement: A diversified approach based on fairness, solidarity and responsibility

Presentation to the Financial Management Institute of Canada, Ottawa

23 November 2005

presentation
Presentation
  • Mandate of the Office of the Chief Actuary
  • Canadian Aging
  • Canadian Income Retirement System
  • Financing the Old Age Security and Canada Pension Plan
  • Framework of an Efficient Retirement System
mission of osfi mandate of oca
Mission of OSFI – Mandate of OCA

OSFI is the primary regulator in Canada of federal financial institutions and pension plans.

  • It protects policyholders, depositors, and pension plan members against any undue loss.
  • It provides services and actuarial advice to the Government of Canada through the Office of the Chief Actuary.
purpose of the cpp actuarial report
Purpose of the CPP Actuarial Report
  • Inform on the current and projected financial status of the Canada Pension Plan
  • Calculate the steady-state contribution rate
demographic assumptions
Demographic Assumptions

Age Profile of Canada's Population, 1951 & 2001

100

Female

95

Male

90

85

80

75

70

65

60

55

50

1946-1965 in 2001

45

2001

40

35

1951

30

25

20

15

10

5

0

300,000

200,000

100,000

0

100,000

200,000

300,000

  • Fertility

(Number of births)

  • Migration
  • Mortality

(Life expectancy)

Sources: Statistics Canada (population census and historical data), U.N. 2002 population projections, CPP seminars

fertility rate
Fertility Rate

1952-1976: 3.1

1977-2001: 1.6

(Children per woman)

Assumption CPP Report 1.60 in 2016+

net migration rate
Net Migration Rate

1.4%

Avg 1979-2003: 0.49%

Avg 1989-2003: 0.58%

1.2%

1.0%

Assumption CPP report:

0.50% 2004 to 2015

0.54% 2020 +

0.8%

0.6%

0.4%

0.2%

0.0%

1955

1965

1975

1985

1995

2005

2015

2025

increase in life expectancies
Increase in Life Expectancies

Life expectancy at 65

Difference

More contributors are expected to reach the retirement age of 65.

Retirement beneficiaries are expected to receive their benefit for a longer period.

working age and t otal p opulation canada
Working Ageand Total Population(Canada)

45

40

35

Total

20-64

30

25

20

Annual increases:

Total 20-64

D 1980-2000 +1.1% +1.4%

D 2000-2020 +0.8% +0.8%

D 2020-2040 +0.5% +0.1%

15

10

5

0

1980

1990

2000

2010

2020

2030

2040

2050

(in millions)

2003

After 2025, almost all projected population increase will come from migration.

canadian aging
Canadian Aging

Population 65 and over

(in millions)

(% of population)

12

25%

Increase of 150%

From 2005 to 2050

10

20%

8

15%

6

10%

4

5%

2

0

0%

1966

1976

1986

1996

2000

2010

2020

2030

2040

2050

Number

% of population

canadian aging1
Canadian Aging

Population 80 and over

(% of population)

(in millions)

4.0

10%

9%

3.5

Increase of 250%

between 2005 and 2050

8%

3.0

7%

2.5

6%

2.0

5%

4%

1.5

3%

1.0

2%

0.5

1%

0.0

0%

1966

1976

1986

1996

2000

2010

2020

2030

2040

2050

Number

% of population

projected number of years needed to go from 12 to 24 of 65 and over as a the total population
Projected number of years needed to go from 12% to 24% of 65 and over as a % the total population

25 years

30 years

40 years

60 years

65 years

65 years

Global Aging

1960 1970 1980 1990 2000 2010 2020 2030 2040

future labour shortage likely or not
Future Labour Shortage, likely or not?

For every 6 who leave, 10 enter

Ratio of 60-64 over 20-24

2003

More people leaving than entering after 2015

150%

125%

100%

75%

50%

25%

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

Canada

United States

Source for US: United Nations Projections, 2003

working age population ages 20 60 indexed 2000 100
Working Age Population (ages 20-60) (indexed 2000=100)

130

US

120

110

Canada

100

100

90

France

UK

80

70

Germany

60

Japan

50

Spain

40

Italy

2000

2005E

2010E

2015E

2020E

2025E

2030E

2035E

2040E

2045E

2050E

Source: UN World Population Prospects

canadian retirement security
Canadian Retirement Security

The Canadian retirement system could be viewed as about 40% to 45% funded.

123

Canadian retirement system with mixed funding approaches is well recognized in the world for its capacity to adapt rapidly to changing conditions.

- Full funding (RPP/RRSP)

- Partial funding (CPP/QPP)

- Pay-as-you-go funding (OAS/GIS)

public pension replacement rates
Public Pension Replacement Rates

Two-Earner Couple

One-Earner Couple

Single

% of Earnings replaced by OAS, GIS and CPP in 2004

120%

100%

80%

60%

40%

30%

40%

20%

0%

20,000

40,000

60,000

80,000

Pre-retirement earnings ($)

38% < $20,000

67% < $40,000

85% < $60,000

94% < $80,000

income replacement rate of public pension plans canada and united states 2002
Income Replacement Rate of Public Pension Plans (Canada and United States, 2002)

GIS

US Social Security: OASDI

Replacement Rate

OAS

CPP

Salary as Multiple of Average Wage

how do we position for the aging of the canadian population
How do we position for the aging of the Canadian population?

3.5%

3.5%

3.0%

3.0%

2.5%

2.5%

2.0%

2.0%

1.5%

1.5%

1.0%

1.0%

0.5%

0.5%

$28 billion in 2004; $37 billion in 2010; $110 billion in 2030

Between 2010 and 2030, the ratio of expenditures to GDP increases from 2.4% to 3.2%, driven largely by the retirement of the babyboomers.

0.0%

0.0%

1990

2000

2010

2020

2030

2040

2050

2060

2070

Evolution of Old Age Security Expenditures in % of GDP

2004

how do we position for the aging of the canadian population1
How do we position for the aging of the Canadian population?

Balancing the budget and putting the debt-to-GDP ratio on a downward track are good ways to ensure that OAS can be financed on a sustainable basis.

Total Government Financial Balances

% of GDP

Canada

G-7

4

2

0

-2

-4

-6

-8

-10

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Source: OCDE Economic Forecasts, No. 74 (December 2003); Department of Finance’s Calculations

how do we position for the aging of the canadian population2
How do we position for the aging of the Canadian population?
  • The CPP is a key pillar of Canada’s retirement income system that is worth saving.
  • The CPP must be affordable and sustainable for future generations. This requires fuller funding.
  • CPP must be invested in the best interest of plan members, and maintain a proper balance between returns and investment risk.
  • Available on the CPP website at http://www.cpp-rpc.ca/princips/principe.html

Principles to guide the federal-provincial decisions on the CPP :

(Agreed on October 1996)

effect of the 1998 a mendments
Effect of the 1998 Amendments

How do we position for the aging of the Canadian population? : CPP Steady-State Funding

  • Increase the contribution rate by 65% over 6 years (1997-2003) and keep the same rate thereafter
  • Moderate the future growth of benefits by 10% on a long-term basis (in 2050).
  • Creation of the CPP Investment Board to diversify the CPP reserve fund and increase investment returns (www.cppib.ca)
cpp steady state funding
CPP Steady-State Funding
  • The steady-state contribution rate is the lowest rate that can be charged that is sufficient to sustain the plan without further increase.
  • It is also the lowest rate that can be maintained over the foreseeable future and that will result in a Assets/expenditures ratio generally constant over a long period of time.
cpp steady state funding1
CPP Steady-State Funding

(Ratio)

8.0

7.0

9.9% Legislated contribution rate

9.8% Steady-state rate

6.0

5.0

4.0

In 2020, CPP/QPP assets are projected to be equal to 17% of the GDP.

3.0

2.0

1.0

0.0

2005

2015

2025

2035

2045

2055

2065

2075

Asset/Expenditure Ratio

slide24

CPP Steady-State Funding

  • The current legislated contribution rate is 9.9%.
  • The steady-state contribution rate is 9.8%.
  • If the legislated contribution rate is higher than the steady-state rate, the funding status of the plan will increase over time.
  • The higher this rate is set above the steady-state rate, the faster the plan will become more funded.
cpp steady state funding2
CPP Steady-State Funding
  • If the steady-state rate is higher than the legislated contribution rate AND if finance ministers cannot reach agreement on a solution, then:
    • Contribution rate increased by ½ of excess over three years, subject to maximum increase of 0.2% per year
    • Benefits frozen
    • At end of three years, next review performed to determine financial status of Plan.
cpp diversified investments
CPP Diversified Investments

Assumed Mix for 2005-2020

65% Equities (Variable Income)

25% Canadian Equity

30% Foreign Equity

10% Real Estate & Infrastructure

35% Fixed Income

34.5% Bonds

0.5% Cash

Assumed Mix for 2025+

55% Variable Income

15% Canadian Equity

30% Foreign Equity

10% Real Estate & Infrastructure

45% Fixed Income

44.5% Bonds

0.5% Cash

cpp diversified investments1
CPP Diversified Investments
  • CPP Assets invested solely in long-term federal bonds will lead to a steady-state rate of 10.5%.
  • Our expected investment policy of 65% variable income securities and 35% fixed income securities leads to a steady-state rate of 9.8%.
framework of an efficient retirement system
Framework of an Efficient Retirement System
  • Diversification of sources of retirement income
  • Diversification of funding approaches
  • Reasonable economic cost of public pensions (% of GDP)
  • Reduction of poverty among seniors
  • Reduction of income inequalities
  • Maintenance of standard of living at retirement