The Canadian Response to the Evolution of the Retirement Security Net Presentation to the Northwind Professional Institute Langdon Hall, Cambridge 27 October 2005

Presentation Mandate of the Office of the Chief Actuary Canadian Income Retirement System Canadian and Global Aging CPP Steady-state Funding Framework of an Efficient Retirement System

Canadian Retirement Security 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) 123 The Canadian retirement system could be viewed as about 40% to 45% funded.

US Social Security: OASDI Salary as Multiple of Average Wage 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

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

Assumption CPP Report 1.60 in 2016+ Fertility Rate (Children per woman) 1952-1976: 3.1 Assumption CPP Report 1.60 in 2016+ 1977-2001: 1.6

Assumption CPP report: 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 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.

Canadian Aging Population 65 and over 12 25% Increase of 150% (in millions) Population 65 and over (% of population) 12 25% Increase of 150% From 2005 to 2050 10 20% 8 15% 6 10% 4 5% 2 0% 1966 1976 1986 1996 2000 2010 2020 2030 2040 2050 Number % of population Increase of 250% for 80+

Global Aging Projected number of years needed to go from 12% to 24% of 65 and over as a % the total population 30 years 40 years 25 years 60 years 65 years 1960 1970 1980 1990 2000 2010 2020 2030 2040

Future Labour Shortage, likely or not? Ratio of 60-64 over 20-24 2003 150% More people leaving than entering after 2015 125% 100% For every 6 who leave, 10 enter 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) 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

Effect of the 1998 Amendments How do we position for the aging of the Canadian population? : CPP Steady-State Funding Effect of the 1998 Amendments 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 Asset/Expenditure Ratio 9.9% Legislated contribution rate 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 2005 2015 2025 2035 2045 2055 2065 2075 9.8% Steady-state rate In 2020, CPP/QPP assets are projected to be equal to 17% of the GDP. (Ratio)

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 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.  

How do we position for the aging of the Canadian population? Evolution of Old Age Security Expenditures in % of GDP 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 1990 2000 2010 2020 2030 2040 2050 2060 2070 2004 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. $28 billion in 2004; $37 billion in 2010; $110 billion in 2030

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