Should Alberta Have Its Own Pension Plan?

Niels Veldhuis, the economist and Fraser Institute president says yes

In June 2020 Alberta’s “Fair Deal” panel recommended that a comprehensive plan be developed to withdraw Albertans from the Canada Pension Plan (CPP). While a wide-ranging study on withdrawing from the CPP has never been done, the evidence clearly points to potential tangible benefits for Albertans.

A 2019 Fraser Institute report—“Albertans Make Disproportionate Contributions to National Programs: The Canada Pension Plan as a Case Study”—documented Albertans’ contributions to the CPP and found that because of the province’s comparatively younger population (and fewer retirees) and higher incomes, Alberta workers accounted for 16.5 per cent of total CPP contributions while Alberta retirees consumed only 10.8 per cent of CPP expenditures. The result was a net contribution by Albertans—that is, contributions to CPP beyond the amount Alberta retirees received from CPP—of $27.9-billion from 2008 to 2017.

The report also found that, using 2018 contribution rates, the CPP is unsustainable without Alberta. The 2018 contribution rate of 9.9 per cent would have to rise to 10.6 per cent of pensionable earnings (split by the employer and employee) to make the CPP sustainable without Alberta.

Should Alberta establish its own standalone plan, the study found the province would have a lower contribution rate (as low as 5.85 per cent). This finding alone warrants more comprehensive study.

Furthermore, it’s worth noting that the CPP is not a low-cost pension. In 2016 Philip Cross, former chief economic analyst for Statistics Canada, compared CPP investment and administrative costs to those of other large public pensions. Of the seven pensions examined, the CPP had the highest costs. There’s a real possibility that an Alberta Pension Plan would cost less than the CPP.

Finally, the Canadian Pension Plan Investment Board, which manages the CPP’s more than $400-billion of assets, has more than 1,800 employees, almost entirely based in downtown Toronto. Having Alberta’s portion of these assets managed by an Edmonton or Calgary-based board would certainly contribute to Alberta’s economy and provide high-paying jobs. This is especially important at a time when Alberta is losing investment, significant businesses and head offices.

The CPP is one of many national programs that rely on disproportionate contributions from Albertans to stay afloat. Research that raises concerns about the CPP and notes the potential for an APP to outperform the current model clearly supports the “Fair Deal” panel’s recommendation that Alberta reconsider its involvement in the CPP. From reduced CPP taxes to the possibility of lower administrative costs, there’s more than enough evidence to warrant rethinking the status quo.

 

Ellen Nygaard, the retired pension policy adviser says no

Withdrawing from the Canada Pension Plan (CPP) and setting up an Alberta Pension Plan (APP) would be a huge mistake. Let’s consider three purported advantages to an APP: lower contribution rates, the end of Alberta’s “subsidizing” Canada, and the opportunity to invest in Alberta.

A small rate reduction might be possible in the short term thanks to our economy and relatively favourable demographics. But what’s more important is stability of contribution revenues. As is the case with the CPP now, most of an APP’s contributions would be used to pay current pensions. The excess would be invested so that earnings pay future pensions and stabilize costs. The key for sustainability is a growing employment earnings base, fuelled by wage and labour force growth. If momentum falters, increases in contributions, reductions in benefits or both could be required. The risk of reduced benefits or higher contribution rates in a separate plan is unacceptably high given Alberta’s dependence on volatile commodity prices. We’re better protected as part of a larger, diversified whole.

This highlights the second “advantage”—no subsidizing other Canadians. There is nothing unfair about the CPP, despite the implication. Albertans contribute at the same rates and receive a pension on the same basis as other Canadians. The purported “subsidy” comes from comparing annual aggregate Alberta contributions with pensions paid. Our aggregate contributions are higher relative to our population because we have higher than average wages and a younger population. Our overall pensions-paid figure is proportionately lower—even though our individual pensions are bigger—because we have relatively fewer seniors.

As for investing in Alberta, pension trustees are often told they should invest in the industries that employ their members. But trustees have a fiduciary obligation to act in the interests of beneficiaries by choosing the best investments and diversifying risk. If an Alberta investment meets those criteria, fine, but we already have more than enough eggs in one economic basket. A trustee’s obligation is to “future you”—a pensioner who needs a secure income. If a fund underperformed because of investment in a suffering Alberta industry, workers would face multiple blows: fewer jobs, lower wages, higher contribution rates and smaller pensions.

Meanwhile, the CPP Investment Board is globally admired for its investment returns and governance. Its board is chosen by the federal and provincial governments, its independence is protected by law, and its mandate is to invest solely in the interests of pensioners. How could an APP improve on this?

Pension arrangements for mobile workers might prove difficult to develop. A duplicate administrative bureaucracy would have to be created. Any gain would be temporary at best and illusory at worst. A separate APP would unquestionably be riskier for Alberta. Once done, it could not easily be undone.

 

Niels Veldhuis responds to Ellen Nygaard

It is a pleasure to engage in a respectful debate with Ellen Nygaard on such an important issue to Albertans. Ms. Nygaard made important contributions to pension policy during her 20-plus year career with the Alberta government.

In her opening comments, Ms. Nygaard asserted it would be a mistake to withdraw from the CPP and addressed three “purported advantages” from Alberta creating its own plan: lower contribution rates, the end of Alberta’s “subsidizing” Canada and the opportunity to invest in Alberta. I will address each in turn.

With respect to lower contribution rates, Ms. Nygaard agrees that a rate reduction would be possible but warns that it would be small and likely only short term. That is, a relatively lower Alberta Pension Plan tax would be dependent on Alberta’s economy (i.e., employment, wage and labour force growth). As indicated in my opening comments, I estimate contribution rates in Alberta could fall to as low as 5.85 per cent from the 2018 contribution rate of 9.9 per cent. That is a 40 per cent reduction in CPP taxes, and hardly small.

That Alberta could reduce its contribution rate while keeping its pension benefits at least equivalent to the CPP is due in large measure to three facts: Alberta has a bigger working-age population relative to its overall population, maintains higher employment rates, and enjoys higher average incomes than people elsewhere in the country. This has been the case for the past 40 years, regardless of the economic cycle, commodity prices or state of the provincial economy. Given this record, the prospect of the rest of Canada outperforming Alberta on these variables going forward seems unlikely.

In highlighting this risk, Ms. Nygaard assumes that the rest of the country would remain economically stable, but that wouldn’t necessarily be the case. Demographics are moving against Atlantic Canada and parts of Quebec, and other regions, such as southwest Ontario, are experiencing a pronounced, long-running decline in income and employment levels. That Alberta would dip below the Canadian average is doubtful. This is what would have to occur for Alberta’s contribution rate to exceed the rest of the country. Possible, but not probable.

Ms. Nygaard’s second claim is that there is “nothing unfair” about Alberta’s net contribution to the CPP. Our estimates show that the net contribution of Alberta workers to the CPP over and above what Alberta retirees were paid in CPP payments is approximately $3-billion per year, and was a staggering $28-billion from 2008 to 2017. “Fairness” is of course hard to define precisely. The Oxford dictionary defines it as “the quality of treating people equally or in a way that is reasonable.”

Let’s remember that the CPP is just one example of Alberta’s contribution to national programs. When the entire contribution to federal finances is examined, Alberta makes a much larger net contribution than any other province. From 2014 to 2018, Alberta’s net contribution to federal finances was $95-billion, and that was during an economic crisis in this province.

But ask yourself if the federal government and the other provinces that rely on Alberta’s contributions are treating Alberta in “a way that is reasonable.” Consider that over the past five years the federal government has implemented numerous policies that have greatly damaged Alberta’s economy, while other jurisdictions, such as BC and Quebec, have pursued policies to prevent pipeline expansion.

Federalist countries such as Canada are established because the component parts (i.e., provinces) expect the benefits of union to exceed the costs. For Alberta, those costs and benefits are not currently resulting in net gains for the province.

Finally, Ms. Nygaard argues that an Alberta-based organization managing a portion of the $400-billion in assets currently managed by Canadian Pension Plan Investment Board (CPPIB) might feel pressure to invest the assets in Alberta. But nothing prevents Alberta from setting up an asset manager whose governance is independent, at arm’s length from the political process and requires a globally balanced investment portfolio. Indeed, Norway’s sovereign fund is explicitly prohibited from investing in Norwegian assets. Nothing prevents Alberta from imposing similar constraints.

Ms. Nygaard asks if an Alberta Investment Board could improve on the current arrangement (CPPIB). Well, an Alberta Investment Board would contribute to Alberta’s economy and provide high-paying jobs. And it could potentially do it cheaper. As Philip Cross, former chief economic analyst for Statistics Canada has found, “there are no economies of scale for public pension plans” and “there may even be diseconomies of scale for larger public pension plans because of the complexity of implementing their investment strategies.” As such, there’s a real possibility that an Alberta Pension Plan would cost less to run than the CPP.

Despite Ms. Nygaard’s concerns, there’s more than enough evidence to warrant a rethink of the status quo.

 

Ellen Nygaard responds to Niels Veldhuis

My counterpart proposes reasons why we need to rethink Albertans’ participation in the Canada Pension Plan. Those arguments are poorly supported and fail the test of “What’s in it for regular Albertans?”

His first contention is that Albertans make “disproportionate” contributions to CPP. They are entirely proportionate on the measures that matter: Albertans pay the same contribution rates as all other Canadians, and receive pensions at exactly the same rates. Comparing aggregate contributions paid to aggregate benefits received by Alberta residents versus other Canadians is irrelevant and misleading—it reflects the relative size of the groups and their total cash flows, not fairness to individuals.

He cites his own Fraser Institute report, which estimates that contribution rates in an APP could be as low as 5.85 per cent. The report does not provide details on how that number was derived. It appears to be based on a time period cherry-picked to produce the most attractive results and ignores the hundreds of thousands of CPP members and retirees in other provinces who are former Alberta workers. And this low-ball rate does not reflect a drastic drop in interest rates and investment return expectations in the last three years.

Albertans should not pin their hopes on low contribution rates. CPP could also have lower contributions if it were not building up a reserve to keep rates stable. A very low Alberta contribution rate would create risk that increases would later be necessary because of our smaller population and volatile economy. The Quebec Pension Plan, with a labour force about twice Alberta’s, raised contribution rates to 10.8 per cent as of 2017 because it could not sustain the same benefits as the CPP at the same 9.9 per cent contribution rate.

Mr. Veldhuis claims that an APP might have lower administrative costs than CPP, based on other Fraser Institute reports. These studies are unpersuasive. They use as a yardstick the cost per dollar of assets in CPP and in five Ontario public sector pension plans, an apples-to-oranges comparison in which CPP’s costs look artificially high because its assets comprise less than one-quarter of its total liabilities (by design). Fairer comparisons would be per member or per dollar of liability.

Mr. Veldhuis’s study uses a calculation method at odds with the CPP’s rules for withdrawal of a province. A province may withdraw from CPP to set up its own pension plan provided that the replacement plan has comparable benefits. An APP would assume responsibility for the total liability for all pensions earned through work performed in Alberta from 1966 to the withdrawal date, regardless of where the people who earned those pensions now live. These liabilities would greatly exceed those for current Alberta residents. A fair share of the assets would be transferred, but would cover only about one-quarter of Alberta’s liabilities.

Some have suggested that Alberta could simply walk away from these legacy obligations and make a “fresh start.” To do this, an amendment to the CPP would be necessary, which would have to be approved by two-thirds of the provinces with two-thirds of the country’s population. Alberta would be very unlikely, even with the threat of withdrawing its contributions, to induce the federal government and the other provinces to approve such a bad deal.

CPP’s investment costs are high for some asset classes, but in this case, you get what you pay for. CPPIB is a world leader in expanding into non-traditional asset classes (e.g., infrastructure investments such as ports), which sometimes carry fairly high costs but are a small factor in contribution rates. This shift to alternative asset classes was prompted by declining traditional asset returns; an Alberta plan would be subject to the same pressure to look elsewhere for return.

Mr. Veldhuis suggests that Alberta would gain high-paying jobs in asset management. But what’s in it for regular Albertans? His point that Alberta is losing investment foreshadows the political pressure an APP would be under to invest in Alberta projects, a prospect already welcomed by APP advocates who seem unconcerned about investing prudently for pensioners.

Building a local economy is not the purpose of a pension plan. The purpose is to deliver promised pensions at a reasonable and stable cost, fairly distributed between generations, optimizing return with acceptable risk.

The case for an Alberta Pension Plan is short-sighted and rests on dubious assumptions, including the belief that Alberta could extract concessions from the rest of Canada. Establishing an APP would expose Albertans to unnecessary risk and instability in exchange for very small potatoes.

Over the years, CPP has been reformed, strengthened and expanded. Why would we walk away from that? Why expose ourselves to the risk that an Alberta government might someday declare the plan unaffordable and amend it to deliver a less safe and less generous pension?

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