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Any reasonable CPP asset split would reduce contribution rates for Albertans

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Any reasonable CPP asset split would reduce contribution rates for Albertans

The politicking around a potential Alberta pension plan, which this week involved the prime minister and Leader of the Opposition, is ramping up. There’s been particular debate about the province’s share of existing CPP assets. What’s clear, however, is that any reasonable division of assets would reduce contribution rates for Albertans.

Specific legislation (Section 113(2) of the CPP Act) governs the withdrawal of any province and the asset distribution calculation, which focuses on the amount paid into the fund by Albertans plus investment returns (net) minus the benefits paid out of the fund and administrative costs.

As stated in the recent report on a potential pension plan for Alberta, a literal interpretation of the legislation would suggest that investment returns should be applied to CPP contributions, but not to benefit payments and CPP administration costs. Applying this calculation, Alberta would receive an “unrealistically large” asset transfer of $747 billion from the CPP by 2027—more than the CPP’s total base assets. As such, the report uses an alternate (and reasonable) interpretation, which applies investment returns to the net cash flows of contributions, less benefit payments and CPP administration costs. Applying this calculation, the report estimates a total asset transfer of $334 billion to Alberta—roughly 53 per cent of CPP base assets.

Based on this division of assets, Alberta workers could receive the same benefit from an Alberta pension plan as they do from the CPP, but with a contribution rate (i.e. tax) at 5.91 per cent instead of the CPP’s current base contribution rate of 9.9 per cent. That’s equivalent to $2,850 in savings to each Alberta worker annually.

But why would Albertans pay less in contributions than they currently do?

Simple—Alberta has a comparatively younger population (i.e. more workers vs. retirees) and higher average incomes (i.e. higher level of premiums paid into the fund). As such, Albertans have paid significantly more into the CPP than its retirees have received in return. (Interestingly, the report assumes Alberta’s demographic advantage will disappear over time, an unlikely development given historical trends, which means the Alberta plan’s contribution rate could be even lower i.e. the savings could be even larger).

Again, this calculation has been met with some disagreement—many commentators have suggested it’s simply unrealistic (nor “fair”) that the CPP turn over this share of assets to Alberta, regardless of the current legislation. It may well be that Alberta has to fight with Ottawa over its share of assets. But one thing is certain—any reasonable division would result in lower contribution rates for Alberta.

For perspective, economist Trevor Tombe calculates several alternative scenarios based on a much lower division of assets for Alberta (less than half the report’s estimate). In his baseline scenario, which assumes the share of CPP assets allocated to Alberta would be 20 per cent ($120 billion in 2025), Alberta’s contribution rate would fall to 8.2 per cent—1.3 percentage points lower than the CPP—equivalent to $836 in savings annually per Albertan.

If assets allocated to Alberta were 25 per cent of CPP assets in 2025 ($150 billion), the rate would fall even further to 7.8 per cent. Again, these numbers are based on a significantly lower division of assets than the current legislation suggests.

There’s still lots to work out when it comes to investigating the potential for an APP. But again, regardless of the final division of assets, Albertans would almost certainly pay less in contributions for the same retirement benefits.

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