Alberta’s Possible Departure from the Canada Pension Plan: A Review of the Issues

The Canada Pension Plan: Features at Issue

Since 1966, the Canada Pension Plan has provided reliable retirement, survivor, and disability benefits based on earnings from employment and self-employment in all provinces except Quebec. Quebec has operated a parallel plan (QPP). The CPP and QPP have had almost identical benefits from the beginning and there is complete portability between the plans. As Canadians move from sea to sea to sea, their CPP/QPP pension protection is continuous. The plans operate for the benefit of the employed and self-employed and have made an important contribution to improving the incomes of older Canadians. In 2022, the CPP paid $55 billion in benefits to 6.4 million beneficiaries.

A seldom-noted strength of the CPP is that key decisions regarding CPP finances, including benefits and contributions, require an agreement between the federal government and two-thirds of the provinces, including Quebec, with two-thirds of Canada’s population. This prevents changes to the CPP based on the whim of any newly elected government but has not prevented many constructive amendments to the Plan over the years.

The CPP legislation also includes a provision that allows a province to withdraw from the CPP on two conditions: 1) a comparable plan in place and 2) the province assumes financial responsibility for benefits earned in the province up to the time of withdrawal. To address the second condition, another provision of the CPP legislation defines what has to be paid to a province that withdraws from the Plan.

The Alberta Challenge

Whether Alberta should remain in the CPP has been on and off the political agenda in Alberta throughout the new millennium. The possibility of leaving has been seized with particular vigour by Alberta’s United Conservative Party (UCP) government since its election in May 2023. The UCP announced a referendum on the issue but has not disclosed what the wording of the referendum question will be, or whether the referendum would be binding.

Proponents of leaving claim that Alberta, on its own, could provide the same level of benefits as the CPP with a lower contribution rate because of its younger population, higher average earnings, and larger portion of the population in employment.

This argument includes the claim that Alberta pays more into the CPP than it takes out. This complaint reflects some misunderstanding of CPP financing rules. People with similar earnings regardless of their province of residence, contribute the same amount to the CPP and they get the same amount in CPP benefits as do Albertans.

Generally speaking, contributors in Alberta have higher earnings and fewer beneficiaries compared to the number of contributors. As a result, total contributions from Alberta will be greater than the benefits paid in Alberta today. This is not because of any form of “discrimination.” Rather, it is because of Alberta’s good fortune in resource development and its relatively younger population. Any reversal in those factors in the years ahead will put the shoe on the other foot. Changes in the resource economy and young workers leaving Alberta to retire elsewhere could change the entire picture. Asking for the money back now because of short-term good fortune is a bit like asking for a refund of home insurance premiums because your house didn’t burn down.

Two other factors that explain why contributions from Albertans exceed benefit payments to Alberta residents are worth noting.

1. Many workers in Alberta come from other provinces. People often move to Alberta for part of their working life and later move back to the province they came from. country. This flexibility allows Alberta industry to attract workers from across Canada. Benefits earned based on earnings in Alberta may be paid elsewhere. The Telus Health report acknowledges that an absence of appropriate data has prevented it from assessing the impact of this reality. (Telus Health purchased an actuarial firm formerly known as LifeWorks. It prepared a report on the impact of Alberta leaving the CPP in favour of an APP. The government of Alberta made the report public on September 21, 2023. We refer to the report as the Telus Health report).
2. Since the late 1990s, workers in all provinces combined have been paying more into the CPP than has been paid out in benefits. This is the consequence of a deliberate effort to build up the CPP reserve fund so that investment income could offset the effect of benefit payments increasing in response to population aging. Investment returns on the larger reserve fund will allow the contribution rate to remain stable.

Views that revolve around Albertans paying more into the CPP than they take out have been amplified by the Telus Health report.

Telus Health initially establishes an amount that should be paid to Alberta based on a literal reading of the key provision in the CPP Act. It concludes that Alberta should be paid $747 billion which is 118% of CPP assets. This fact exemplifies the flawed drafting of this section of the CPP Act. The report concludes, correctly, that this is an unreasonable amount.
The report then develops an alternative formula that leads to the conclusion that Alberta is entitled to 53% of CPP assets or $ 334 billion. About 16 % of CPP contributions over the years have been based on employment in Alberta.

Telus Health notes that the level of contributions that can support an APP with benefits comparable to the CPP goes down as the payment from the CPP to Alberta goes up. With a payment of $334 billion from the CPP, the report claims that an APP could start with a contribution rate of 5.91%.

The fact that a literal application of the CPP Act produces an absurd result is very important. It signals the reality that the size of the payment to Alberta will be established through a negotiating process that may bear little resemblance to the wording of the CPP legislation.

The amount of the payment and the method used to establish it based on the Telus Health report would be very damaging to CPP finances. It would be damaging to other provinces and – perversely – create an incentive for other provinces to leave the CPP while the Plan still has assets to claim. We guess that a payment to a departing province more closely aligned with the portion of contributions to the CPP over the years is a more likely outcome. That would mean payment in the neighbourhood of $100 billion. This could support an APP contribution rate of just under 9.0%.

The specific number aside, it is our view that payment to Alberta or any province leaving the CPP should meet three standards of fairness:

1. It should be fair to all provinces, not just the one leaving the Plan.
2. The assets payable to a single province that leaves the CPP should be neither more nor less than what it would receive if all nine participating provinces were to withdraw from the CPP at the same time. There should be no reward for being the first leaver.
3. The settlement contemplated in point 2 should be limited to the total of CPP assets. A payment of $334 billion to Alberta fails to meet these standards.

Concerns for Albertans: Benefits and Contributions

Much of the pitch for leaving the CPP is based on the notion that a CPP level of benefits can be provided at a lower contribution rate than that of the CPP. In the near future, that is likely to be true. Even then, the difference based on realistic assumptions about the payment to Alberta is rather small. But the APP will be making benefit promises that have to be fulfilled 50 and 60 years in the future. What matters is the long-term.

The experience of both the CPP and the QPP illustrates how difficult it is to accurately assess future prospects for the age structure of the population. In 1966 when the CPP and QPP were created, Quebec had a relatively young age structure. After nearly 60 years, its population is older, and it has a higher contribution rate than the CPP. Both plans have experienced unanticipated aging of plan members.

An APP is more vulnerable to financial risks than the CPP. Alberta has a smaller population. Its population is more influenced by interprovincial migration that can vary quite widely even in short periods of time. Its economic base is relatively narrow and more variable.
The larger size of the CPP reserve fund creates investment opportunities for the CPP Investment Board that an Alberta fund cannot match. The larger size of the CPP fund also allows it to pursue opportunities at a lower cost. (It is worrisome that some advocates of an APP seem to want a fund that would invest in the Alberta economy. This would amplify the risks beyond those that stem from the narrower contributory base of the plan compared to the CPP).

There is a substantial amount of risk in what is likely to be an irreversible decision. The benefits of diversification and scale would be lost.

There has not yet been a definitive statement from the government of Alberta that benefits similar to those of the CPP would be maintained over the long term. (Similar benefits have to be in place at the time of withdrawal. Telus Health says this position can be reversed in the future). In the past prominent Albertans with UCP tendencies have advocated scrapping the CPP in favour of mandatory individual savings accounts which provide less predictable benefits that can run out during retirement.

Benefit design is a very important issue. Albertans need to know what is going to be created. A design that remains similar to the CPP would facilitate establishing portability arrangements with the CPP and, in turn, facilitate labour mobility in and out of Alberta.

How Would Alberta Run the APP

One of the most important issues that is not resolved by the Telus Health report, and so far by the government of Alberta, is how an APP would be governed. As was noted above, the CPP governance structure prevents changes based on partisan political swings and the whims of a newly elected government. The question arises of how the government of Alberta plans to prevent that happening with an APP. What governance structure does the government have in mind? How would stakeholders be involved? Would non-governmental stakeholders have a role in governance?

Albertans also need to know how an APP fund would be managed. The governance structure of the fund and its mandate need to be made clear before the promised referendum. There is some unfortunate history in Alberta’s management of investment funds that points to the need to get these structures right. For the long-term sustainability of an APP, the fund management function needs to be put at arm’s length from the Alberta government of the day.
As noted above, the position of the Alberta government with respect to the APP benefits structure should be explained along with the financing rules that will apply.

The Telus Health report notes that the process of setting up an APP is complicated and costly. It could cost as much as $1billion.

The Impact of an APP on the Remaining CPP

As noted above, a payment to Alberta at the level and method suggested by Telus Health would be very damaging to the CPP – especially if it provokes other provinces to leave the CPP while there are still CPP assets to be claimed. Short of that, an exit from the CPP by Alberta will result in an increase in the CPP contribution rate in the near future. Based on its proposed payment to Alberta, Telus Health estimates that the CPP contribution rate will increase to 10.36%. This could provoke CPP financing rules that would result in a suspension of indexing of CPP benefits and an increase in contributions.

If, after leaving the CPP, Alberta was to adopt a benefit structure quite different from the CPP, this would make it difficult to establish portability arrangements and their absence could hamper interprovincial mobility. This would be of greatest harm to Alberta but would harm other provinces as well.

Concluding Thoughts

There is little to be gained in the near future by an APP versus the CPP in terms of a required contribution rate and there is significant risk for Albertans in the longer term. Current demographic advantages don’t come with guarantees for the future. A decision to leave will be irreversible.

If an APP benefit structure that is dissimilar to that of the CPP is adopted for the long term, it will be difficult to work out portability arrangements with the CPP and QPP. This may be damaging to labour flows in and out of Alberta. This would be damaging to the Alberta economy.

There is no easy way to determine the amount that should be paid to Alberta if it leaves the CPP. The strict wording of the Act is of little help. The amount to be paid will be settled by negotiations that are bound to be contentious. Under the circumstances, it would likely be best to amend the relevant section of the CPP Act to establish a reasonable solution in advance. This would provide a clear understanding of how this precedent-setting situation would be settled and provide guidance for the future. Negotiations with the existing wording of the CPP Act in place will not provide the needed clarity.

Amending the relevant section of the CPP Act would require an agreement between the Government of Canada and two-thirds of the provinces with two-thirds of the population. Given the potential threats to other provinces from an Alberta withdrawal from the CPP, they are unlikely to be forgiving.