February 28, 2024 – Alberta’s plan to withdraw from the Canadian Pension Plan (CPP) in favour of establishing its own Alberta Pension Plan (APP) would gamble on the retirement security of Canadians, affecting individuals both within Alberta and across the nation, says a new report by the C.D. Howe Institute.
In “Pension Roulette: The Risks and Consequences of Alberta Leaving the CPP," author Bob Baldwin, Proprietor of Baldwin Consulting and Co-Chair of the Pension Policy Council of the C.D. Howe Institute, examines the financial assumptions of the proposed APP, assesses their reasonableness, and outlines the risks and consequences of the departure for Alberta and other provinces.
The APP’s appeal largely hinges on transferring 53 percent of the CPP assets, totaling $334 billion. Baldwin notes that this figure stems from a reading of the CPP legislation and suggests that alternative, justifiably smaller asset transfers could occur. With a reasonable transfer of assets, establishing an Alberta Pension Plan (APP) would entail assuming significant risks for relatively modest and uncertain long-term benefits.
The report outlines some basic aspects of the CPP that are relevant to the possibility of Alberta leaving the CPP. It examines the financial consequences of the claim, both for the new APP and the smaller CPP. Finally, it offers thoughts on the risks an APP might face, assuming the province withdraws a more reasonable amount from the CPP.
“The numbers don’t add up,” Baldwin explains. “If other provinces use the same rationale for Alberta’s current proposed withdrawal, the claims on CPP assets would be more than 100 percent. The question whether Alberta should leave the CPP in favour of an APP has consequences that extend beyond Alberta.”
Furthermore, Alberta’s tally of contributions made minus benefits paid to its citizens ignores labour mobility. People can work in Alberta and make contributions there but later move to another province and continue to collect benefits. Alberta’s demographics, with its younger, higher-earning workforce, are now favourable to keeping contribution rates relatively low. But over decades, demographics can change significantly, undercutting the province’s assumptions about future contributions.
Quebec's journey offers a warning. From the outset, Quebec chose not to participate in the CPP, instead managing its own Quebec Pension Plan (QPP), which is largely similar. Baldwin cautions that during the planning stages of the CPP and QPP, Quebec was believed to have a demographic advantage that was expected to persist for the next 30 years. However, the demographic benefits Quebec might have enjoyed in the mid-1960s have faded over time. As a result, Quebec has had to increase its QPP base contribution rate beyond that of the CPP to sustain benefits that are very similar to those of the CPP.
Lastly, major unanswered questions surround the governance of the APP, which must be addressed before Albertans decide on whether to transition from the CPP to an APP. Key questions include: How will the benefits compare to those of the CPP? Once established, will the APP’s structure diverge from the CPP’s? How will benefits and contributions adjust to shifts in Alberta’s economic and demographic landscape? Furthermore, will governance be managed as an internal government function, or will it operate at arm’s length?
He concludes: “In short, Albertans face a decision. However, they must be aware of the risks to the APP’s financial stability and to the interprovincial mobility of individuals entering or leaving Alberta. The Alberta government must clarify its long-term vision for the APP to facilitate an informed choice.”
For more information, please contact: Bob Baldwin, Proprietor of Baldwin Consulting and Co-Chair of the Pension Policy Council at the C.D. Howe Institute and Gillian Campbell, Communications Officer, C.D. Howe Institute at (416) 220 - 8470 or gcampbell@cdhowe.org.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.