While the case for creating an Alberta Pension Plan looks straightforward on the surface, it’s far from a slam dunk, according to a memo published by the C.D. Howe Institute.
In the memo responding to Alberta Premier Jason Kenney’s plan to consult on whether the province should withdraw from the Canada Pension Plan and start its own pension system, Ottawa-based pension expert Bob Baldwin weighed the arguments.
Since Alberta is a relatively young population, he wrote, many argue the province could create an APP that would be similar to the CPP in its benefit provisions and financing with a lower contribution rate. This same group says the contribution rate for base benefits — those in place before the creation of the CPP’s enhanced benefits currently being phased in — in an APP could be about two percentage points or more below the CPP rate of 9.9 per cent.
“So convinced are some prominent Albertans of this line of argument that the advantage of a separate APP has been called a slam dunk,” wrote Baldwin. “If Alberta could be sure of staying forever young, this argument would have merit. As always, however, there is uncertainty about the future and, in Alberta’s case, there is real uncertainty about its ability to remain forever young.”
While Alberta’s demographic factors are similar to Canada as a whole, noted the memo, the province has experienced a very large inflow of young interprovincial migrants moving for jobs in the strong oil and gas industry. However, referring to challenges for the future, it said any stagnation or even contraction of that industry will bring a significant decline in inbound migration, undermining “Alberta’s relatively youthful status and its lower-cost APP benefits.”
In the memo, Baldwin put forward Quebec as an example of this type of demographic gamble. When it created a separate Quebec Pension Plan, the province was relatively youthful, he wrote, though that’s no longer the case and the QPP contribution rate for base benefits is higher than the CPP rate.
The memo also said it’s worth noting some analyses that promote the advantage of an APP by focusing exclusively on the base benefits and ignoring the new enhanced CPP benefits. “Alberta’s demographic advantage is basically irrelevant to the additional benefits because they are to be fully funded with invested contributions and returns.”
The cost advantages of the enhanced benefits will be determined by the rates of return garnered by the Canada Pension Plan Investment Board and the Alberta Investment Management Corp. While Baldwin noted the AIMCo has a good track record as an investment manager, he said it will be relatively small compared to the CPPIB, even after an equitable asset transfer.
“So it isn’t clear AIMCO would have any advantage over the CPPIB in generating the returns necessary to sustain the additional benefits.”
The memo also referred to some analyses that assume administrative costs for the APP will be at the same level as for the CPP, which is very unlikely given the economies of scale that exist in pension administration, wrote Baldwin. He noted startup costs will be substantial and Alberta will have to create a capacity to collect contributions, calculate and pay benefits, maintain earnings records and adjudicate disputes.
“All things considered, the creation of a separate APP looks less like a slam dunk than a three-point shot from mid court.”