Rest assured, there is no hole in Quebecers’ woolen socks. The Quebec Pension Plan (QPP) has enough money to pay pensions for the next 50 years.
End of the conversation ? No way ! Because the assumptions behind this reassuring forecast can change. When we take a closer look, there is a strong probability that the plan will fall below the required level over the next 20 years, according to the latest actuarial valuation of the QPP.
The idea is not to be alarmist, but rather to take advantage of the fact that things are going well to think calmly about an effective adjustment mechanism in the event that the QPP’s health deteriorates.
This is what the Minister of Finance, Eric Girard, had the wisdom to do by launching the debate on this delicate issue during the consultations held in mid-February on the future of the QPP.
So far, it is mainly his proposal to postpone the minimum age to receive his pension, from 60 to 62 years, which has caught the attention. Last Thursday, the Minister announced the abandonment of this project which was not necessary, as we have already written1.
However, the adjustment mechanism of the QPP must be reviewed so as not to accentuate its already enormous intergenerational deficit.
Where does this deficit come from? Let’s do some history…
When the QPP was created in 1966, the government wanted to lift seniors out of poverty. Retirees were therefore quickly entitled to a full and complete pension, even if they had not contributed during their entire career. In doing so, the bill has been passed on to future generations.
Subsequently, the government always delayed before raising the contribution rate which was too low from the start… and which has become even more so with the increase in life expectancy, the drop in returns, the fall of births and the improvement of QPP benefits.
All of this has the effect that today’s workers pay contributions three times higher (10.8% of their salary for the basic plan, assumed equally with the employer) than those of their elders who did not only paid 3.6% of their salary until 1986.
Obviously, we cannot go back. But in the future, a more equitable adjustment mechanism should be established. It’s not rocket science, just follow the example of the Canada Pension Plan (CPP), the twin of the QPP elsewhere in Canada.
Since 1998, the CPP has provided for equal risk sharing between contributors and retirees. If the plan is out of balance, it gets back on its feet by both increasing contributions and freezing the indexation of pensions for three years.
In Quebec, the risk falls entirely on contributors. In other words, it is always up to young people to pay for the broken pots. Hence the inequity.
But with us, income is a sacred cow. For many, tampering with indexation would be a heresy that would shake public confidence.
However, in many countries such as Japan, Portugal, Italy, Germany or even Sweden, the retirement age or the amount of the pension vary according to life expectancy and a series of economic factors.
In Canada, more and more pension plans offered by employers are also based on the principle of risk sharing. And this does not contribute to the impoverishment of retirees, as critics of these “target benefit plans” claim.
As proof, the Ontario teachers’ plan (Teachers’) takes into account all sorts of risks (inflation, longevity, performance), which does not prevent it from being one of the most generous in the country.
While Quebec is looking into the future of the QPP, it is time to put in place such a principle of risk sharing between contributors and beneficiaries.
And above all, before improving the plan again, let’s remember that you never get anything for nothing. Each improvement will end up costing contributors more.