Although the Canada Pension Plan seems to be going from strength to strength, things are not looking quite so rosy for the Quebec Pension Plan.

A new report from the Ottawa-based Caledon Institute of Social Policy highlights the differences between the two plans and suggests action needs to be taken soon to protect the pensions of Quebecers.

Actuarial reports on the CPP indicate the plan is in good shape and will be sustainable for at least the next 75 years. However, the most recent actuarial report on the QPP points out the current 9.9% combined employer/employee contribution rate will be enough to pay benefits only until 2050, notes Edward Tamagno, author of the report, entitled A Tale of Two Pension Plans: The differing fortunes of the Canada and Quebec pension plans. If nothing is done, the QPP’s reserve fund will be completely depleted by 2051. In contrast, by 2050, CPP assets are projected to be $1.4 trillion, or six times annual expenditures.

Even though 2050 may seem a long way off, Tamagno suggests changes to the QPP need to be made well before then so that the plan can continue to meet its commitments beyond that point. But given that features of the plan — such as contribution rates, benefits and the level of earnings on which contributions are paid — have generally been kept in line with the provisions of the CPP, options for improving the financial position of the plan may be limited.

Tamagno suggests several possibilities, the most controversial of which is that the QPP’s reserve fund could borrow from the CPP’s reserve fund to make up the shortfall between its annual expenditures and revenue, when it is exhausted. He admits further analysis would be needed to confirm if the approach would be techni-cally feasible, but he is convinced it would be.

But Pierre Plamondon, chief actuary for the QPP, says such a proposal is “not very realistic.” He doubts people in the rest of Canada would want to lend money to Quebec in this way. “It would be a debt Quebec would owe to the rest of Canada,” he says, “and Quebec taxpayers or QPP contributors would have to pay it, either by an increase in the contribution rate or through interest on the loan.”

Plamondon notes three key reasons why the QPP’s situation has diverged from that of the CPP’s:

> The demographics are less favourable. Quebec’s population has been aging faster than the rest of Canada’s as a result of lower fertility and immigration rates. There will be fewer workers and, therefore, fewer QPP contributors in the 20-64 age group over the next 20 years.

> Some QPP benefits — for example, certain survivor and disability benefits — are more generous than those in the CPP. (Tamagno suggests that bringing these in line with CPP benefits would help improve the QPP’s position.)

> The level of average wages in Quebec has been lower. As the first $3,500 of earnings are exempt from QPP (and CPP) contributions, the effective contribution rate in Quebec is lower than in the rest of Canada.

If nothing is done, future generations of Quebec workers will have to assume a contribution rate of around 12.6% after 2050, notes Plamondon in the Actuarial Report on the Quebec Pension Plan as at Dec. 31, 2006.

The financial pressure on the plan has increased, he says, and the steady-state contribution rate — the lowest combined employer/employee rate required to sustain the plan without further increases — has increased to 10.54% from 10.3%. (The steady-state rate for the CPP is now 9.82% and the legislated contribution rate for both plans is 9.9%.)

Quebec is required to hold a public consultation on the plan no later than 2010, Plamondon says: “This will provide an opportunity to propose ways of improving the plan’s financial situation without having to saddle future generations of contributors with an excessive load.”

Quebec’s Minister of Employment and Social Solidarity, Sam Hamad, is apparently anxious to hold the consultations as soon as possible; Plamondon’s office is working on a consultation paper, which must be released by the end of 2009.

Quebec issued a working paper in 2004, entitled Adapting the Pension Plan to Quebec’s new realities, which had proposals for far-reaching changes to the plan, Plamondon notes. They include changes to the period over which contributions are made so that the longer an individual works and accumulates earnings, the higher the pension would be. The paper also includes proposals to limit payment of benefits to the surviving spouses of contributors not yet retired to a temporary three-year period.

@page_break@It was decided to hold off on implementing any changes to the plan. Plamondon suggests that some of the proposals in the 2004 paper might be on the table again.

As for maintaining equivalency with the CPP, Plamondon says it’s not easy to determine what differences between the QPP and CPP would be possible while still maintaining equivalency between the two plans. He observes that major parameters such as contribution rates, maximum pensionable earnings and the age of retirement have always been the same. But Plamondon is confident Quebec has some flexibility to develop options without putting the equivalency of the two plans into question.

“There’s no panic about the situation of the QPP,” Plamondon says. “It’s more a question of inter-generational equity. When will people pay for the benefits they will receive in future years? If we wait until 2051 to take action, it means our grandchildren will have to pay.” IE