has navigated the past several decades will suggest steps the U.S.
could take now to help mitigate its own financing problems.
Appendix A of the 26th Actuarial Report on the Canada Pension Plan (CPP) provides an excellent background of the actions
leading up to and taken as part of the 1997 Amendments to CPP.
In summary, the 1997 amendments involved increasing contribution rates over the short term, reducing the growth of benefits
over the long term, and investing net cash flows in private markets. The amendments also included significant changes to the
Plan’s financing provisions, including the introduction of steady-state funding intended to build a reserve of assets and stabilize
the ratio of assets to expenditures over time and full funding of
any increases in benefits or new benefits.
According to Appendix A, “The combination of steady-state
funding and full funding supports the objective of the 1997 re-
form package to improve the financial long-term sustainability
of the Plan so that the CPP will be affordable and sustainable
for future generations.”
In brief, to determine the steady-state rate, the CPP actuar-
ies project benefits and revenues for 75 years and solve for the
lowest contribution rate to stabilize the asset-to-expenditure
ratio over time. Specifically, this lowest or steady-state rate is the
combined employer and employee contribution rate for which
the projected ratio of Plan assets to expenditures 10 years after
the end of the current three-year review period equals the same
ratio projected for 60 years after the review period.
The CPP’s steady-state rate plus any additional rate needed
for full funding of benefit enhancements as described above
gives the minimum contribution rate for the Plan. For each actuarial valuation of the CPP, the minimum contribution rate
is recalculated to reflect actual experience since the previous
valuation, as well as changes in assumptions and methodology.
Consistent with the concept of sustainable solvency discussed
above, the CPP asset-to-expenditure ratio is expected to reach a
stable level and remain at that level for at least the next 75 years.
If the minimum contribution rate is higher than the legislated
rate, and the federal and provincial governments do not take
action, the insufficient rates provisions in Section 113.1 of the
Canada Pension Plan statute will apply to automatically increase
the contribution rate and/or freeze benefits.
The CPP actuaries call this steady-state rate a partial funding approach that is a hybrid of pay-as-you-go financing and full
funding. An important part of the 1997 amendments was the
increased responsibility given to the actuarial valuation reports
under the law. The CPP legislation now includes self-sustaining
provisions (automatic adjustments) to safeguard desired levels
of Plan funding in the event that the minimum contribution rate
exceeds the legislated contribution rate and no recommendation is made by the federal and provincial ministers of finance
to either increase the legislated rate or maintain it.
Thus, the financing approach adopted for the CPP envisioned
a “Self-Sustaining Sustainable Solvency”—designed not only
to achieve sustainable solvency at the time of adoption of the
changes, but also to maintain it automatically in the future.
Applying the CPP Approach to Social Security
In conclusion, the author believes that the actions taken in the
1997 amendments to the CPP represent a good starting blueprint
for solving Social Security’s long-term financing problems. Specifically, adoption of a combination of increased taxes intended
to remain level after an initial phase-in period, reasonable benefit reductions, and self-sustaining provisions based on the
results of actuarial valuations to safeguard accumulation of desired levels of System funding would improve intergenerational
equity, provide a better price tag for the System and increase the
public’s confidence in the program. It is too bad that we haven’t
taken such action sooner, but it is not too late to do so now.
This year’s trustees report contains the following conclusion
with respect to the long-term problem:
The Trustees recommend that lawmakers address the
projected trust fund shortfalls in a timely way in order to
phase in necessary changes gradually and give workers and
beneficiaries time to adjust to them. Implementing changes
soon would allow more generations to share in the needed
revenue increases or reductions in scheduled benefits.
Social Security will play a critical role in the lives of 59 mil-
lion beneficiaries and 165 million covered workers and
their families in 2014. With informed discussion, creative
thinking, and timely legislative action, Social Security can
continue to protect future generations.
The leadership of the actuarial profession has often endorsed the concept of serving the public need. Tom Terry, then
president of the American Academy of Actuaries, said in the
November/December issue of Contingencies:
The Academy builds trust both by caring about doing the right
thing and then by doing it to the best of our collective ability.
We care deeply about the consequential public policy issues
for the American people, such as ensuring Social Security’s
benefits and the promise of public pension plans. Earning this
trust means continually holding ourselves to the highest standards of scrutiny when serving the public interest.
The author encourages the profession and its members to advocate an actuarial approach for Social Security similar to the one
employed for CPP as the “creative thinking” that the trustees
(and our lawmakers) so desperately need in fulfillment of the
profession’s duty to the public.
KEN STEINER is a retired pension actuary. He is a former
vice president for pension issues and chairperson of the Social
Insurance Committee for the American Academy of Actuaries. He
endeavors to support the Academy’s mission to serve the public
and the actuarial profession in his retirement by helping individuals
develop reasonable spending budgets in retirement via his blog at