Canadian Pension Pilfer

Over the weekend, the Canada Strong and Free Network organized its annual networking conference in Red Deer, during which I participated in a panel on the merits of establishing an Alberta Pension Plan.

Joined by University of Calgary Economics professor Trevor Tombe and Cory Morgan from the Western Standard, and moderated by the CFSN Chair, Michael Binnion, I debated several different aspects of the plan, and thought it would be useful to share my insights with you.

First of all, Alberta has been getting shortchanged in Confederation in various areas ever since becoming a province in 1905, along with Saskatchewan.

“The prairie provinces are robbed of their chief source of revenue, not for the benefit of the federal treasury, nor of the Dominion at large, but for the benefit of the horde of grafters connected with the Ottawa Liberal machine,” said a Calgary Herald editorial at the time.

The frustration with Ottawa back then was over the control of natural resources.

During the creation of Alberta and Saskatchewan, the federal government retained control over the two new prairie province's natural resources - they remained the only two in Confederation without natural resource rights until 1930!

We all know the history since then, but suffice to say that not much has changed.

In October 2021, 62% of Albertans went to the polls and voted in favour of removing the principle of equalization from the Constitution.

Through the equalization program, Alberta sends over $20 billion per year to the rest of the country in transfer payments.

Since the creation of the program in 1957, Alberta has seen over $630 billion leave the province.

The federal government has completely ignored the results of the referendum and the efforts of the provincial government to have a discussion about equalization.

In fact, earlier this year, the “Ottawa Liberal machine” voted to extend the equalization program with its existing formula for five additional years.

The Canada Pension Plan (CPP) is just another example of a federal program that takes advantage of Alberta’s relative youth and wealth to buy votes in the rest of the country.

In mid-September, the Alberta government released a report completed by one of the most prominent human resource and pension analytics firms in Canada.

LifeWorks - formerly known as Morneau-Shepell - was commissioned by the Kenney government in 2020 and is the firm which launched Bill Morneau into the Ottawa Liberal Finance Minister job.

The report was a bombshell.

Using the asset allocation formula in Section 113 of the Canada Pension Plan Act as a baseline, LifeWorks calculated that the net total assets in the plan that belong to Albertans, after subtracting administrative fees and all benefits that have been disbursed, and after adding accumulated returns on those assets, was $334 billion.

This calculation did not come from thin air.

The formula used in the calculation has been in the CPP Act since its establishment in 1965.

It has not been changed, even though the CPP Act has been reformed multiple times since then.

“If the asset allocation formula had been considered incorrect or irrelevant, it presumably would have been amended during these reforms, but it was not,” wrote former Alberta Finance Minister Travis Toews in a Financial Post article last week.

“It is reasonable, then, to conclude that the legislation’s intent remains the same — to ensure an exiting province is not worse off on withdrawal from the plan — and that is the foundation for LifeWorks’ conclusions,” added Toews.

There’s an issue though…

There is only about $630 billion in the CPP, so $334 billion would be about 53% of the total CPP assets.

Now, at first glance, this may seem impossible - how can a province with about 15% of the population own 53% of the assets in the pension plan?

But, the fact is that Alberta has had a younger, higher income, working population relative to the rest of the country, perennially, ever since joining the CPP in 1965. 

As such, Alberta has been paying in more than our fair share of pension contributions every single year, while taking out less than our fair share of pension benefits every single year.

Think of it like having a joint bank account.

One person puts in $100 per month, and spends $40 per month.

That means that while their contribution is $100 a month, their net contribution is $60 per month.

The other person puts in $200 per month, but spends $160.

So, their net contribution is just $40 per month - $20 less than the other person.

After 12 months of credits and debits, the total amount of money in the account would be $1,200.

The first person contributed $1,200, while the second contributed $2,400.

But the first person only withdrew $480, while the second person withdrew $1,920.

That leaves the net contribution of the first person - their account balance - at $720, while the second person’s net contribution - their account balance - is just $480.

The roughly $60 in interest the account might have earned over that time must get split proportionally too - $40 to the first person, and only $20 to the second.

In the end, despite putting in just half the amount the second person did, the first person owns the majority of the money in the account.

The CPP is, of course, much more complicated than this simple example, with more than two provinces, all sorts of expenses, and other complications.

But, the point is that the amount of money contributed in to the account is not important - what matters is the net contribution - the account balance of each province.

More money than average going in every year and less money than average going out every year, means an ever-increasing share of the pot belongs to Albertans, which creates a compounding effect because that means Albertans get an increasing share of the returns on those assets too.

And there has been a long time for those returns to compound, because we’ve been overpaying for a very long time.

Do it for 60 years, and a province representing just 15% of the population absolutely can own 53% of the CPP.

An Alberta Pension Plan has the potential to be the jewel in Alberta’s crown - a stand-alone fund that could be the envy of the world.

But, we have to do it right - we have to be smart about how the details will work.

Luckily, the government is still in the early stages of consultation, and so there will be plenty of time to work out those details.

Project Confederation will be participating in those consultations, and we need your help to do so.

If you are in a position to assist, please consider making a donation towards our campaign:

We’re also looking for volunteers from across the province to get involved and help spread the word, so if you’re interested, please sign up to volunteer now!

Thank you for reading.

Regards,

Josh Andrus
Executive Director
Project Confederation