Last week there was a lot of talk in the media about the need to reform and expand the Canada Pension Plan, (CPP). Most observers think CPP is a good tool for the public to save for retirement. The problem is that it only provides a maximum $12,000 of income to retirees; far short of what most people need to sustain their retirement lifestyle. In a completely different public discussion, I have heard a lot of people bring up Norway as an example of how to responsibly develop natural resource assets in a way that also gives most of the value added to the people.
What do the CPP and Norwegian resource development have in common? The majority of Norwegian natural resource revenues go towards funding their state pension plan. In fact, the Norwegian pension fund, which supports a population of only about five million people, is the single largest pension fund in the world.
Before oil was discovered in the North Sea in the 1960s, Norway was a poor country by European standards. As the North Sea oil industry developed in both British and Norwegian waters, two things became apparent to Norway. First, the scale of the wealth relative to the size for the country would be very large. But also, the wealth would not last forever because most North Sea oil fields depleted relatively rapidly.
The solution was to devote the bulk of oil revenues into the state pension plan. The main goal of this strategy was to make sure that the value of a non-renewable resource like oil was converted into something of perpetual value for future generations. It also had some other advantages. For example, since the government could not rely on oil revenues for general revenue, it has had to maintain fiscal discipline when it comes to taxation and expenditures.
Could Canada adopt the Norwegian model to address our pension issues? It would be difficult at the federal level but perhaps individual provinces could take away a few lessons. CPP is a federal program while natural resource revenues belong to the provinces. This is the main obstacle I see in adopting the Norwegian model in Canada. I cannot see Alberta, and to a lesser extent, BC and Saskatchewan, funding pension checks in eastern Canada. In fact, this is the main reason why Norway has chosen to remain outside of the EU; so they can keep their oil revenue away from their European neighbours.
What about at the provincial level? Quebec has opted out of CPP for years and Ontario is openly talking about having their own supplement to CPP. And Alberta has attempted to save money for future generations with their Heritage Fund. However, that hasn't worked very well for them and the Alberta government has not been able to show fiscal discipline. With oil still hovering near $100/bbl, Alberta is currently running a deficit that is only growing! So devoting royalty revenues to a provincial pension plan could be a made-in-Canada way to capture that value for future generations, not current governments.
An interesting experiment would be to go beyond the provincial level and focus the pension benefits on those who reside in the actual regions where the resource development is happening. This is a whole other topic that will be the subject of next week's column.
