The Canada Pension Plan (CPP) was begun in the heady days of the late 1960s when jobs were plentiful and inflation and interest rates were low. The prospect of baby-boomers aplenty coming into the labour force meant that its genesis as a pay-as-you-go pension plan posed no funding problems in the foreseeable future.

(P.S. - a pay-as-you-go plan, in pension terms, is not the same as a pay-as-you-go plan for mobile phones. Essentially, it means that the current generation of workers funds the current generation of retirees. Each dollar in the door is spent immediately on someone else's retirement benefits, rather than being set aside (and perhaps invested?) to fund the retirement pension of the person who contributed the money in the first place).

Fast forward 30 years later to 1996 and what was on the horizon for the CPP? Lower participation rates in the labour force, coupled with higher interest rates and an ageing population meant that contributions were slowing while benefits were increasing - a S U R E F I R E recipe for disaster in pensionland.

The actuaries diddled, the politicians dithered, what to do, what to do? The CPP's status as one of the cornerstones of the publicly funded Canadian retirement system was crumbling. Without a drastic restructuring the CPP would not be able to promise current workers that it would be there for them when they retired - and, in a pay-as-you-go system, it's the current workers who are paying for the current retirees. There is no magic pool of money. If current workers can't be persuaded or duped into thinking that the next generation of suckers will come along and support them, then there's political revolt because nobody wants to pay when they won't receive anything in return.

The solution lay in converting the CPP from a pay-as-you-go system to a funded pension plan. A funded pension plan means that the actuaries go to work, their eyes sparkling behind green eyeshades, computing life expectancies, contribution rates, interest rates, inflation rates, investment returns, sensitivity analyses, and so on (can you say boring?), in order to determine how much money has to be accumulated in order to fund the retirement of the current generation of contributors (that's us working stiffs).

Needless to say the actuaries were successful in their deliberations. They managed to compute a rate of contributions that would result not only in enough money to be able to pay the current retirees, but enough money to set aside and invest to be able to fund the contributors' own retirements.

This all sounds great in theory. But, guess what? Those poor dupes caught in the middle - who were part of the "transition" from pay-as-you-go to fully funded - wound up on the short end of both sticks. Not only did they have to pay for the last generation of retirees, but they also had to put enough money aside (through the statutorily mandated CPP) to fund their own retirement.

Basically, they had to pay twice. No wonder contribution rates went through the roof when the CPP was reformed in 1998. More on that, later.mortgage calculator