298 PA R T I I I Financial Institutions pension plans, benefits are typically paid out from current contributions, not tied closely to a participant s past contributions This pay-as-you-go system led to a massive underfunding The problems of the public pension plans could become worse in the future because of the growth in the number of retired people relative to the working population The government has been grappling with the problems of the public pension plans for years, but the prospect of a huge bulge of new retirees has resulted in calls for radical surgery (see the FYI box, Should Public Pension Plans Be Privatized?) In 1999, for example, the CPP was given authority to sharply increase contribution rates from 5.6% in 1999 to 9.9% in 2003 It was also given the authority to invest its accumulated assets in the market in order to earn a higher return so that future increases in contribution levels will not be needed FYI Should Public Pension Plans Be Privatized? In recent years, public confidence in the public pension plans has reached a new low Some surveys suggest that young people have more confidence in the existence of flying saucers than they in the government s promise to pay them their public pension plan benefits Without some overhaul of the system, public pension plans will not be able to meet their future obligations The government has set up advisory commissions and has been holding hearings to address this problem Currently, the assets of the public pension plans, which reside in trust funds, are all invested in government securities Because stocks and corporate bonds have higher returns than government securities, many proposals to save the public pension plans suggest investing part of the trust fund in corporate securities and thus partially privatizing the systems Suggestions for privatization take three basic forms: Government investment of trust fund assets in corporate securities This plan has the advantage of possibly improving the trust funds overall return, while minimizing transaction costs because it exploits the economies of scale of the trust funds Critics warn that government ownership of private assets could lead to increased government intervention in the private sector Shift of trust fund assets to individual accounts that can be invested in private assets This option has the advantage of possibly increasing the return on investments and does not involve the government in the ownership of private assets However, critics warn that it might expose individuals to greater risk and to transaction costs on individual accounts that might be very high because of the small size of many of these accounts Individual accounts in addition to those in the trust funds This option has advantages and disadvantages similar to those of option and may provide more funds to individuals at retirement However, some increase in contributions would be required to fund these accounts Whether some privatization of the public pension plans occurs is an open question In the short term public pension plan reform is likely to involve an increase in contributions, a reduction in benefits, or both For example, under the 1997 changes to the CPP Act, the percentage of liabilities of CPP that are funded is expected to increase from the current 8% to 20% by 2018