Enhanced CPP vs Personal Investing

[Infanteer]

The problem, however, comes back to a more philosophical one as I see it.  CPP forces people to save something, which is important because sadly without it there would be a lot of people retiring with absolutely nothing, because they don't save anywhere near enough on their own.  Of course, in the business I'm in I'd love it if people had to save more on their own but in the long run I'm not convinced it's the best overall strategy.

I will say that I agree that we definitely don't see people learning enough about finances in school, it falls to parents to do that, and while there's been efforts to add something to the curriculum I don't think it's anywhere near enough because the rate of financial illiteracy in this country is atrocious.

I'll agree with both parts.  The libertarian in me says "people should save money for retirement", but that's a perfect world.  The state has to deal with the real world, where if we don't force people to pay into a pension plan, then we are paying their welfare because they're broke in retirement.

That being said, we need more education in schools into basic things like "bank accounts, savings, investments and mortgages".  I can recall that, throughout high school, there were no visits nor could I even find workshops on how to manage personal finances.  It has all been trial and error for me; including a bunk mortgage that I was able to get away from later on because I started doing a bit of research.

 

[Redeye]

I'll agree with both parts.  The libertarian in me says "people should save money for retirement", but that's a perfect world.  The state has to deal with the real world, where if we don't force people to pay into a pension plan, then we are paying their welfare because they're broke in retirement.

Exactly.  All the rhetoric in the world about "personal responsibility" becomes essentially meaningless in consideration of the reality that we don't let people starve in the streets in this country, and those who fail to save enough wind up living off the state in some form anyhow.

That being said, we need more education in schools into basic things like "bank accounts, savings, investments and mortgages".  I can recall that, throughout high school, there were no visits nor could I even find workshops on how to manage personal finances.  It has all been trial and error for me; including a bunk mortgage that I was able to get away from later on because I started doing a bit of research.

I agree - there's efforts being made in this respect, by the banking industry, by the Financial PlannerStandards Council (the people who control the CFP designation), and so on, but it's not really well done, and there's a lot of information floating around that's no good.  When I was a mortgage lender it wasn't uncommon for people to come in with loads of questions obviously derived from reading about the process in the USA (which is quite different), and in many cases it's made worse by people in the industry failing to explain things well.

Whenever anyone bitches at me about banks, I always ask them if they've actually gone in to ask questions about things like fees etc, because that's another "personal responsibility" issue - too many people pay too much because they simply can't be bothered to do their homework.

 

[Brad Sallows]

Yet when it comes to the vast body of legislated rules we have, which tends to grow rather than abate (some political ideologies going so far as to consider a legislative sitting "wasted" if several important pieces of new legislation are not passed), ignorance of the law is no excuse.  Why should people not be held entirely accountable in all things?

 

[Redeye]

Yet when it comes to the vast body of legislated rules we have, which tends to grow rather than abate (some political ideologies going so far as to consider a legislative sitting "wasted" if several important pieces of new legislation are not passed), ignorance of the law is no excuse.  Why should people not be held entirely accountable in all things?

So, to restate what you've just said, we should let senior citizens who haven't saved adequately for retirement or enjoy longevity such that their savings haven't lasted be evicted from their homes and starve to death if they go broke and their families aren't able to support them?  That's "accountability", sure, but I don't think we live in a society where that would be tolerated - and I sure wouldn't want to.

 

[a_majoor]

I'd much rather live in a society where people are expected to pull their own weight and are given the tools to do so at an early age.

Looking at the opportunity cost question, I made a simple example so the principle is clear (without obscuring the answer in moving parts)

Citizen "x" is self employed and can contribute $100/month in an RRSP and must contribute $100/month to CPP.
The individual works for 20 years

CPP ROI is 3.5%
RRSP ROI is 6%
Market ROI is 8%

$100/month in CPP for 20 years yeilds $34686
$100/month in RRSP for 20 years yeilds $46,204
$100/month market for 20 years yeilds  $58,902

Current situation getting CPP and RRSP gives total yield of $80,890
"Enhanced" CPP doubling contribution (and thus crowding out RRSP contribution) = $69,372; opportunity cost to citizen "X" is $11,528
"Opt out" model allowing full contribution to go to RRSP (no CPP) gives total yeild of $92,408; opportunity cost to citizen "x" (who does not have this option) is $11,518

The difference between an "enhanced CPP" and an "op out" model is $23,046, using the conservative 6% compound interest rate. Data about the stock market dating back to the South Sea Bubble shows the long term ROI is actually @ 8%, but a 20 year period of investment might be made in one of the troughs, so 6% is a reasonable assumption.

I have no problem if people can choose to make their own decisions and opt out, someone with $10,000 to $20,000 more saved at the end of the day is more self sufficient and has more options (even if you keep throwing "what if scenarios"); including the option of charitable gifts to help people who are less fortunate.

As well, in the CPP + RRSP and "Opt out" scenarios, Citizen "x" has a considerable sum which can be passed on to other family members, providing them with a higher platform from which to start and giving them more options as well.

 

[TangoTwoBravo]

"Are there no prisons? And the Union workhouses, are they still in operation?"

 

[Redeye]

I'd much rather live in a society where people are expected to pull their own weight and are given the tools to do so at an early age.

So would I, but I live in the real world where people don't.  Or think they have, but one of a myriad of unforeseen events changes things.

Looking at the opportunity cost question, I made a simple example so the principle is clear (without obscuring the answer in moving parts)

So simple as to be completely, utterly meaningless, since you haven't actually modelled what that money turns into.  The difference is that CPP pays an inflation-adjusted annuity for life.  An RRSP doesn't - it's a finite amount of money, unless of course someone takes it and buys an annuity with it, but it wouldn't likely have the indexing without substantial cost.

I have no problem if people can choose to make their own decisions and opt out, someone with $10,000 to $20,000 more saved at the end of the day is more self sufficient and has more options (even if you keep throwing "what if scenarios"); including the option of charitable gifts to help people who are less fortunate.

In theory I have no problem with the idea of someone opting out of the CPP - IF they are obliged to save in some vehicle that prevents them using the money for the intended purpose.  The problem with that is that there will be a transition period should people opt out of the CPP in droves (which, of course, I doubt would happen, but still must be considered) where money to pay pensioners would have to come from somewhere - ie the tax system.

As well, in the CPP + RRSP and "Opt out" scenarios, Citizen "x" has a considerable sum which can be passed on to other family members, providing them with a higher platform from which to start and giving them more options as well.

Citizen "x" may have a considerable sum, yes.  That's often the attraction of taking the commuted value of a private sector pension vice an annuity, particularly in cases where the annuity is of such size that it's more than is needed to meet lifestyle needs, or Citizen "x" has enough saved up in other vehicles to meet his needs and desires more control over the money.  That said, the decision often is made based on consideration of benefits (health, dental, etc) for pensioners, since when you "take the money and run" you generally lose any such benefits and the cost of them must be factored in to the decision.

 

[a_majoor]

Never the less, the principle still stands; people in control of their own resources get better outcomes and have more options than people who don't. (Regardless of the form, more is always more, and greater quantities have a quality all of their own)

Most of the apocalyptic scenarios only apply to a small minority of the population (really, we have come a long way from William Blake's "Dark Satanic Mills"), and even there a richer society will have the charitable resources to assist. Much of the real damage of the Nanny state is the presumption that disconnected bureaucrats can usurp the roles of families, neighbours, communities and associations (the can't, and the Local Knowledge Problem demonstrates that no matter how much power and resources they hold, they never will), and the displacement of community by the State based on that presumption.

The State can be swiftly and effectively replaced and communities rebuilt*, indeed it is a well known observation that people identifying with political conservative parties (Classical Liberals, to correctly identify them) donate more time and money to charity than self identified "progressives", and with more resources available they would certainly reach out more. There is also nothing at all to stop you, the reader, from volunteering to assist those in need to the limit of your ability and resources.








* As a footnote, when States fail, such as during natural disasters, community help almost always springs up by itself; Churches in New Orleans or today in the US Great Plains, "Life Hackers" creating local infrastructure in Japan after the earthquake, or more ominously, the Muslim Brotherhoods, Hezbollah and Hamas coming out to assist victims in Islamic countries. Loyalty can easily be transferred from the State to the new community partners should the State not pick up the game swiftly enough.

 

[Redeye]

Never the less, the principle still stands; people in control of their own resources may get better outcomes and have more options than people who don't. (Regardless of the form, more is always more, and greater quantities have a quality all of their own)

I fixed that for you.  Interestingly enough, when you compare, for example, the growth in value in stock markets with the return on investment received by the average investor, you often find a large disparity, because the ability to make choices is not necessarily the ability to make better choices.

Most of the apocalyptic scenarios only apply to a small minority of the population (really, we have come a long way from William Blake's "Dark Satanic Mills"), and even there a richer society will have the charitable resources to assist. Much of the real damage of the Nanny state is the presumption that disconnected bureaucrats can usurp the roles of families, neighbours, communities and associations (the can't, and the Local Knowledge Problem demonstrates that no matter how much power and resources they hold, they never will), and the displacement of community by the State based on that presumption.

Well, we've already seen that while community and charitable work can help, it simply isn't enough to deal with the problems we have currently, though one could argue quite effectively that you'll never totally eradicate poverty, homelessness, etc - but to suggest that "community will simply take care of the problem" isn't particularly correct based on what is currently observable.

The State can be swiftly and effectively replaced and communities rebuilt*, indeed it is a well known observation that people identifying with political conservative parties (Classical Liberals, to correctly identify them) donate more time and money to charity than self identified "progressives", and with more resources available they would certainly reach out more.

By "well known observation" you mean an assertion without merit or evidential support, right?  While this claim is oft-made, I've yet to see any sort of empirical evidence to support it whatsoever.  I'd also suspect that with the various dimensions involved in making such an assessment, and more importantly the efficacy of such  alleged philantrophy, no such research has ever been conducted in any sort of reliable manner.

Not to get too far into the weeds, but I often find it amusing that people who purport to support the ridiculous philosophy known as "objectivism" will then go out and cite things like the work of churches in responding to disasters, when Ayn Rand despised religion and as I recall referred to churches as "Kindergartens of socialism".  She also made a point of telling Playboy magazine that charity is not a moral duty  Then you have other morons like Glenn Beck spouting off about how "social justice" (the idea that churches should get actively involved in helping those in need) is some sort of evil.  Rand actually believed that total selfishness was some kind of virtual, after all.

It's also worth knowing that she died receiving social security and medicare benefits, and mostly alone having alienated virtually everyone in her life.







* As a footnote, when States fail, such as during natural disasters, community help almost always springs up by itself; Churches in New Orleans or today in the US Great Plains, "Life Hackers" creating local infrastructure in Japan after the earthquake, or more ominously, the Muslim Brotherhoods, Hezbollah and Hamas coming out to assist victims in Islamic countries. Loyalty can easily be transferred from the State to the new community partners should the State not pick up the game swiftly enough.
[/quote]

 

[a_majoor]

There is plenty of evidence on charitable giving, and it is easy for you to do the research and find it.

The scale of the problem is not anywhere near what the poverty industry makes it out to be, and if you consider that few poor people are suffering from starvation in Canada (obesity is the real problem), most people categorized as "poor" have such amenities as cars, televisions and personal computers and a serious policy discussion revolves around ensuring "poor" people have access to high speed Internet service, then it seems the definition of "poor" and "poverty" have been mangled beyond recognition.

Perhaps a better way of looking at the scale and scope of the problem wold be to take the population of Vancouver's East End and divide that by the number of people who live in the Greater Vancouver area. Do similar comparisons in other cities and you will see that the number of truly sick and unfortunate people are indeed small enough to be effectively dealt with through charitable work, and I know enough volunteers and volunteer enough of my resources to realize that if *we* had more in our own pockets *we* would make a much bigger dent in the problem. As 41% of the average Canadian's income goes to taxes, our options are indeed restrained.

I have no idea where your off tangent attack on Objectivism fits in with this discussion, although true Objectivists would suggest that it is their choice to offer charity or not; not an imposed spiritual duty or a command by the State.

 

[Redeye]

There is plenty of evidence on charitable giving, and it is easy for you to do the research and find it.

There's plenty of conjecture, not a lot of studies - and those I found actually don't support your theory, but the number of variables in play also makes a really good study difficult if not impossible.  I'll contentedly accept that there's no really strong correlation between vague political affiliations and charitable giving.  See, you'd need to go deeper into that and assess the nature of the charitable giving, what the money goes to etc, etc, and various other things.  I don't think anyone's done that.

I have no idea where your off tangent attack on Objectivism fits in with this discussion, although true Objectivists would suggest that it is their choice to offer charity or not; not an imposed spiritual duty or a command by the State.

I'll concede that the off tangent posts are generally your bailiwick rather than mine, but I included it because Objectivism is in my humble opinion the absolute stupidest "philosophy" ever created, and Ayn Rand is marvel of hypocrisy.  Suffice it to say, in the opinion to which I'm entitled, saying "I am an Objectivist" and "I am a moron" are synonymous, and I think more people are discovering that - at least, I'm hoping so.  The (mostly negative) publicity it's been getting since Paul Ryan wrote a contender for The Longest Suicide Note In History for the GOP Budget in the States is helping.  But you're right, it's not really relevant to to matter at hand.

 

[KJK]

I came across this in the Financial Post today. Shared with the usual disclaimer.

It is misleading to tell Canadians that the CPP is fully funded and could reliably deliver richer benefits on the same basis. The CPP is not fully funded in the sense most Canadians would understand the term, and its benefits are not guaranteed. The CPP is a gamble, not a guarantee. Doubling down means running the same risks on a larger scale.

http://opinion.financialpost.com/2011/06/10/cpp-is-a-gamble-not-a-guarantee/

He also states that in order to fully fund the current benefits CPP contributions would have to be raised to 11% from 9.9%

KJK 

 

[Redeye]

I came across this in the Financial Post today. Shared with the usual disclaimer.

It is misleading to tell Canadians that the CPP is fully funded and could reliably deliver richer benefits on the same basis. The CPP is not fully funded in the sense most Canadians would understand the term, and its benefits are not guaranteed. The CPP is a gamble, not a guarantee. Doubling down means running the same risks on a larger scale.

http://opinion.financialpost.com/2011/06/10/cpp-is-a-gamble-not-a-guarantee/

He also states that in order to fully fund the current benefits CPP contributions would have to be raised to 11% from 9.9%

KJK 

What I see as a problem here is that the suggestion that using a 4% rate of return is somehow wrong.  The author correctly states that that is well above the yields currently
available on sovereign debt, long term that's a realistic number, and more importantly, that's not what the CPPIB invests in - they have a substantial, and reasonable well
performing equity portfolio which enhances their returns.

 

[a_majoor]

The argument is you are constrained to whatever ROI CPP chooses to disburse, wheras personal investing provides the opportunity of larger ROI based on long term historic market ROIs of 6-8%. The extra 2%-4% compounded is worth a considerable amount at the end of a working lifetime, and the flexibility to carry over that amount t o spouses or family is a tremendous benefit not available with CPP.

 

[Redeye]

The argument is you are constrained to whatever ROI CPP chooses to disburse, wheras personal investing provides the opportunity of larger ROI based on long term historic market ROIs of 6-8%. The extra 2%-4% compounded is worth a considerable amount at the end of a working lifetime, and the flexibility to carry over that amount t o spouses or family is a tremendous benefit not available with CPP.

Did you even read the article?  No.  You clearly did not. Robson argues that to be considered "guaranteed" and fully funded that CPPIB should invest only in Federal government real return bonds from which he derives his model contribution amount.  That's not a model for full funding I've ever seen used to assess pensions, because all pensions invest in more diversified portfolios than that, the CPPIB especially does - its holdings are very broad and historically it has done very well.

In addition to that - the changes currently being implemented to the pension should enhance its position further.

I see you want to flog the "market return" dead horse some more - the key to that is while that's the market return it doesn't take into account transaction and carrying costs, and the fact that despite what the market returns, "average" investors don't tend to do as well, mainly because they make poor decisions, and because they have to pay costs.  That's why something like an expanded CPP could offer advantages - with its size and scope its transaction and management costs are miniscule, which might appeal to those who do not have the expertise to it themselves.

 

[a_majoor]

Compound rate of return is a dead horse? Many bankers, businessmen, politicians, investors and financial planners would beg to differ.

What it really amounts to is you would have people forced to pay into a system where they have no input into the investment decisions or outcomes, and are forced to take whatever is given to them upon retirement. Remember upthread the real compound ROI of CPP is actually under 3.5%, not the 4% assumed in the article. Perhaps there is a market for that kind of thing, but let that be an option, not a constraint. Literally forcing people to forego potentially large gains speaks of a world view of forced equalization, and lopping the heads off the tallest poppies in the field.

Political solutions based on these world views are really forms of class warfare, and dragging people down to some arbitrary level isn't a workable model for societies (as history has repeatedly shown).

 

[Brad Sallows]

>So, to restate what you've just said, we should let senior citizens who haven't saved adequately for retirement or enjoy longevity such that their savings haven't lasted be evicted from their homes and starve to death if they go broke and their families aren't able to support them?

Yes, let's go directly to the worst possible extreme without considering that they might have to give up their homes and live in modest state-sponsored pensiones.  It is a strange world progressives inhabit in which social benefits are either everything or nothing.

What I refer to is this contradiction: a person can be sued into penury simply because he is ignorant of his liability and despite manifest good intentions, but heaven forbid people be constrained to live modestly due to their own imprudence and lack of foresight.

 

[brihard]

Did you even read the article?  No.  You clearly did not. Robson argues that to be considered "guaranteed" and fully funded that CPPIB should invest only in Federal government real return bonds from which he derives his model contribution amount.  That's not a model for full funding I've ever seen used to assess pensions, because all pensions invest in more diversified portfolios than that, the CPPIB especially does - its holdings are very broad and historically it has done very well.

In addition to that - the changes currently being implemented to the pension should enhance its position further.

I see you want to flog the "market return" dead horse some more - the key to that is while that's the market return it doesn't take into account transaction and carrying costs, and the fact that despite what the market returns, "average" investors don't tend to do as well, mainly because they make poor decisions, and because they have to pay costs.  That's why something like an expanded CPP could offer advantages - with its size and scope its transaction and management costs are miniscule, which might appeal to those who do not have the expertise to it themselves.

Anyone in a position to invest privately has a bank account, likely with a major bank. Any one of those banks offers investment advisors at no cost- I used to use them myself.

Through the banks a variety of investment vehicles are available that offer many of the same advantages. A diversified portfolio of ETFs or mutual funds will generally offer the same advantages, and if the investment timeframe being looked at is to be measured in excess of a decade, with costs averaged by continually paying in, the risks of investing in such a manner would be largely mitigated, no?

Speaking for myself, I'll never bank on CPP or on any private or public sector pension fund- too many private funds have gone pear shaped, and I don't like the implicit assumptions inherent in relying ion a public sector pension. Given the option, I'll do my own investments as much as possible. Granted, currently I'm downright reckless with my stock selections- but at this stage in life I can afford to be, and more conservative approaches will follow before too long.

I will concede that the average person doesn't know enough about investing to be of much use. But the same expertise available to CPP is available to largely the same extent through the banks, and is offset in relation by the relatively low annualized ROI that CPP offers.

 

[a_majoor]

Why would the public service unions (with their gold plated pensions) want to step into the CPP debate you ask?

http://freedomnation.blogspot.com/2011/07/pensions-reality-and-fantasy.html

Pensions: reality and fantasy

The Canadian Federation of Independent Businesses has come out strongly against increasing the size of the Canadian Pension Plan. They argue, correctly, that the increase will amount to a payroll tax and would hurt smaller businesses and discourage employers from hiring. Large corporations can generally swallow this sort of cost increase, but your local bakery or small law firm would be badly hurt.

The CFIB goes further by saying that public sector pensions are unsustainable and are unfair to every other Canadian.

The Public Service Allaince of Canada, a public sector union, was quick to say that the CFIB’s opposition is “a cynical campaign designed for no other reason other than to divide Canadians.” I’ve said it before and I will say it again, socialists have a tendency towards paranoia. What possible gain could the CFIB achieve by “dividing Canadians” over pension issues?

Actually the truth is that Canadians are already divided between those living in reality and those that are living in a fantasy world.

In reality money is not an unlimited resource and wealth must be created through productivity. If you want to have a comfortable retirement you must invest wisely and save prudently. Sometimes something happens and your investments and savings are lost, but risk cannot be taken out of life. The world is a risky and often dangerous place; all you can do is work hard and hope for the best.

In fantasy world money is an unending resource and all you have to do to create wealth is to take it from someone else. You don’t have to worry about investing or saving because your employer and the government will always have their unlimited supply of cash to hand over to you. Risk is not a concern because unicorns chased away risk with their loud farts.

I grant that fantasy world sounds more appealing than reality, but it is ultimately fantasy. You cannot change the realities of life simply by wishing or pretending it away. I forget now who said it, but many years ago I heard someone explain that you cannot bend a spreadsheet with good intentions. Reality is the world we actually live in and public policy should be based on what is real.

The reason why the private sector doesn’t have public sector pensions is because the private sector can’t afford such high pension benefits. Hell, the public sector can’t really afford it either. It is time for the public sector to wake up to reality.

 

[Neill McKay]

Why would the public service unions (with their gold plated pensions)

I swore I'd never use this, but  :.