Enhanced CPP vs Personal Investing

[a_majoor]

Interesting comparison between the Australian system and the US system. Some lessons learned here for those who wish to see them; and going towards the Australian model (or the similar Chilean model) would do a lot to mitigate the issue of unfunded liabilities in government pensions and the sustainability of OAS (which was recently an issue in the media):

http://finance.townhall.com/columnists/danieljmitchell/2012/05/03/australia_vs_the_united_states_two_charts_that_tell_you_everything_you_need_to_know_about_social_security_reform/page/full/

Australia vs. the United States: Two Charts that Tell You Everything You Need to Know about Social Security Reform

    Daniel J. Mitchell
 
There are two serious problems with America’s Social Security system. Almost everyone knows about the first problem, which is that the system is bankrupt, with huge unfunded liabilities of about $30 trillion.

The other crisis is that the system gives workers a lousy level of retirement income compared to the amount of taxes they pay during their working years. Younger workers are particularly disadvantaged, as are African-Americans because of lower life expectancy.

These are critical issues, but perhaps looking at a couple of charts is the best way to illustrate why the Social Security system is inadequate.

Let’s start by looking at some numbers from Australia, where workers set aside 9 percent of their income in personal retirement accounts.

This system, which was made universal by the Labor Party beginning in the 1980s, has turned every Australian worker into a capitalist and generated private wealth of nearly 100 percent of GDP. Here’s a chart, based on data from the Australian Prudential Regulation Authority.

Now let’s look at one of the key numbers generated by America’s tax-and-transfer entitlement system. Here’s a chart showing the projected annual cash-flow deficits for the Social Security system, based on the just-released Trustees’ Report.

By the way, the chart shows inflation-adjusted 2012 dollars. The numbers would look far worse if I used the nominal numbers.

The two charts aren’t analogous, of course, but that’s because there’s nothing to compare. The Social Security system has no savings. Indeed, it discourages people from setting aside income.

And Australia’s superannuation system doesn’t have anything akin to America’s unfunded liabilities. The closest thing to an analogy would be the safety net provision guaranteeing a basic pension to people with limited savings (presumably because of a spotty employment record).

So now ask yourself whether Australia should copy America or America should copy Australia? Seems like a no-brainer.

 

[a_majoor]

Proposals to expand the CPP are in the air again, and of course the proponents never state what the seen and unseen costs are going to be:

http://opinion.financialpost.com/2012/12/17/pension-shakeup-needed/

Pension shakeup needed

Bill Tufts, Special to Financial Post | Dec 17, 2012 9:01 PM ET
More from Special to Financial Post
 
Adjustments to CPP a diversion from the real problem

Some politicians and unions in Canada are on an ideological mission to increase the Canada Pension Plan without understanding the key drivers and policy implications behind the move. Business is solidly against the move, seeing it as another payroll tax that our struggling economy can’t support.

Some key facts must be understood. An enhancement of the CPP will be a significant drain on investment capital, at a time when the public sector unions, and even the Bank of Canada, are calling for business to come off the sidelines and kick start our economy. Expanding the CPP now will have the opposite effect.

Increases in CPP will be a redirection of money from the private sector that creates capital investment. The CPP investment fund invests in mature companies and government bonds, not the innovative small business sector that is the driver of our economy.

It is important to examine how much capital is hoarded by the CPP.

Last year working Canadian families and businesses each contributed 50% of the $ 37-billion in contributions that went into the plan. In addition, the plan earned another $15.5-billion in investment income. This contrasts with the $30-billion that was contributed into the public sector pensions last year and $33-billion into RRSP’s.

The former head of the CPP stated that the plan would accumulate over $275-billion by the year 2020. If a plan was implemented to double the CPP as some proponents suggest, the plan would need to accumulate a total of $550-billion by 2020. The total unfunded liability of the CPP program documented in the last actuarial report in 2009 was $748-billion. Now public-sector unions want to double that amount! This new deficit would be in addition to the health-care unfunded liability and the other pension shortfalls that exist in the country today.

This pool of capital going into the CPP diverts money from the small companies and corporations that fuel the economic engine.

The contributions in the CPP are based on the wages of Canadians. Contributions are already set at 9.95% of salary and are paid for by matching contributions from workers and their employers. Doubling these contributions in this very fragile economy could have catastrophic and unintended consequences.

The CPP is already part of a very effective retirement security program that includes the Old Age Security (OAS) program as well as the Guaranteed Income Supplement (GIS). Increasing the CPP would merely be a diversion from one of these programs. It would not enhance our national programs and, in fact, would lock Canadians into contributions of almost 20% of payroll.

Proponents for the Big CPP suggest that it could wipe out all of the shortfalls in savings for Canadians. It is true that increases in CPP contributions would help the public-sector pension plans that are integrated with the CPP, but for most Canadians the benefits would be minor. It would mean that Canadians would have to pay a higher amount of payroll taxes to fund the plan, which diverts even more money from their own RRSPs. Currently, the average Canadian, by the time they reach age 65, can only manage to save $60,000 for retirement.

The provinces promoting a “modest enhancement” of the CPP are the same ones that have fiddled while the pension system has burned. The Pooled Registered Pension Plan was discussed at the past few finance ministers’ conferences and was implemented in federal legislation this past spring. Rather than getting on with the business of creating the rules for the new plan required at the provincial level, some provinces are still tinkering with the broken defined-benefit system. Defined-benefit plans are being rapidly wound down by the private sector, yet, paradoxically, are still receiving billion-dollar bailouts in the public-sector system. Bailouts paid for by taxpayers.

One option for the CPP would be to allow for voluntary contributions from all Canadians. We can change the public-sector systems that are costing $30-billion a year for a small, protected class of public-sector retirees. Then the system might have enough money to help all Canadians just a little bit. Let the public-sector unions, the big promoters of the Big CPP, back up their ideas with commitments to help pay for those in the private sector.

Another alternative would be to eliminate the CPP pension for public-sector employees who have a retirement pension income greater than $50,000. That would add fairness to the current system. They would still have a wonderful pension without unduly taking from those in the private sector, who paid for their cushy retirement plan in the first place.

We need a comprehensive restructuring of the system, including the winding down of the special class of public-sector pensions. Adjustments to the CPP at this time are just a diversion away from the real problems, created by federal employees wanting to protect their golden rewards, and would amount to merely minor tinkering. The head of the Ontario Teachers’ Pension Plan said it best earlier this year: “As the signs came in that the assumptions were wrong [for pensions], the changes weren’t made when they could have been evolutionary. Now, the changes have to be revolutionary.”

Tinkering with the CPP is not the type of revolutionary change that is needed to save the system.

Financial Post

Bill Tufts is founder and executive
director of Fair Pensions For All.

 

[observor 69]

About those “unfunded liabilities”

When it comes to the Canada Pension Plan, a major talking point from the right is that the CPP has “unfunded liabilities”, with the implication that is not affordable and financially unsustainable. This is nonsense, a scare tactic based on an accounting fiction that counts only future expenditures but does not count future revenues.

http://www.progressive-economics.ca/2011/08/09/about-those-unfunded-liabilities/

 

[Brad Sallows]

Neither the future revenues nor expenses are certain.  But the self-indulgent generation that benefited from being large, due to its parents' willingness to raise larger families, should not expect to tax at higher rates the smaller generation it produced.

 

[a_majoor]

Actually, unfunded liabilities is exactly correct: these are payments that are pledged to be honoured, but no funds exist to cover the pledge

You might tell me that you will give me $10,000 at a future date, and even sign a contract to do so, but until the money is in escrow in your bank account, you are actually skirting fraud at best. As the holder of a valid contract, I'm not likely to accept "sorry, I didn't make as much as I thought this year" as a valid excuse for not paying.

While I can take you to court and seize your chattles, the reality is much different for people expecting CPP. They will either not get it at all (with no opportunity for redress), receive a vastly reduced amount (ditto) or discover that through inflation and currency manipulation, the pension has much less actual value than they would have expected, once again with no possibility of redress.

 

[a_majoor]

The idea should be featured on the "Walking Dead", as reality does not seem to phase people who work to promote this idea:

http://opinion.financialpost.com/2013/02/20/terence-corcoran-the-new-national-savings-fantasy/

Terence Corcoran: The new national savings fantasy

Terence Corcoran | Feb 20, 2013 9:24 PM ET | Last Updated: Feb 21, 2013 11:12 AM ET
More from Terence Corcoran | @terencecorcoran

Dangling the prospect of a risk-free national system creates more problems than it solves

Ever since the giant meteorite of endless fat investment returns crashed and burned through the defined benefit pension system, Canada’s savings establishment has been on the hunt for a replacement. If only we could bring back some semblance of those glory days when employers contributed matching funds to help employees achieve guaranteed pension benefits people could read on a piece of paper: When you retire, your monthly pension will be $3,295, or whatever.

Every actuary on the planet knows that those days are gone forever, having been based on a premise that proved false. The defined benefit pension model assumed risk-free long-term investment returns in the stock market. No such returns exist, it turns out. As one actuary told me yesterday, “It’s a model that doesn’t work in the real world.”

It is somewhat surprising, then, to see a proposal from one of Canada’s leading bankers promoting a variation on a defined benefit pension plan. In a speech this week at a policy forum in New Brunswick, Gerry McCaughey, CEO of the CIBC, called for the expansion of the Canada Pension Plan or establishment of a “CPP-like vehicle” that would give Canadians a new opportunity to save more for retirement.

The key elements of the McCaughey plan are sketchy. Canadians would be offered an opportunity to sign up for a regular savings regime on a voluntary basis, perhaps doubling their current contributions to the Canada Pension Plan. Employers would not be required to match funds, but the money would flow into a national pension plan managed perhaps by the Canada Pension Plan Investment Board.

Individual Canadians would then essentially be investing their money on a voluntary basis in the investment performance of the CPPIB. Such a plan “would give Canadians the choice to put aside more — a little more at a time — with the confidence of clearly knowing what benefits it will bring,” said Mr. McCaughey. “It would deliver scale, date certainty and real dollar amount certainty.”

Read excerpts from a speech by Gerry McCaughey, chief executive of CIBC, before the Public Policy Forum’s National Summit on Pension Reform Tuesday.

With this plan, however, Mr. McCaughey is reintroducing the defined benefit pension concept on a national scale, a concept that seems beyond the ability of any pension system to deliver. There is no way to provide individual investors with guaranteed pension benefits 35 or 40 years into the future, because there is no way to guarantee investment returns.

Mr. McCaughey did not say who would pick up the ball if the benefits could not be met.

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To back the need for such a major national scheme, Mr. McCaughey depended on some long-term projections by the bank’s economists. Their report, issued Wednesday, was standard forecasting fare. Looking 40 years into the future based on current assumptions and trends, the report concluded that Canada has a massive long-term saving problem on its hands. Unless Canadians save more, coming generations will find their retirement incomes fail to maintain their pre-retirement standards of living.
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All the number crunching, however, does more to promote extreme action and fear mongering than shed light on Canada’s saving and retirement issues. Blake Goldring, CEO of AGF Management Ltd, on Wednesday called for “compulsory” savings regimes. “Compulsory participation seems extreme, but we are facing an extreme situation.”

If Canadians won’t save voluntarily, they must be forced to save. Or so goes current panicky thinking, as if Canadians were individually too dumb to begin doing some of their own thinking about their personal saving needs.

With these proposals, Mr. McCaughey and Mr. Goldring are feeding the national nostalgia for a risk-free pension system with fat benefits at the end.

Dangling the prospect of a risk-free national system creates more problems than it solves. For one thing, it lends credibility to promoters of organized labour’s proposals for a major CPP expansion. At the same conference where Mr. McCauchey dropped his plan the head of the Canadian Union of Public Employees reiterated the union’s call for a massive expansion of the CPP. Benefits should be doubled, said CUPE head Paul Moist, and employer contributions should be increased.

Mr. Moist knows where the problems are. Lurking in the background are the big government employee defined-benefit plans — for teachers and other civil servants. These are dinosaurs walking the land, their long-term future at risk in the wake of the giant meteor that has blown away their investment feeding system.

A new era of saving and investment dawns, one based on realistic assumptions about risk, changing demographics, greater longevity. But new eras require new thinking on the part of individuals, business and government as to who should carry the risks.

Canada may need new savings vehicles and tax rules, new regulations to facilitate savings. There appear to be many options on the table. Trying to create a new national substitute for a fantasy seems like the wrong way to prepare for the new era.