Canada Pension Plan Memo

To: Generation X, Generation Y and Millennials

From: The Baby Boomers

Re: Pension Savings 

Date: June 21, 2016

It has come to our attention that you are not saving sufficiently for your retirement. This does not surprise us. We haven't saved sufficiently for our retirement either. Some of us have made enough money in the housing market to be relatively comfortable, and a good number of us have workplace pensions. Low-income Baby Boomers will be protected by Old Age Security, Guaranteed Income Supplement and the Canada Pension Plan. But middle-income Baby Boomers without workplace pensions - people making $60,000 or $80,000 a year - are facing a big drop of their standard of living upon retirement.

So we've decided to reform the Canada Pension Plan. You have to understand: we are doing this for you. It's for your benefit, so that you will have a secure retirement. Now we know you might be a little bit sceptical.

Source: Rosen et al, Public Finance in Canada

After all, when the Canada Pension Plan was first introduced, people who were in their 50s and early 60s at the time enjoyed massive windfall gains. The 1985 overhaul of the Canada Pension Plan preserved benefits for older Canadians by increasing the premiums paid younger Canadians. So we understand that you may be worried that this set of reforms is just another money-grab. 

You shouldn't be concerned. Those people who say you will pay more into the CPP over your lifetime than you will ever collect in benefits don't factor in the value of the disability insurance that the Canada Pension Plan provides. The Canada Pension Plan Investment Fund has a diversified portfolio of assets, and lower administrative costs than a lot of private funds.  These changes will be great for you.

Trust us. Why would we lie to you?

Comments

[Avon Barksdale]

Nice post Frances.

I find this CPP expansion so disingenuous. The way it's sold is just terrible. There is no such thing as an employer contribution – the employee pays the who shot. If a job pays $50,000 per year, the business doesn't care if it pays that money to the employee or the government, the marginal product is $50,000 period. Expect take home wages to go down. It will do little to solve the so called savings problem. People will adjust private savings downward to keep their consumption more or less the same in the face of the higher contributions – there will be at least some displacement. CPPIB is increasingly not a good deal in terms of its management fees. It has become a giant actively managed fund with fees nearing 3 billion dollars per year. They do economically nonsensical things like invest in many different hedge funds at once. Newsflash – the more hedge funds you invest in, the closer the returns looks like the index, you have just found a way to buy an index fund for two and twenty! As you point out, unless you become disabled, you will not receive what you contributed to CPP, and you have no capacity to bequeath your benefits after death. It surprises me that people over look the estate planning issue. For the median wage earner, we are talking about 10% of your total lifetime earnings, and you seriously want to have no control over that after you die? Finally, the paternalism is so ugly. How does the government know the optimal savings rate for each family? I agree that we shouldn't let seniors live in poverty, but the most vulnerable seniors contributed little to CPP over their lives in the first place. This expansion is smokescreen to get votes from a middle class who won't read the details. I know that the government loves to trot out behavioural economics as a justification for CPP expansion, but perhaps we should start applying behavioural economics to public choice.

[Bob Smith]

Nice post.

I'm sort of mystified by the proposal. If, as seems to be the case, this is targeted at people making $55-$82k a year, I'm not sure how effective it will be. After all, while people in that group may be under-saving for retirement, but I'd be surprised if they all saved nothing. To the extent they have any savings, you'd expect the forced savings in the CPP would just replace existing (inadequate) saving, making them no better off (and, to the extent they have less control over their wealth, potentially worse off). I suppose there might be some people in that group who save nothing, in any form, but they (rationally) might respond to increases in expected future income by current dissavings (e.g., borrowing - it's not as if that isn't a problem for Canadians).

Moreover, to my mind, the biggest issue is the loss of autonomy over savings. The CPP forces people into a one-size fits all savings vehicle, without regard to their unique need and circumstances. Maybe some people want less income during their retirement in order to leave money to their kids (both my kids have disabilities, so this is a real issue for me), well that's not an option under the CPP. Maybe some people have shortened life expectancy and want to blow their money while they can enjoy it, again, not an option. Maybe people want to access their savings to start up a business or buy a house. Again, not an option. Even if, at the end of the day, I would rationally choose the CPP over all other options (and, there's at least some compelling arguments that that isn't self-evident), there's value in simply having the choice (aside, the value of simply having a choice, even if it doesn't affect the outcome is a point that much of the analysis of the Brexit debate misses. Although a sovereign Britain might rationally choose to adopt most of the policies that have been forced upon it by the EU, the choice of saying "no", even if not exercised, is valuable).

That said, I suppose the upside of the proposed CPP reform is that it's not half as ill-conceived as the proposed Ontario pension plan. That's a nice bit of political framing there by the provincial Liberals - suggest a plan that so ill-considered that I'm glad to replace it with anything else. The other potential upside was suggested by Phillip Cross in today's post to the effect that an increased CPP reduces government payout obligations under most public defined benefit pension plans, making the CPP reform a sneaky way to get public servants to pay for more of their pension entitlements. If he's right about that, I'm baffled why all the public sector unions have been lobbying for this sort of change, as it is clearly contrary to their own members interests.

[Kevin Milligan]

Hi Frances,

you're right on the mark for past CPP reforms--great benefit to boomers.

But this time, the wording of the announcement seems to indicate a 2nd tier that would not result in a windfall gain. To buttress that interpretation, wasn't there wording put in the 1990s reform that any further expansion would be on a demographically paid-for basis? Admittedly, I can't find that provision in the CPP Act right now, but I know it was part of the 1990s reform discussion.

We will need to wait and see if this is just an expanded YMPE that will provide a windfall to those now aged 55-60 as you fear or if it is a true 2nd tier that would not be a windfall.

[Stewart]

Why are young people receiving fewer benefits than contributions? Is it because we are backfilling for previous generations' benefits?

[Frances Woolley]

Kevin -

I hope you're right but fear you may be wrong, for two reasons.

First, how much $1 in contributions now buys in terms of future benefits depends crucially upon the rate of interest. Can we be sure that the interest rate that's being assumed in the underlying CPP calculation is realistic? What if - as I suspect - it's unrealistically high? We may think that we're going forward on a demographically paid-for basis, but in fact we'll create a windfall gain to the people who retire in the next few years.

Second, I don't understand the politics behind something that doesn't create windfall gains for people nearing retirement. Yes, I think that actually CPP does pretty well compared to private investment funds, but we're talking about pretty small differences here. I can't see people going to the ramparts to fight for something that gives an extra 1% on their rate of return on investment after management fees.

How about this as an alternative story: there's an idea out that that seems to have pretty widespread support among sensible economists that payroll taxes get shifted onto workers (except minimum wage workers)- eventually. So it takes a while for that shift of taxes from employers to workers to happen. So an increase in employers' CPP premiums will be born by employers ins the short term and by workers in the long term. Again there's an intergenerational equity story to tell here - if tax shifting takes time it's millennials and gen y works who will bear the brunt of wage/labour adjustments created by these increased CPP employer premiums, while those nearing retirement will get a clear benefit from the increased employer contributions.

[Frances Woolley]

Bob - interesting comments, thank you for them.

I agree with you in general that there is a very large difference between the type of implicit contract between contributor and pension provider offered by CPP/QPP on the one hand, and the much more explicit retirement contract available through RRSPs and TFSAs on the other hand (with employer pensions being somewhere in between the two). I guess I would place emphasis on autonomy than you do, however, and more on moral hazard, as in this old post: http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/09/the-overlooked-failure-in-pension-markets.html.

[Frances Woolley]

Avon: "I agree that we shouldn't let seniors live in poverty"

Yup. But the senior poverty issue is a total red herring. There are almost no married senior couples living in poverty - the seniors who are vulnerable to poverty are single, unattached seniors, many of whom - as you say - probably didn't have great CPP entitlements in the first place. *This is really not going to do much to address senior poverty at all, either now or in the future. It's not even about poor seniors; it's about the people with a total household income of about $80,000 or $100,000 a year with no workplace pension and minimal retirement savings - who are currently facing big drops in their standard of living upon retirement.*.

[Frances Woolley]

Stewart - yes, current workers are paying for current retirees' pensions plus pre-paying their own pensions. Also CPP/QPP provides pretty good disability coverage which is a significant and often overlooked (as in the diagram above) aspect of the program.

[Avon Barksdale]

Frances,

That's what I was saying: The CPP increase does nothing to address seniors in poverty. If we think of government as a mechanism to solve public good problems like poverty then CPP is a misuse of government power.

[Avon Barksdale]

Frances

How well CPPIB does in stocking picking is moot considering that individual benefits are not tied to market returns. Furthermore, CPPIB has no alpha. Anytime you think you have alpha, remember alpha is just beta you don't understand.

[Vladimir]

Has anyone done a back of the envelope calculation on the distributional effects? If I read the Globe correctly , the replacement income level is increasing from 25% to 35%. Surely that along with the higher level of insurable earnings will affect eligibility for the GIS and increase OAS claw backs . I get the sense that lower wage workers may effectively end up seeing little to no benefit.

[Frances Woolley]

Avon - yes, I was agreeing with and re-iterating your point about senior poverty for anyone who missed it (i.e. about 80% of the respondents to that recent poll about expanding the CPP).

[Frances Woolley]

Vladamir - the distributional effects are all going to depend upon how the phase-in works, whether the disability benefits are expanded, and precisely who ends up paying the employer contributions (owners of capital, workers in the form of lower wages, workers in the form of lower employment, customers in the form of higher prices), and the actual returns the CCPIB manages to achieve. Some people might have done back of the envelope calculations, but I wouldn't place a lot of faith in them.

[Bob Smith]

Frances,

Fair point re moral hazard (although, query whether the CPP resolves that issue or simply hides it - I seem to recall Andrew Coyne doing a deep dive recently in the CPPIB's annual reports and suggesting that it might not be as cost effective as advertised), but I'm not sure there needs to be a conflict - or at least as stark a conflict - between resolving the moral hazard and allowing autonomy (at least to a degree). You could have a mandatory savings vehicle with a choice of investment vehicles (possibly with an enhanced CPP as simply one alternative, maybe even the default one - I've long been a voluntary member of the Saskatchewan Pension Plan).

In terms of the political aspect, I think the phase-in over 5 years, starting in 2019, does some of the heavy lifting - i.e., the cost will be trivial before the next election, and the minimal nature of the benefits for soon to be retirees may not yet be obvious to them. The hope is the cost will come in gradually enough that it won't be noticed (e.g., boiling the frog). At the same time, the gradual phase-in will presumably make it easier for employers to shift all the cost to employees.

The other change is that they're making the additional contribution deductible, rather than creditable, which will reduce the apparent cost to employees (this is in keeping with the Trudeau governments focus on tax cuts for the upper-middle class). I'm kind of curious how that will play out. While there's merit to allowing a deduction for savings from a purely policy perspective, the optics of providing a deduction that's worth, say, 30 cents on the dollar for Joe Q. Public, but 54 cents on the dollar for Joe Q. CEO are probably poor.

Avon,

How the CPPIB does in stock picking may be moot for CPP beneficiaries - given their fixed benefit - but not to taxpayers who have to make up any shortfall in return (a group which, broadly, overlaps with the beneficiaries). That said, you point about the purported benefits of the CPPIB being oversold is well taken.

[Kevin Milligan]

Found the 'pre-pay' provision introduced in 1990s. 113.1(4)(d) of CPP Act
http://laws-lois.justice.gc.ca/eng/acts/C-8/page-32.html#h-66

"(d) that changes to the Act that increase benefits or add new benefits must be accompanied by a permanent increase in the contribution rates to cover the extra costs of the increased or new benefits and by a temporary increase in the contribution rates for a number of years that is consistent with common actuarial practice to fully pay any unfunded liability resulting from the increased or new benefits."

This says, as I understand it,that any new benefits must be paid for by increase in contribution rates on a forward looking actuarial basis. So, no inter-generational transfers here, as I see it.

[Frances Woolley]

Kevin - thanks.

This seems to say that any increases must be fully funded. However it doesn't say *who* is doing that funding. Fully funded is totally compatible with 35 to 45 year olds picking up part of the tab for 55 to 64 year olds.

[Phil Koop]

I can't see people going to the ramparts to fight for something that gives an extra 1% on their rate of return on investment after management fees.

Seriously? Let's try some concrete numbers. Suppose that the period of CPP contributions is 40 years, that the risk-free rate of return is zero, and the equity premium is 4% annual, leaving available a theoretical expected real return of 4% annual. You might think it is a bit lower or a bit higher, but it seems about right. A large fund like the CPP can actually achieve the market return! And let's accept your premise that the median CPP beneficiary would only incur additional costs of 1%; that is a heroically optimistic assumption based on the observed data, but whatever. Assume that real annual contributions are constant over the investment period; due to contribution caps, this is not completely unrealistic for the middle-income category you identify. Then for each dollar of annual contribution, the individual ends up with $77.66 whereas the CPP investor ends up with $98.82, or about 27% more wealth.

OK, so this calculation abstract, approximate, and contingent; people who underperform the market by 1% are by selection unlikely to "go to the ramparts" to fight about it. But they would if they understood it in a way that seems real to them. How would they react if you proposed a great new policy, the only drawback of which is that their property values would immediately plunge by 22%?

[Arrow1963]

The other aspect of this, which I haven't seen yet in this comment thread, is in the annuity value that CPP provides.

Can you even buy a true inflation-adjusted annuity in Canada? We looked into annuity options (for my grandmother): they seemed seriously impacted by adverse selection and sold through really inefficient processes.

The CPP is large enough that you have a population-level insurance pool for a better, cheaper annuity than anyone can buy privately. Overall (as an index investor), I think it's fair value, and don't mind contributing to it.

(Though I agree in general that this is a paternalistic 'non solution' to a 'problem' that doesn't really exist. )

[Avon Barksdale]

Arrow1963,

The CPP annuity is actually very expensive because it serves as a disability fund at the same time. For most Canadians, they will contribute far more to CPP than they will ever get in return.

Why do you say that privately sold annuities have serious adverse selection problems? Really? I doubt that. The people that the insurance companies don't want for an annuity are the healthy and long lived. It is true that super healthy people nearing retirement are lining up to buy annuities, but masquerading as unhealthy?

[Avon Barksdale]

Phil Koop,

CPP benefits are not tired to market returns. That the government runs a hedge fund on the side does not matter one bit. What matters is the benefit to which I'm entitled given my contribution. On that basis, CPP is a disaster for most Canadians.

[Arrow1963]

Avon,

1. So there's value in the disability insurance then, independent of the annuity? Doesn't make much sense to value one without the other.

2. "Adverse Selection" in this case runs opposite to that generally seen in health insurance. Because 'especially healthy people' are more likely to want to buy annuities, they need to be priced on the basis of atypically long life expectancies, meaning that prospectively 'average' buyers don't face a positive risk-adjusted return.... (death spiral).

[Avon Barksdale]

Arrow1963,

For adverse selection to create a market failure, I need some sort of information asymmetry. In the limit of perfect information, everyone would get their actuarial fair price. If I can't tell who's who, then I assume that everyone is healthy and drive up the price for everyone, creating a market failure. But insurance companies do have the ability to get information. They can see that someone is unhealthy and offer a lower price. I suspect that market failure isn't a big deal here.

[Arrow]

Avon,

That's cute. You assume there's a functioning market. Having looked into the market, and being an economically literate consumer, I'm telling you that there isn't.

I honestly don't know if it's a legal restriction, or just practical, but I have very little faith that you can find competitive quotes on an 'impaired annuity' (and again, good luck finding something with a CPI match).

[Avon Barksdale]

Arrow

So let me get this right. You calculated the fair price of a impaired annuity from scratch and came to the conclusion that the offer was wrong? How do you know the market isn't working? How do you know quotes aren't competitive?

[Arrow]

Your personal standard for market failure is the precise personal knowledge (and presumably risk structure and risk preferences) of firms, consumers, and potential competitors?

I don't know the precise price structure of any monopolist (or large oligopolist). However, given basic economic theory, I can have a pretty firm working assumption that they're collecting economically inefficient levels of profit, deadweight loss exists, and that there is room for improvement as a consumer.

This is all aside from the fact that, in our search, we could not find the products we thought were theoretically useful. I'm hesitant to say that something doesn't exist "at all" because I'm not omniscient, and evidently that's the level of knowledge necessary here to argue that a niche market isn't efficient.

Those which were transparently priced had an implicit life expectancy of more than 5 years greater than average (based on age adjusted life tables), and even that depended on interest rates and inflation remaining historically low over the next 20 years.

I was interested. We looked at the options, and decided not to buy. The industry is built around 'selling' bad products to people who don't know better on the basis of increasingly high commissions for increasingly high modeled corporate profit levels. The 'annuity puzzle' is that consumers don't annuitize, even though there are obvious welfare gains to risk minimization. One explanation is behavioural errors and false risk assessment on the part of consumers. The other is that the market is not competitive, and prices are out of line. Having personally been on the consumer side of this transaction, my diagnosis is 'market failure'.

If you're actually interested in seeing the market as it is, I'd like to see 2 public quotes on Canadian CPI - adjusted annuities (like the CPP). I'll wait.

[Frances Woolley]

Phil: "Seriously?"

I agree with you that fees matter - in fact Canadian fund management fees are a national disgrace. My point is more a political one. Only a minority of people will get emotionally invested in this issue - even though fund management fees make a huge difference to people's future standard of living.

[Avon Barksdale]

Arrow

So now it's monopoly power not adverse selection?

[Arrow]

Avon,

No, the primary issue here is adverse selection.

The reference to monopoly power serves only to illustrate the absurdity of this level of prima facie allegiance to the assumption of economic efficiency in the real economy.

[Avon Barksdale]

Arow

And government monopolies are better? Why are government monopolies the solution? Economic efficiency might not be perfect but I'll take a market failure over a government failure any day of the week.

There is no reason to think that annuities are inefficiently priced in Canada. To the extent that they are, government is the problem in preventing competition and through hyper-regulation. That's hardly a reason to support CPP - fixing a government mess with more government.

[Don Janzen]

Big CPP

In the interest of full disclosure, I am a Financial Planner. I have a vested interest in this topic because my income is derived from helping people save for their goals. If CPP is increased it will likely affect my income because even more people will decide not to be responsible for their own finances and let the state provide for them.

Now that that’s out of the way……

The first step to fixing a problem is to define it. There have been plenty of opinions thrown around on this topic but I have yet to see a legitimate comprehensive study that says we have a retirement problem currently or that we will in the future. Who is suffering now? Who is anticipated to suffer in the future and why? What metrics are being used to determine who will be in trouble? Casting aside entirely useless anecdotal evidence, here are the hard facts that anyone can unearth with a little research.

Senior poverty is way down. According to several published studies (search for “senior poverty Canada”), we have one of the best records of senior poverty reduction in the developed world. It’s not completely eradicated and in the last couple of years we’ve slipped a bit but we’re doing well. And there are millions of seniors that may appear to be poor when compared to whatever benchmark you think is appropriate, that live very comfortably because they have always and continue to live within their means.

So those are the facts about senior poverty. No gaping hole of need there.

Now the low income earners. Thanks to our current system of public pensions, two thirds of the lower wage earners will receive more income in retirement than they do at age 50!

For middle to high income earners, they have the means to save for their retirement so why are we concerned about providing them with retirement income? If these people are unable to afford the retirement they envisioned because they decided to allocate their incomes to other pursuits, wouldn’t education and coaching on how to budget and manage personal finances be a much better use of resources? I suspect that a major reason some people fall short of their retirement savings goals is the misuse of credit so let’s fix that problem. Which raises another point. Big CPP advocates also ignore the fact that many of these middle income earners haven’t saved because they’ve been buying and paying off homes. For them, their home may be their retirement plan because they can sell, downsize and pocket the difference to generate additional retirement income. And what about inheritances? There’s trillions of dollars waiting to be transferred from our parents to us. That will certainly make a big difference for many. And many people will choose to work beyond age 65. Not everyone hates their job. Many are very happy to continue to work and earn enough money to support their lifestyle. Because of increased life expectancies we should expect the lines between pre and post retirement to get quite cloudy. Unfortunately some will find it necessary to continue to work but many will do it happily.

And finally, the top income earners deserve no additional help from taxpayers to enjoy their retirement but changes to universal programs like CPP will put more money in their pockets so clearly increasing CPP benefits across the board should be a non-starter.

By the way, back to poor seniors. As I said above, we have come a long way towards eradicating senior poverty but we haven’t achieved 100% yet. But this plan of increasing CPP will not fix this. Those who never worked or contributed only small amounts to CPP will never benefit from an increase in CPP benefits. Two times zero is still zero. Enhancements to OAS and GIS like increasing payouts and drastically throttling back the eligibility to provide more income to seniors that really need it so they can afford decent housing and adequate and nutritious food makes much more sense that any CPP changes.

The lack of any benefit for low income earners and the lack of any need for high wage earners should, on their own, be enough to stifle any further talk about increased CPP.

So who exactly needs help? It’s ludicrous to create a solution if we don’t know precisely what the problem is. Simply repeating over and over again that Canadians aren’t saving enough to retire comfortably doesn’t make it a fact. Throw out the old chestnut about needing 70% of pre-retirement income when you retire. Seventy percent is too much for some and not enough for others. You will need the assets to create the income for the lifestyle you choose. It takes some effort for individuals to do this calculation but to make broad changes for undefined objectives is not good policy and just plain lazy.

Aside from that, here are more reasons not to implement any CPP changes:

Cash flow drag for all employees, employers and self-employed Canadians.
It’s a fact that overhead costs are very important to business owners so they try their best to keep their cost down and an increase in CPP premiums will absolutely factor in on any decision about hiring or maintaining employee levels. Anyone who disagrees has never run a business. Last year, the head of the CLC and a very vocal proponent for increasing CPP benefits, agreed that it was not a good time to increase EI premiums for that exact reason. But now he doesn’t perceive an increase in CPP premiums as a drag on the economy or that it will jeopardize jobs. I sent him an email asking why but he didn’t answer. And don’t forget the millions of self-employed Canadians. They will not feel kindly towards anyone who foists an increase on them because they don’t have an employer to stick half the premium with. They get to pay 100%. And by the way, the “employer” for government employees isn’t some obscure multinational corporation – it’s the taxpayers, you and me.

Reverse Robin Hood
It’s universal so working poor will take home less income so rich retirees will get more

Pensions will adjust
More CPP benefits mean that pensions will be motivated to reduce their benefits

Bad social policy
Discourages self-reliance, accountability, saving and planning

Loss of flexibility and options
Unlike personal savings, you can’t decide what sort of savings vehicle is best suited for your specific needs and temperament when you contribute premiums to CPP. Along with that complete abdication of control, you lose the option of dipping into your savings on a rainy day because there is absolutely no way to access your CPP savings to provide necessities of life if you lose your job, to buy a home or pay for education for you or your children. And if you have saved adequately and you’ve determined that you don’t need more for your retirement, you will continue to be forced to make contributions instead of going on vacation, buying a rental property or buying that “toy” you’ve always wanted.

Diversification of savings
Is it smart to put even more of our eggs in one basket? Common sense dictates that we should diversify more instead of putting more in CPP. Diversification of managers is as important as diversification of assets. And there comes a point where an investment fund can become too big. With additional size comes less flexibility and nimbleness. Gargantuan positions in securities cannot be changed with the speed of much smaller funds. And an even bigger CPPIB could distort markets especially small ones like Canada. Warren Buffett, arguably the best investment manager in the world once said he could generate 50-per-cent annual returns if he ran a smaller portfolio so clearly a gargantuan fund might sound like a plus but it’s not. Also, if the CPP Investment Board managers favour one sector of our economy over another, it could hurt un-favoured economic sectors in our economy.
Estate value
When you own your own savings you can pass any leftover assets to your heirs. Not so with CPP. There are small spousal and dependant benefits and a very small death benefit but that’s it. There are no guarantees that you or your loved ones will receive back even 100% of what you’ve contributed because all that money you’ve contributed over the years isn’t really yours.

Red Herring, “conventional wisdom” issues that cloud the discussion

“Excessive fees of retail investment choices”
The myth that Canadian mutual funds are higher than other jurisdictions has been busted. It’s simply not true (search “are Canadian fees excessive?”). But there is a cost of owning mutual funds so if you believe that the cost exceeds the value you receive, there are many other low cost options like ETFs or GICs.

“Canadians can’t save”
How is it that if people cannot find a way to put aside anything in savings but they will be able to afford more CPP contributions? Is it merely a discipline issue? Then let those without discipline sign themselves up for CPP at a level of their choice and let others opt out. And if self-discipline is a problem, mutual funds with deferred sales charges and a professional advisor’s advice and coaching will help to keep people on course and resisting the urge to let their emotions drive the bus. This is where those fees with mutual funds become very cost effective. To paraphrase the Mastercard commercials – Helping people stay the course with their investments…. Priceless.

“Doubling CPP benefits can be achieved with a modest increase in premiums”
This is the position that the Canadian Labour Congress is promoting. This concept defies simple arithmetic. Maybe that’s why no one will produce the data that supports this fantasy.

“People aren’t contributing to their RRSP, the program is a failure”
This is a completely unreasonable leap in logic. We know that something like $633 billion in RRSP room is available. But do we know how much of that room is “owned” by people who shouldn’t be contributing to RRSPs? Contributing to an RRSP doesn’t make a lot of sense for people who will be in the same marginal tax rate when they retire as they are while they’re working either because they are at the low end of the income spectrum or the high end. And since low income people will be well provided for via public pensions and many high income people have rich pension plans they don’t need an RRSP and tax-wise they don’t make sense either. Plus how many people just don’t need to contribute to RRSPs for other reasons like inheritances, real estate or businesses that they intend to convert to income when they retire? Low contribution rates do not equal a failure of the program.

“Mutual funds are too risky”
The CPPIB invests in publicly traded stocks and bonds just like mutual funds. Why is one fund risky but the other is not?

“CPP benefits are guaranteed, the CPP fund has done well, and their fees are incredibly low”
Well yes and no. If markets don’t co-operate or demographic projections don’t play out as planned, the only way to continue to pay out at promised levels is to increase the premiums. It’s not magic. Any perceived guarantee depends on our willingness to prop up the plan.
The performance of the fund isn’t magic either. It has ups and downs just like any other pool of investments. The difference is that unlike your personal investment portfolio, the CPPIB isn’t required to send you a personalized performance report. They don’t even send you an overall performance report for the fund. It’s available online if you look for it but they aren’t required to do any more than that so they are able to maintain and an illusion of no losses and only positive growth.
Comparisons of fees between the CPPIB and other vehicles are unfair. The CPPIB doesn’t have the same costs or provide the same services that come with the investment in a mutual fund. Try to make an appointment with a CPPIB employee to review your account, get their advice about tax planning, retirement planning, a severance payment or your spouse’s estate. It’s not hard to see why their fees are low. Besides managing the investment portfolio they don’t have to do anything else.

“Most Canadians are behind increasing CPP benefits”
Well if you spin a topic properly and ask the question the right way to the right audience, you’re bound to get the answer you’re looking for. But tell them the possible negative aspects of the saying yes and you’ll likely get different results. Next time someone tells you the results of a survey, ask to see the question and who and how many people they asked.

So at best, we have a solution looking for a problem. But more unsettling should be the fact that none of the proponents of Big CPP have ever submitted their full mathematical analysis along with their assumptions to first prove claims that there is a crisis and that their proposals will float. I’ve asked various Big CPP pushers but I’ve never had any luck. But if that’s not worrisome enough, one proponent, an esteemed professor from the University of Ottawa says we shouldn’t worry about full pre-funding! It’s not important. And he has a PHD in Economics from Cambridge!

It’s difficult for me to see this as anything more than a push for more income re-distribution for the sake of an ideology that plays well with those who have squandered their income on things instead of saving for the future and those who see nothing wrong with carrying debt into retirement. Company pensions have never been a major factor either. About 30% of Canadians have a pension today and that number hasn’t been much higher than that, ever. Generations of Canadians have retired comfortably on their savings coupled with public pensions. We all know of many, many examples. What’s different now? Why can’t this and future generations live within their means and plan and save for their retirement? Why should those who have saved support those who have not? No one will starve if we don’t increase CPP - no one. The need is being manufactured and repeated over and over in an effort to pull the wool over our eyes. Politicians who have a need to deflect their mismanagement of other issues are quick to jump on this bandwagon to improve their image. I sincerely hope that this issue is put to a serious debate before we proceed because when you look at it logically I’m afraid this emperor has no clothes.

I opened with an explanation of my interests and biases on this topic. Everyone has them but I’ve made sure I was up front about mine. Hopefully readers are able to evaluate my opinions without dismissing them out of hand. What you have to ask yourselves is what are the biases of the Big CPP proponents? What’s in it for them?

[Declan]

Notwithstanding Avon's determination not to understand the concept of adverse selection (no, it can't be solved with more competition!), Arrow makes a key point - the big plus of the CPP, efficiency wise, is the annuity aspect which generally goes overlooked.

With respect to the original post, it seems to be an attempt to substitute generational warfare for analysis and seems to suffer from sunk cost fallacy in a way which you might not expect to find on this blog in particular. I don't appreciate the implication that the true statements at the end of the post are in fact lies, when they are clearly true. Finally, this is an economics blog, so I understand the motivation here, but it still seems silly not to engage the primary stated motivation for the changes, that people won't save enough if left to their own devices.

[Kathleen]

@Don Janzen: "About 30% of Canadians have a pension today and that number hasn’t been much higher than that, ever."

Not sure where you are getting this fact.

Proportion of Paid Workers Covered by an Registered Pension Plan (RPP) in 1991 was 45.3 (49.1% for males, 40.8% for females). Of these RPP's, 86.5% of the Private Sector plans were Defined Benefit plans.

Proportion of Paid Workers Covered by an Registered Pension Plan (RPP) in 2006 was 38.1 (37.5% for males, 38.9% for females). Of these RPP's, 74.2% of the Private Sector plans were Defined Benefit plans.

Statistics Canada. 2000. Pension Plans in Canada, Statistics Canada Catalogue no. 74-401-XIB. Ottawa. P. 18
Tamagno, E., Occupational Pension Plans in Canada: Trends in Coverage and the Incomes of Seniors (Ottawa, Caledon Institute of Social Policy, 2006)

Likely the trend of disappearing RPP's has continued, so it is clear that the people who are retiring today came from a pension environment that is very different from the one being faced by current younger workers.

The CPP expansion seems pretty tame. It is fully funded so a boomer who is retiring now will not see any additional contributions or benefits. Current workers can simply look at this as providing them with access to a reasonably priced fixed income vehicle. Those who are going to be relying on RRSP's and their own savings can simply reduce the asset allocation to fixed income investments. That alone is worth the price of admission. It is the one asset class where there are very few good options to the retail investor.