Jack Mintz, Research and Pensions
It is a bit stunning to discover that Jack Mintz – former head of the CD Howe Institute and now at the University of Calgary – has been appointed research director of the federal – provincial review of pensions.
Even Finance Minister Flaherty should be a bit embarassed to appoint as a “researcher” someone who is so strongly on the record as a fervent defender of individual responsibility for retirement savings and the virtues of RRSPs. And one can only scratch one’s head and wonder why the provinces would have agreed to the appointment of someone who has attacked recent provincial proposals so strongly – assuming they were asked.
According to a media release from the Department of Finance
“At their last meeting on May 25, 2009, federal, provincial and territorial finance ministers agreed to create the Research Working Group on Retirement Income Adequacy to expand the knowledge base underpinning the subject of retirement income adequacy. This group, chaired by Ted Menzies, parliamentary secretary to Minister Flaherty, and supported by research director Jack Mintz and finance ministers from British Columbia, Alberta, Manitoba, Ontario and Nova Scotia, is to report to finance ministers and ministers responsible for pensions by the end of 2009. The first meeting of this group was held on July 22, 2009, in Calgary and participants agreed to a work plan, which will culminate in a report to ministers.”
http://www.fin.gc.ca/n08/09-072-eng.asp
Jack Mintz is squarely on the public record as an opponent of new public pension plans, and a strong proponent of individual savings through RRSPs. In a May op ed in the National Post he specifically warned against recent provincial proposals:
Nova Scotia, Ontario, British Columbia and Alberta issued reports last year not only addressing regulatory issues but, in some cases, proposing a dangerous new idea: a government-promoted multi-employer pension plan, something akin to group RRSPs and other retirement savings vehicles, except subject to pension regulations…
From a public policy perspective, the notion that governments should set up multi-employer super-funds operated on a non-profit basis is flawed for two reasons.
By pushing for super pension funds that operate on a non-profit basis, the government is creating a non-taxable competitor who has a clear advantage over private companies such as banks and insurance companies that offer an array of similar products to enable individuals to fund their retirement benefits through RRSPs rather than defined contribution pension plans. While a non-profit pension plan might save some money in this respect, it is no different than government choosing to establish non-profit businesses in other industries, shifting resources to untaxed providers.
More worrisome is the potential implicit liability faced by governments. While the B.C. government, for example, has made it clear it has no legal responsibility towards any financial problems that might arise from a province-wide pension fund, it would likely be politically responsible. With the kind of markets we have had lately, employees close to retirement might be upset with a money-losing plan that their government helped create and expect compensation paid to the plan. Just think of provincial-sponsored pension funds as the Fannie Mae of the pension industry.
I think it would not be a stretch to say that, far from being “embarrassed,” by appointing someone as, shall we say, opinionated as Jack Mintz, Flaherty has implied in advance just what sort of recommendations he wants coming out of this “investigation.”
In other words, the purpose of this sham “research” process is to produce a report justifying increased focus on personal savings vehicles (RRSP, TFSA) and decreased support for public pension plans.
This is just another example of government supporting private profit making over non-profit government plans. The government is not fit to compete with private plans just fit to rescue them when they go sour! All power to the corporations.
I’m guessing that Andrew is just feigning being stunned. We’ve got a Conservative government in power, and Jack’s a conservative economist. He’ll give them a review they want to hear, and because he’s a respected economist, it will give them some ammunition for pension reform.
I think Jack’s argument that Andrew has quoted seems fairly convincing; I’d be interested to hear a counterargument, as it sounds like Andrew probably disagrees with Jack.
I do disagree with Jack. See earlier posts to this blog under “pensions” especially http://www.progressive-economics.ca/2008/07/03/a-new-pension-debate/
In a nutshell, individual savers set aside far too little to secure a decent retirement, and they achieve far lower returns than large, well managed, low overhead pools of pension savings.
Andrew, your argument appears to boil down to whether a government plan would have an overwhelming cost advantage over private savings. In the post that you link to you cite a 3%-4% per year difference, which is huge.
That might have been true once (after all, Canada’s mutual funds have the highest MER’s in the world!) but is no longer true. ETF’s (Exchange Traded Funds) have much lower MER’s and provide low-cost diversification (costs for a diversified portfolio running around 50 bp per year using the Barclay’s and Claymore offerings).
Suppose Jack Mintz recommends raising RRSP limits and expanding TFSA’s. Would that be a bad thing for those not currently covered by a defined benefit pension plan?
Mintz sets the bar extremely low for private industry. He does not even really argue that private financial managers would do a better job.
His issue is the alleged unfairness of exposing them to public-sector competition. This is the position of US health insurance companies against the prospect of a public provider. Taken to its logical conclusion, this position opposes public provision of any services.
Mintz suggests that proposed public pension plans would have an unfair advantage because they would be “non-taxable.†But they would pay no tax even if they were “taxable†because they would never generate profits. So, Mintz’s contention is actually that non-profit enterprises have an inherent advantage over profit-seeking enterprises.
My understanding of neoclassical economics is that the profit motive prompts such efficiencies in profit-driven enterprises that they can sell products cheaper (and still turn a profit) than non-profit enterprises. If this premise is true, then private financial managers have nothing to fear from a little non-profit competition. If this premise is false with respect to financial management, then society would indeed be better off providing this service on a non-profit basis.
Either way, Mintz’s position is wrong. The standard to which private enterprise should be held is actually doing a better a job than public or non-profit enterprise. Otherwise, its profit is just waste.
Erin’s argument appears to be independent of the tax rate, which can’t be right 😉
Also, I don’t think it’s so obvious that Mintz is wrong (not that he’s delivered a report yet). Don’t forget that you typically have no choice about whether to participate in public (=state) operated programs. I’m not allowed to opt out of CPP or EI, for instance, even if I think they’re a bad deal.
If I have no choice about participating (i.e. if I am coerced into joining even if I think someone else could do a better job in providing me with a pension), shouldn’t the program be held to an extremely high standard? In fact, since coercion is generally taken to be a bad thing, shouldn’t it be a last resort?
The case for compulsory participation flows from the fact that people are manifestly not saving enough when it is up to them – hence the huge amount of unused RRSP contribution room and the emerging consensus that there will be a large future shortfall in retirement incomes due to the decline of workplace pensions (which are not voluntary for individuals.) Enhanced RRSP contribution room would only increase savings for those who already save to the max – which essentially boils down to those with high incomes. Last stat I read was that the median value of an RRSP for persons aged 55 to 65 is just $60,000 – enough to buy an annuity of about $3,000 per year.
Canada has made a mess of income security programmes. More pension reform advice coming from Mintz and the premiers should worry us. The talk today is of bringing the Banks into the discussion.
We probably need to establish a parallel committee to the Mintz group, calling on Bob Baldwin, Monica Townson and some other notables to help educate us on what a secure pension regime would look like in the context of public finance.
Privatizing the management of the CPP, and sending money into the stock market has not worked. Putting provincial public pension money into the market rather than into government bonds has not worked. Allowing tax subsidized RRSP money to go abroad has not worked.
It would make more sense to tax corporations at a higher rate to fund public pensions than to allow private pension funds to go under when companies go under, leaving people who have paid in to plans without pension coverage. In essence we need to insure private pension plans.
Starting from first principles, a true public pension plan would cover every adult, and would represent an intergenerational transfer of purchasing power. Funding levels would depend on the amount of public investment planned. Corporate contributions should take the form of payroll taxes recognizing that value added should not just go into the pocket of companies. Creating large pools of capital only makes sense if the pensioners-to-be have control of their deferred wages which is what individual pension contributions really amount to.
Different people make different choices about how much to save, so it’s hard to make blanket generalizations. Perhaps some of them take the existence of OAS and GIS into account when deciding how much to save, and perhaps some of them are making consumption/savings choices that we personally might not agree with, based on their own preferences.
Not everyone thinks that Canada has done a terrible job on income support programs: see, for example, http://ideas.repec.org/h/sls/secfds/08.html
Note that an intergenerational transfer of wealth would obviously create winners and losers based on age, and is therefore a huge political issue. I can see why someone currently at or near retirement age would be in favour of it, but I can’t see why my kids would be.
If we want workers to control their deferred wages (or “investments”, if we’re being less coy) then RRSP’s and TFSA’s are one way to achieve that. And the incidence of payroll taxes is such that increases mostly end up falling on the workers in the long run, as I think we all know, so it’s not obvious what the benefit from hiking them would be.
Mintz is also the head of the University of Alberta’s School of Public Policy, most recently notorious for insisting that Bush war criminal Condoleeza Rice attend as guest of honour for the gala opening. Mintz said Rice was a good example of what a school of public policy can produce. Mintz has corporate connections to big oil as well.
OK, betting on the URL theory, here’s more or less my detained post:
Different people make different choices about how much to save, so it’s hard to make blanket generalizations. Perhaps some of them take the existence of OAS and GIS into account when deciding how much to save, and perhaps some of them are making consumption/savings choices that we personally might not agree with, based on their own preferences.
Not everyone thinks that Canada has done a terrible job on income support programs: see, for example, Lars Osberg’s paper entitled “Poverty Among Senior Citizens: A Success Story”.
Note that an intergenerational transfer of wealth would obviously create winners and losers based on age, and is therefore a huge political issue. I can see why someone currently at or near retirement age would be in favour of it, but I can’t see why my kids would be.
If we want workers to control their deferred wages (or “investmentsâ€) then RRSP’s and TFSA’s are one way to achieve that. And the incidence of payroll taxes is such that increases mostly end up falling on the workers in the long run, as I think we all know, so it’s not obvious what the benefit from hiking them would be.
The Mintz report can be found here and the Baldwin report here.
In light of Mintz’s views, I don’t suppose that Minister Flaherty’s announcement today (December 16, 2010)that the government is abandoning expanding CPP in favour of banks and employer controlled pensions!
Pooled Registered Pension Plans may (PRPP’s) well be a good choice for many people if the expenses are low enough. Whether CPP expansion is off the table or not remains to be seen. It seems to be taking a lot of time to get Alberta and Quebec on board., and the Federal government cannot act unilaterally on this.
From a macroeconomic perspective private pension plans, RRSPs, TFSAs, and all other private savings vehicles constitute a drain on aggregate demand which needs to be made up by government spending, business investment, household debt or exports or else unemployment will increase. It would be better to increase OAS\GIS.
Additionally, relying on the private savings vehicles listed above for retirement income means speculating in financial assets over several decades, a risky business for individuals. Expansion of CPP and OAS/GIS eliminates this needless risk.
Finally, the expansion of private savings vehicles is a way to subsidise the financial industry by having it provide a service that is much more efficiently provided by government programs. All the financial advisors, actuaries, investment specialists, etc, whose jobs would become redundant should be retrained to do something useful such as finding ways to reduce climate change, improve public health, and so forth.
If CPP benefits are increased, and the increased contributions are invested by the CPPIB, then the situation is no different than if individuals decided to start saving more of their paycheque and invested those savings in equities and bonds, just like the CPPIB does.
Expansion of CPP, OAS, and GIS might be a good idea, but in the meantime many people ought to think about boosting their own personal retirement savings.
“Expansion of CPP, OAS, and GIS might be a good idea, but in the meantime many people ought to think about boosting their own personal retirement savings.”
The fact is most people will fail to do so. It’s a flaw in human nature.
I agree that behavioural economics has a lot to teach us, and I think Dan Ariely is doing a nice job popularizing it.
Richard Thaler and Cass Sunstein wrote a book called “Nudge” about how to harness some of these irrationalities for good. Chapters 6 through 9 deal specifically with encouraging better financial decisions. It’s an interesting read.
Re rcp @ 3:04pm:
I agree entirely regarding the effects of the CPPIB. It is diminishing aggregate demand and speculating in financial markets. It would be better to increase OAS.
Faced with a less than ideal system an individual must work out his/her best options. Increased saving outside of a TFSA may not be the best option depending on income level due to clawback of OAS.
@ Keith Newman:
I agree that a TFSA may be a good option, not only to avoid OAS clawback but also to avoid GIS clawback.
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