Should the public protect private pensions and RRSPs?

There is a lot of concern about there about the state of private pensions and private savings plans (RRSPs and the like). Having lost a quarter to a third of their value in the past year, those who anticipated a cozy retirement are now rethinking those plans.

But the core problem is that asset values (houses, too) have grown at annual rates that far exceed income growth, and have been further fueled by rising debt loads. As a society we have come to treat the stock market as a one-way bet, not recognizing that what is popularly called “investment” is really speculation that asset values will keep rising and we will bank the capital gain as income.

To grossly oversimplify, it is like we went into the casino and were up 60 grand at midnight then lost it all just before leaving. Should then the public protect all or any of those gains?

To me the answer is clearly no. This dynamic is actually a big part of growing inequality in our society. Those fortunate enough to have jobs with defined benefit pensions or to have bought into equities or the housing market long ago reaped huge gains relative to those who did not. For the public to now move in and lock in some of those gains seems wrong to me. The public sector cannot and should not prop up real estate or equity values.

Ultimately, this is a call for more publicly-provided income security and public pensions, and less private in the mix. Right now it is a three-pillar approach of Old Age Security (and the low-income top-up, the Guaranteed Income Supplement), Canada Pension Plan, and whatever private savings you can muster. While the OAS is an excellent program, and the CPP was shored up in the mid-1990s (a tax increase that met with essentially no opposition), there has been a huge emphasis on RRSPs (where you get a tax deduction then pay tax, typically at a lower rate, on withdrawals) and in 2009 the Tax Free Savings Account (where you pay tax then don’t pay tax on withdrawals). These latter private plans are huge tax expenditures for the government, give the most benefit to the richest among us, and contribute to a you-are-on-your-own culture.


  • I agree. I think any money we put into protecting retirement incomes should go into enriching CPP. I would include allowing greater contribution maximums and a larger number of years, in turn funding a higher CPP maximum. Then with the elimination of mandatory retirement, allow people to choose when to start collecting between ages 60 and 70, with a higher benefit for those who collect later. Make it more of a middle-class benefit instead of a sub-poverty benefit, which encourages some boomers to work an extra year. Maybe with 45 years of contributions at professional incomes, a retired couple could get two benefits worth $20,000 each.

    And if you worked as a physical labourer in an historically well-paying sector (resource/construction/auto), you also have the possibility of reaching the maximum even younger because of those peak contributions at age 25-40. And if you could work in a less valiant job for several years after your body wears out, you can boost your benefit by retiring a few years later.

    Increases Labour Force participation. Pays for itself. Reduces poverty. That kind of thing.

  • Do we know how much of a problem this really is? If you’re only a few years away from retirement, then you shouldn’t have much invested in the stock market anyway.

  • Well, as my first-year humanities professor said, one of the major philosophical issues is, “what shall we do with all of the stupid people?”

    Seniors aren’t the largest percentage of the poor, but people’s principal becomes significantly eroded as they enter retirement. I just think if you work hard all your life at anything, you should be able to retire above the poverty line regardless of how savvy you are at finance.

    I would guess that left-leaning carpenters wouldn’t want economists to be responsible for freely deciding which building codes or laws of physics to obey when they do renos on their own homes. Instead, we create rules that save people from themselves.

  • Stuart,

    Funny you should say that.

    For the first time today I realized that the neoclassical ontology has a explicit theory of alienation: namely, when society stops individuals from being smart, stupid or ignorant.

    Some irony therefore that they should spend so much time lecturing the rest of us on what is in our own best self-interest.

  • Do you mean that they assume that individual choice is the correct choice regardless of whether the public thinks it was a good idea? I think that’s what Bush was on about when he tried to privatize social security.

    And would are be saying that it creates alienation in that it strips away communal views of what is good, and celebrates the rugged individualist, who stands alone on the hill, with a bottle of antidepressants, pondering their diminished RRSP portfolio?

    Had to look up ontology.

  • “Do you mean that they assume that individual choice is the correct choice regardless of whether the public thinks it was a good idea?.”

    Yep, and that is a pretty standard normative tenant of classical liberal political philosophy.

    Ontology comes in because neoclassicals (NCs) not only assume this but locate the origins of social reality in the innate nature of human beings to truck barter and trade as Smith had it.

    In NC economic theory this is our homo-economicus: rational individuals maximizing (optimizing) in the furtherance of their myopic self-interest. The standard model then makes all those assumptions which drive the rest of us crazy but which really exists to prove that rational individuals, all myopically optimizing, produces the best of all possible worlds. As an aside it was this that Greenspan admits he got wrong.

    When things like unemployment of resources such as labor arise such phenomena are explained by recourse to bad public policy and cultural norms (like welfare, high UI replacement rates, unions, traditional values barriers to trade, product standards, regulations etc., etc.)

    The NC theory of alienation would then be that in a “natural state of nature” people would be free to truck barter and trade without interference from all the aforementioned barriers (frictions) to an individual’s realization of their self interest in the market place.

    Thus the problem of alienation is the problem of society and politics writ-large. In a nut shell, for NCs alienation is caused by the existence of society! Society is the barrier that must be overcome so that individuals can fully realize their nature. And people think Marxists over reach for wanting to abolish capitalism!

    The NC account is not fully coherent because if, as methodological individualism dictates, and to which both branches of NC economics (New Keynesian and New Classical) adhere, rational individual self interest is the sine que non of existence and society can only ever refer to an aggregation of said individual rationality (society does not exist as Thatcher’s oft-quoted phrase has it) then whatever exists must be an expression of that rationality and thus cannot be alienating. As such, they have to violate their own methodological strictures by smuggling in an ontologically PRIOR entity such as the state or society to explain alienation or unemployment for that matter. But then we ask where the state and society come from and the answer must be individual irrationality.

    You are now in a closed loop with two oppositely charged poles which nonetheless rappel. AKA a contradiction.

    Duglas North’s 1994 “economic performance through time” is a great example of an NC attempt to finesse all of the above.

  • Did I read correctly, withdrawals from RRSPs are not taxable. In fact there is a withholding tax payable when they are cashed in, and the withdrawals are included as income and tax is calculated in the annual return at the usual rate. You of course do not pay tax on RRSP accumulated income before you withdraw it.

  • It seems that free-markets and risk-taking have been supported by various policy puts.

    I wonder how many financial advisors recommended a portfolio heavily weighted in government bonds to their 65+yr old clients? And how many clients actually listened to that advice? I’m guessing both parties made mistakes.

    The time to do the ‘right’ thing was several years ago by training financial advisors about their fiduciary duty to clients and appropriate portfolio construction. Some advisors seem to view their jobs as salespeople rather than portfolio over-seers. This is a problem.

    Problem is, now we have a mess that needs cleaning up. Today, we just need to enact policies to prevent riots on the streets.

  • Maybe people should riot if that is what their myopic self interest demands:).

    More seriously, the investment community and fiduciary duty is another one of those oxymorons from the recent past which needs to be put firmly to sleep. First you had the average age mismatch between advisers and clients. Second, and more crucially we only need to look at the pay structure of your typical financial advisor’s pay to see that the short-term and long term were quite misaligned. And third, you had all that hype backed by all those financial puts you mention. Put it all in a pretty package called myopic self interest and voila on est ici.

    A more robust public pension scheme with a progressive inheritance tax to pay for it would seem to be one option. If not, see you in tens years for the next bail-out of homo-economicus.

  • Duncan,

    A nasty typo. I hate those ones. Thanks for catching it. I will amend the text.

    The point was that they are opposite in construct to the TFSA. With RRSPs however one would typically pay at a lower tax rate as seniors’ incomes are lower. In the Budget 2008 there is a nice chart that shows the RRSP and TFSA to be functionally equivalent in terms of returns.

  • Again, can anyone put any numbers to this? For example, are there any data on the number of seniors who were hurt when the tech bubble crashed?

  • Sorry Gordon, I don’t have that. Travis, I’ll have to read the fountainhead and get back to you.

    I find financial advisors are pretty quick to recommend that the percentage of money you have in bonds should be about your age. Like my father is 77 so he should have that percentage in bonds. I think you need some money in equities for growth, so putting all your money in bonds is not much wiser than being all equities at 65+.

  • Stuart,

    That is not Rand. Its the vanilla ontological core. Imagine how much further Rand goes.

    Independent of data one is permitted to ask what if questions followed by what ought the policy be if the what if were true. I swear it is done all the time econ texts.

  • Vanilla ontological core. Sounds delicious.

  • Marc, I agree that lesson one from the current pensions crisis is that we should radically shift the balance in favour of public pensions. However, a number of very significant issues remain with respect to the fate of employer sponsored pensions. Should there be a backstop if an employer goes under and the plan is underfunded? Yes – the pension represents deferred wages over many years – workers have the right to collect the benefit they paid for and looked to government regulators to protect. Is a pension insurance fund a public bailout? No – serious proposals would fund it via risk pooling over the whole world of employer pension plans, as in the US which insures pension benefits up to $50,000 (vs no protection at all in Canada outside Ontario, and very little there) There is also an issue with respect to the low priority given to pension fund deficiencies relative to other debts in the event of bankruptcy. In short, there is a lot that can be done public policy wise to protect pensions which do not involve bailouts by taxpayers … which you seem to imply is the issue in play.

  • There is little doubt much needs to be done for better protect in general as evens ones rights are in jeopardy in this country under the rule of Harper. Especially in light of Harper’s Governments eagerness to get involved with P3s were publics money goes private. Like the Canadian Line costing 2 Billion now if thats isn’t a stretch of the imagination I don’t know what is. These guys are a hoot as not sure who is more out of reality the voter or these jackals. I thinking the jackals as Canadians have the final say.

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