More on the Pension Debate
I have just returned from Calgary and the pension forum organized by Jack Mintz through the University of Calgary. Mintz was, of course, the author of a recent research report to the federal and provincial finance ministers which concluded that the status quo was basically working well, except for a modest proportion of middle income earners who may not be saving enough.
In fairness to Mintz, this forum did not ignore the main reform options on the table. The case for an expanded CPP was made in a generally very good background paper by Jon Kesselman of UBC (to be posted to the School of Policy Studies of the University of Calgary web site in due course.) I got to comment on the paper, and CLC President Ken Georgetti, was a concluding speaker.
Somewhat surprisingly, pension luminary Robert Brown (former head of Price Waterhouse) came out in favour of CPP expansion, though only to 35% of the current maximum earnings level. There was also a panel on the case pro and con for large, voluntary pension pools along the lines proposed by three provincial reviews.
What are the key issues in play around an expanded CPP, on which I have blogged before? Just about everyone accepts that the CPP as it now exist works well and delivers a fully portable defined benefit indexed to inflation at very low cost, which has a significant impact on income adequacy in retirement.
Mintz and many others argue that the current system has given us a very low poverty rate among the current elderly, about the lowest in the OECD. And it is true that poverty as measured by the LICO AT and other measures such as the LIM is lowest among seniors, because public pensions (CPP plus OAS/GIS) come close to pushing seniors above these lines. But the lines are low â€“ about $15,000 for singles and a bit above $20,000 for couples â€“ and many seniors have incomes just above the line. Richard Shillington has calculated that if we set the poverty line at 60% of the median (ie LIM plus 10% – a line commonly used in Europe), the poverty rate for Canadian seniors would be 20% for singles and 15% for couples.
The second main argument against CPP expansion is that most current seniors are getting adequate replacement incomes in retirement. This is true to a point â€“ if only because income adequacy has been revised down to 60% of pre retirement income and those without pension savings can and do continue to work and draw on housing wealth. However, what is true of the current elderly may well not be true of later age cohorts. Many of todayâ€™s seniors get pension incomes from employers who have radically downsized or disappeared, and pension coverage for younger and middle aged workers in the private sector is well down from earlier levels. Younger workers have lower wages at the same point in their working lives than those who cam before, enter decently paid and secure employment much later in life if at all, and have much higher levels of debt than todayâ€™s seniors. It is a very risky bet that the system will work as well moving forward.
The third main argument against is the â€œnanny stateâ€ argument â€“ individuals should bear responsibility for their own fate. In point of fact, many of the experts give short shrift to this one and agree that individuals left to their own devices tend to save far too little, and also invest very badly and at high cost. Kesselman argued that the state will have to pay in the final analysis and that an expanded CPP will reduce future GIS expenditures and create room for user fees on the elderly for their health care and other needs. There seems to be a lot of support for opt out schemes and larger pools of investment savings than RRSPs, on the basis that leaving individuals on their own just doesnâ€™t work. It is unclear to say the least why mandatory inclusion is the acceptable basis of private employer pension plans but is unacceptable when it comes to expanding CPP.
The fourth argument against expanding CPP is the anti tax argument, even though increased CPP premiums are a premium and not a tax and the main incidence would be on labour. Still, at least some employers and workers will object on grounds of cost, even though the cost of expansion is less than 6% of pensionable earnings.
And the final argument against CPP expansion is unstated in public but was very much on the minds pf the many attendees from the financial sector â€“ it would eat into the hefty fees of the financial and insurance industry. Many of the experts at the conference held to the view that these fees are charges are excessive, and that investment advice is expensive and often not very useful to clients.
By far the most disappointing part of the conference were keynote speeches from federal finance minister Flaherty and his colleagues Dwight Duncan of Ontario and Ted Morton of Alberta. The latter was at least pretty clear â€“ the system is not broken and some minor changes to encourage private saving are all that are needed for at least a decade. He gave a flat no to expanding CPP, on grounds of increased costs to individuals and employers, and on the rather bizarre grounds that CPP drains Alberta savings to non Albertans. Flaherty and Duncan were much less explicit, but spoke of the need for caution, the dangers of unintended consequences, and the need for further study of a system that is supposedly working well. Hardly a word on broken pension promises, eroded retirement savings, the high cot of RRSPs and so on.
All of which hardly sets the stage for thinking much will come out of next monthâ€™s meeting of finance ministers, despite the very strong case for expanding public pensions.
Interesting … in the debate over pensions ,and the lack thereof i would make two points. Firstly those who are deciding on the availability of pensions are the only ones left with defined benefit pension plans. Those who are taken care of themselves with taxpayers money are telling the taxpayers who create the wealth in the economy that they should make do with market forces and self sufficiency but those making the rules shelter themselves with the money created by those who they are telling to suck it up…secondlly , every year in canada financial institutions take about % 6 BILLION in management fees from pooled mutual funds, while producing returns that in many cases are flat or negative.. interesting that the government in all their wisdom is quite content to let banks , which they have the power to regulate, basically committ financial rape of those place fiduciary trust . If you want to reform the pension plans in Canada , what is good for the goose is good for the gander… put government employees in the same postion as the rest of the population and then we will listen …force the banks to reduce mutual fund fees and perhaps only be allowed to charge fees if they have positive returns…mutual fund management fees are the only service sold in canada where they can charge for a negative result.
Brian, you are right that Canadian mutual fund fees are far too high – by some estimates, the highest in the world.
However, you don’t have to pay them. The ETF’s (exchange-traded funds) offered by iShares, Claymore, BMO, and others have much lower management fees than mutual funds, typically under 0.50% per year.