Beware ‘pensioncare’

NationalPost.com – Opinion
Published: Saturday, May 08, 2010.   Terence Corcoran,  Financial Post

It’s impossible to know what proportion of Canadians are seriously worked up about the need for pension policy reform. What we do know is that 100% of the nation’s pension policy wonkdom is a beehive of feverish activity and that lawmakers are cranking out radical ideas and plans. The Canadian pension system is certainly in need of legal and regulatory repair, but what it may not need are the grand reforms, wholesale transformations and mandatory regimes now under discussion.

Finance Minister Jim Flaherty, speaking on Tuesday in Toronto at a pension conference sponsored by the Institute for Research on Public Policy, repeatedly said that Ottawa has “no conclusions” in mind and is open to all options. “We want to get it right and not do any harm,” he said. However, somewhat ominously, Mr. Flaherty also said the government was weighing options between a “voluntary supplementary” Canadian Pension Plan or a “mandatory” expansion of the CPP. It will be a noteworthy policy move if the Conservatives come to endorse a radical pension reform that forces individuals or corporations to participate in a new compulsory savings regime.

The starting point for reform appears to be the idea that 11 million Canadians do not have workplace pensions. That’s usually followed by concern that Canadians may not have enough savings to maintain a post-retirement living standard equal to some arbitrary proportion of their pre-retirement income. Is 70% enough? Sixty per cent? Whatever the percentage, it is easily manipulated to promote a policy outcome.

Both points are trick propositions, mostly designed to stimulate radical reforms rather than factual analysis of the pension issue. Eleven million looks to be a cooked number, one often used by the Canadian Association of Retired Persons (CARP), a lobby group that makes a profit lobbying government for more wealth distribution to zoomers, those over the age of 45.

One pension consultant has a different breakdown of the Canadian pension system. About 17.8 million Canadians are in the workforce. Approximately 5.7 million are members of registered pension plans. Another 3.3 million have RRSP savings. The remainder, about 8.8 million people, have no pension plan and no personal RRSP savings. However, about half of the people without pension coverage (4.2 million), are low-income Canadians, many of whom will receive government pensions that will boost their incomes. Of the remaining pensionless Canadians, a large proportion have other sources of income or wealth for retirement, including real estate, small businesses and other investments and savings that are not in an RRSP.

Pension reform may be necessary, but it is a sensational distortion to imply that 11 million are heading into post-retirement destitution. And whatever the real number of Canadians without pensions, it is sure to go up under two non-government bills now making their way through Parliament. Senate bill S-214– An Act to amend the Bankruptcy and Insolvency Act and other Acts — would force bankrupt companies to give preferred-creditor status to unfunded pension plan liabilities. NDP MP John Rafferty has his own private member’s bill, C-501, that would do much the same thing. It’s due for debate and a possible vote next week.

Both bills would do no good for Canadians who want to keep working and have pensions. Pushing existing pension liabilities up the creditor cue would automatically devalue the loans of other creditors and possibly even tilt a company into bankruptcy. Attaching higher risk to pension liabilities will also discourage businesses from taking on any pension risk on behalf of employees. Why pass a bill that would add to the existing obstacles to the formation of new pension plans?

More sensible reforms were introduced earlier this week by Ottawa. In regulatory changes, Mr. Flaherty proposed new solvency standards for private pension plans. Instead of using current market values to determine pension portfolio values and minimum funding requirements, plans would be allowed to use averages of values. Private plans would also be allowed to invest in resources and real property. Rather than setting up new laws to discourage corporate pensions, the government has moved to help private pensions survive without ruining their balance sheets.

Much grander reforms are being proposed to Ottawa and the provinces. Finance ministers meet in Charlottetown in June to continue discussions over a variety of proposals, including the idea of expanding the Canada Pension Plan through a mandatory system that would force Canadians to save more through compulsory savings. The new money would be invested by giant operations, such as CPP, or by private players.

The main argument at work here is the belief that large institutions such as the CPP Investment Board and major state agencies such as the Ontario Teachers’ Pension Plan can investment money more efficiently and at lower costs than a private mutual fund or other market-driven investment firm. Individual Canadians are apparently too dumb to manage their own money in a market setting, and it is the role of the state to intervene to save investors from themselves.

Such proposals, called “pensioncare” as a companion to medicare, assume that big government-run or government-mandated investment vehicles can beat the market and get higher returns. Will companies and small businesses be forced to contribute matching amounts of money? Can a supplementary system, somehow promoted and supported by government, be brought in on a voluntary basis? Will each investor have his own personal account?

Perhaps the biggest question is whether pensioncare will be simply an RRSP dressed up with government-mandated management of the money to protect investors–problematic in itself–or whether pensioncare will become another vehicle to redistribute wealth?

Mr. Flaherty says the Conservative government has no preconceived ideas for pension reform. But surely there would at least be a pre-determination to avoid a major expansion of government involvement in the investments of Canadians and major additions to an already massively redistributionist political system.

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