Hot! CPP hike a better fix for retirees

WinnipegFreePress.com – opinion/editorials
04/28/2014.   By: Editorial

The Harper government has asked the country to take an interest in target-benefit pension plans as a solution to the retirement-saving problem. Such a device may be of use to a few workers and employers, but it is no substitute for expansion of the Canada Pension Plan.

Kevin Sorenson, the minister of state for finance, announced national consultations on the government’s idea of writing new provisions into Parliament’s Pension Benefits Standards Act, which regulates pensions in railways, airlines, banks and the rest of the federal labour jurisdiction. Pension standards in all other industries are regulated by each province.

The company pension plans now available in the federal jurisdiction have either defined benefits (the employer has to cover the difference if the plan runs short of money) or else defined contributions (the benefits are scaled back if the plan runs short). A large risk is borne by the employer in one kind and by the pension-plan members in the other kind. The government is proposing a third kind of plan, the target benefits plan, in which the representatives of the company and the plan members have to get together and agree what to do if the money runs short.

Retirement saving is a national problem because company pensions are now rare in Canada outside government service. Three-quarters of private-sector employees have no company pension plan. Typically, they have no other retirement savings, either. They will have only their Canada Pension Plan benefits and the old age pension to finance their retirement years. A great many people now in their 40s and 50s will live close to the poverty line in their late years. Rather than condemn old people to live in squalor, the governments of those years will have to tax a shrinking number of working people to top up the incomes of a growing number of retired people. A better solution is retirement saving by people who are now working.

The provincial governments want Ottawa to expand the Canada Pension Plan so contributions and benefits would be increased. The Harper government refused because the cost of increased contributions would be hard on some employers and would slow economic recovery in the near term. The target benefit plan is offered as a voluntary solution.

The solution, however, falls far short of the problem. It can help only the tiny part of the workforce that lies in federal jurisdiction and lacks pension coverage. It leaves workers’ retirement incomes at the mercy of adverse events in much the same way as defined-contribution plans.

As a voluntary system, it leaves employers free to offer a plan they can afford and it leaves workers free to decide, as they hire on with a company, whether the wages and benefits they are offered are good enough. But as a practical matter, a free market in pension plans cannot work well because workers are in no position to evaluate the plan they are offered. You can’t readily tell if a plan is adequate until you start drawing benefits — and then it’s too late to do anything about it.

There is probably no harm in writing provisions for target-benefit plans into the federal pension-standards law, but it’s a bandage on a wooden leg. Mr. Sorenson and his colleagues are inviting the nation to debate the shape and colour of the bandage. They are studiously avoiding the inadequacy of Canadians’ retirement savings. They are sending the great majority of employed Canadians toward years of post-retirement poverty. They are condemning the next generation to accept tax increases to alleviate the poverty of retirees.

A better solution is available. The Canada and Quebec pension plans operate efficiently and serve the entire labour force. The provincial governments, which control the public plans jointly with the federal government, are already on board for expansion. A series of small, staged contribution increases with long advance notice should allow companies to adjust.

Editorials are the consensus view of the Winnipeg Free Press’ editorial board, comprising Gerald Flood, Catherine Mitchell, David O’Brien and Paul Samyn.

Republished from the Winnipeg Free Press print edition April 28, 2014 A8

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1 Comment

  1. 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. 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!

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

    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?

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