Canada’s pension-reform debate needs a large dose of reality

Posted on June 9, 2016 in Social Security Debates – ROB/Commentary
Jun. 08, 2016.   TED MALLETT

Ted Mallett is chief economist at the Canadian Federation for Independent Business.

In public policy, the appearance of doing something positive is far simpler than making genuine progress. Policy issues are complex and peoples’ attention spans are limited, so wooing support is tough work if you first have to educate the public on the context of a policy issue, gather the evidence for them, allow them to weigh it objectively and give them good reasons to trust your sincerity. It should be no surprise, then, that in the stew pot that is the current Canada Pension Plan debate, bromide is the chief ingredient.

The bromide, in this case, is the notion advanced by some that the stinginess of employers – particularly small ones – is responsible for a retirement income crisis. It may be a sweet and simple kernel of an argument, but it provides little actual sustenance. Add in a dash of highly selective reading of the statistics and an exaggeration of what sufficient postretirement incomes really are and we have the essence of many of the arguments for boosting public pensions.

Pity there isn’t more support for serving the public with substance, context, evidence or objectivity, because that is what the pension debate really needs. It is certainly a debate worth having, but rather than pointing at whether employers offer their own plans and how those plans are structured, we really need to be building it from how the public weighs present spending versus saving and how far the government needs to go in making those kinds of decisions on their behalf.

Consider two employers with identical jobs, one paying $20 an hour with no pension and the other paying $19 an hour with a 5.26 per cent ($1) pension contribution. The employers are completely neutral to the wage-benefit structure; the only meaningful difference is in how employees themselves value current (wage) versus future (pension) earnings. Those who value current dollars more highly will prefer to work for Employer 1. Those who place more value on savings will either do it themselves, or be happy that Employer 2 is doing it for them.

Forcing Employer 1 to make an additional $1 pension contribution may have the appearance of boosting postretirement incomes, but it ignores the fact that because the value of an employee’s output doesn’t change, their wage level would pretty quickly drop back to $19 an hour. This wage reversion is something many of the loudest proponents completely ignore when pushing for bigger mandatory public pension plans.

Evidence of this effect is pretty clear from the latest gross domestic product numbers released at the end of May. Wage growth has been quite modest, but largely because earnings have been diverted; the share of employee compensation from employer social policy contributions (EI, pensions, health benefits etc.) has reached record highs (16.2 per cent of wages and salaries in the first quarter of 2016 – up from 9.5 per cent in 1981). Employees are, on balance, better protected now than ever before, but they themselves have borne the costs.

“Time preferences of money,” as economists call it, are not uniform; they differ by age, family circumstance and even by hardwired mindset. For example, among younger people, whose focus tends to be on paying off student debt or buying a home, preferences are toward the present. Among older people, the focus turns to valuing savings more highly. Governments should indeed wonder whether the public’s time preferences are skewed too close to the present – or which groups of people are most at risk – because chronic undersaving does have consequences on program delivery into the far future. However, they need to do a much better job of reminding people that a future pension cannot be grown from nothing; it can only be collected from their current earnings. Governments must also do a better job of comparing a generalized or mandatory approach to one that better targets identified gaps in the savings safety net.

The current list of ingredients in the pension pot has been pretty satisfactory for Canadians. The differing flavour structures of CPP-QPP, OAS-GIS, RRSPs, TFSAs, employer plans and peoples’ own savings have balanced off the needs and wants of the general public. Let us hope that finance ministers don’t overstir the mix when they meet in Vancouver later this month.

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