Finance ministers make right call on big CPP

Posted on December 16, 2013 in Social Security Policy Context – Opinion
December 16, 2013.   
Terence Corcoran

Does government really know how much Canadians should be saving? Should it impose forced savings to meet specific macro-economic targets?

Over-hyped and over-sold by big labour and fans of big government, the Canada Pension Plan expansion express kicked into reverse Monday and now appears to be heading back to square one. It was mostly bamboozle from the beginning, a snake-oil sales promise that free money could be found to double the pensions of Canadians.

Some reform of the CPP may emerge in the future, but following their Meech Lake meeting on Monday Canada’s finance ministers emerged to say they had failed to reach an agreement on what those reforms might be. Certainly dead in the water at this point is the grand scheme, floated by Prince Edward Island’s Wes Sheridan, to double CPP pension benefits over time by launching a series of increasing premiums and payroll deductions.

Some blamed Federal Finance Minister Jim Flaherty for killing the reform movement. He called the PEI plan a “bazooka” that would take cash from taxpayers and business and “blow money all over the place” at a time when the economy can ill afford new mandatory confiscations of incomes.  Alberta Junior Finance Minister Kevin Sorenson said “Now is the time for fiscal discipline … now is not a time for CPP payroll tax increases.”

Ontario’s Finance Minister, Charles Sousa, seemed upset by the failure of the reform movement. He repeated claims by his premier, Kathleen Wynne, who has said that if Ottawa doesn’t act “we will work on a made in Ontario solution” because Ontario needs an “investment in people” and an “investment in infrastructure.”

That’s an odd way to sell pension reform, as a public investment policy rather than as a savings plan to benefit retirees — as if investment in infrastructure would not occur without a big fat CPP.

But that is exactly the kind of phoney economic argument that doomed the PEI scheme as it gathered media momentum over the last few months. One by one, proponents trotted out a series of popular economic themes and premises that had little or no foundation.

An expanded CPP would cure ills and make the lame economy walk again. Savings would increase, infrastructure spending would rise, retiring middle class Canadians would receive higher benefits, and the CPP’s investment managers would continue to rake in fat investment returns.

The starting idea, that Canadians are not saving enough and are at risk of ending up in retirement poverty, is a hotly debated theory that divides experts along ideological lines. Does government really know how much Canadians should be saving? Should it impose forced savings to meet specific macro-economic targets? “Canadians are not saving enough,” Mr. Sheridan told CBC radio Monday, “and it’s the middle class that’s mostly guilty.”

There is no free lunch in economics — a lesson every defined benefit pension plan in the world learned over the last decade

Few of Canada’s middle class, with incomes between $30,000 and $100,000, would see themselves as “guilty” of some economic crime because, as a macroeconomic collective, they did not save what the government thinks they should be saving.  With interest rates at 1.5% on savings instruments, lending rates at record lows, and prices stable, the average member of the middle class is only guilty of smart thinking: Now is the time to borrow and spend, the savings will come later when it comes time to repay the borrowing.

What really stalled CPP expansion, and the reason it deserved this fate, is simple enough. The plans failed because of the underlying weaknesses of the claims and proposals put forward by proponents of radical expansion.  Worth especially close examination were the rhetorical devices delivered by the executives who sit atop some of Canada’s big public sector pension plans and their union supporters.

The Canadian Union of Public Employees, the Canadian Labour Congress, the heads of the Ontario Teachers Pension Plan and the Ontario Municipal Employees Retirement System (OMERS), aggressively fought for CPP expansion.  Their underlying objective has been to expand CPP benefits to help bail the public sector pension plans out of massive unfunded liability crises.

The pension benefits of the vast majority of Canada’s public sector pensions regimes are paid at about 70% of the employees average salary over the last five years of employment.  But the 70% payout is calculated after deducting the CPP benefits the retiring employee will receive.  Therefore, if the CPP benefit paid to middle-class Canadians were to double over the next couple of decades, the unfunded liabilities of the big public sector pension systems would be dramatically lowered.

A sharp lowering of the unfunded liability for the Ontario Teachers plan, OMERS and other provincial corporations (including its electricity monopolies) would be a big relief to the government.  That is not going to happen.

Another big sales pitch in favour of CPP expansion is the belief that big government-backed defined benefit pension plans can somehow manage to get fat investment returns not available to individuals or others less savvy or with less scale.  Jim Leech, outgoing head of the Ontario Teachers pension, said recently that big plans can get bigger returns through diversification. “Diversification is the only free lunch in investing where you can protect yourself.”

As somebody once said, there is no free lunch in economics — a lesson every defined benefit pension plan in the world learned over the last decade.  Still, today, the pension industry promises returns of more than 4%.

There is no free money in long-term pension management. Two C.D. Howe Insitute researchers said last week in a paper titled “Long-Term Returns: A Reality Check for Pension Funds and Retirement Savings” that future long-term rates of return on pension funds are likely to average 2.7%.  By curbing the push for a major expansion of the CPP, the majority of Canada’s finance ministers have wisely avoided promising Canadians something that does not exist.

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