Whether voluntary or mandatory, there is no need to expand the CPP

Posted on May 28, 2015 in Social Security Debates

NationalPost.com – Full Comment
May 27, 2015.   Andrew Coyne

If you’re just joining us, the Conservatives are now, as of this Tuesday, formally in favour of a voluntary expansion of the Canada Pension Plan, having earlier been opposed. The Liberals are now in favour of a mandatory expansion of the CPP and against a voluntary expansion, having earlier been in favour of the latter and against the former. The NDP at least are consistent: they favour a mandatory expansion of everything.


But seriously. The politics of the CPP are entertaining enough, but underlying the show of discord there is a broad consensus among the parties: notwithstanding the exhortations of their governments (those notorious paragons of thrift), Canadians are not saving enough for their retirement; consequently, they must be forced/invited to save more through the CPP. But consensus doesn’t make it true.

If you buy the idea that Canadians are not saving enough — enough, that is, to support themselves in their retirement at something approaching their pre-retirement lifestyles — then it might make sense to force them. Or at least it would, if what we were talking about was a subsistence level of income.

The argument is of the “moral hazard” variety. The default position of a free society would ordinarily be to trust people to save for their own retirement — unlike accidents or catastrophic illness, an easily foreseeable event with a long lead time to prepare for. But saving involves sacrifice, and people don’t like to sacrifice if they don’t have to.

If people knew that, even if they saved nothing at all, others would provide for them — and we would: it’s simply not credible to suggest that people who neglected to save would be left destitute — they might be tempted to skip it. Or at least to undersave.

But so far as absolute deprivation is concerned, we’ve already covered that, through Old Age Security and the Guaranteed Annual Supplement, income support programs that everyone pays into and everyone (below a certain income) is paid out of.

And so far as we are talking about assuring that those of modest means save enough to replace their incomes in retirement — on the parallel theory that we would not leave them to live in near poverty if they did not — well, that’s covered by the existing CPP.

Indeed, as research by the economists Kevin Milligan and Tammy Schirle has shown, virtually everyone — in excess of 95 per cent — among the bottom two fifths on the income scale is currently saving at a sufficient level to replace at least 50 per cent of their income in retirement, the recommended minimum. It is unclear why we should force them to save more than they want to, unless it is public policy to make them live better in retirement than they do now.

(This point bears emphasizing: no one — not the Conservatives, not the Liberals or the NDP, not the government of Ontario — is proposing simply to give more money to people. The proposal is to take more money from them now, and give them more later.)

So the argument about forcing people to save more than that is really about people higher up: the third, fourth and fifth quintiles, about one in six of whom are not saving “enough,” by that 50-per-cent standard. But the further you climb the income scale, the hazier the case for public intervention becomes.

It’s hard to argue that these under-savers, as well off as they are, are somehow gaming the system: no one’s going to rush in to rescue them from having to shop at Costco. If they’re saving less than other people think they should, it may simply reflect their own life preferences. Maybe they’d rather live a little better now, at the cost of living a little poorer later. Who’s to say?

This raises a further difficulty. If people are saving about as much as they want to now, then forcing them to save more in one way, through an expanded CPP, may simply result in an offsetting reduction in their other savings, in their RRSPs or TFSAs.

All in all, it’s difficult to make the case for forcing even these alleged under-savers to save more, let alone forcing everyone to, regardless of their circumstances.

Still, suppose that were the policy. Does it automatically follow that they should be forced to save through the CPP? Put it this way: if it were left up to them, as the government prefers, would anyone choose to invest in the CPP?

There’s a notional CPP that often gets talked about: the one that, thanks to its large size and public purpose, keeps costs low and manages efficiently. Then there’s the CPP as it actually is: a bloated corpocracy on a runaway expansion tear, making massively risky bets in the name of the fund’s “long time horizon” knowing that no one will be around to hold them to account if they don’t pay off.

At the turn of the millennium, when the CPP first started investing in public markets, it was a comparatively lean operation. Constrained to invest “passively,” that is, in a way that mimics the broad market indices, the CPP Investment Board had just five staff in its first year; its chief executive was paid just $200,000.

But in the years since then it slipped its “passive” leash, allowing it to pursue an “active” management strategy. Staffing levels now exceed 1,000, while the average compensation in the executive suite exceeds $3 million.

And the result? About the same as you’d expect for any actively managed fund: in any given year, the fund is as likely to underperform its benchmark “reference portfolio” as it is to outperform.

If we must have another forced saving plan, far better it should be invested in individual savings accounts — people would be more likely then to regard their contributions as savings, rather than a tax. It would look like an RRSP, only one limited to a mix of broad, low-cost index funds, like Exchange Traded Funds.

The CPP? Include me out.

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