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Bad Idea #17 – Expanding the Canada Pension Plan

Expanding the Canada Pension Plan (CPP) is a bad idea intended to solve a problem that I am unconvinced anyone even understands.  I am going to express why I think expanding the CPP is a dead end.  I am also going to express why it is the wrong answer to the wrong problem.

It is no secret that many baby boomers are approaching retirement and now find themselves without sufficient savings to afford retirement.  The landscape is littered with 3,000 and 4,000 square foot homes and used BMWs as far as the eye can see, but somehow, our elected officials have been persuaded that the impending lack of retirement income for the ‘me generation’ is a problem and a problem that government needs to solve.

Expanding the CPP isn’t even helping everyone.  It is generally agreed that low income Canadians and the working poor don’t have a retirement income problem as much as they have a working income problem.  Expanding the CPP isn’t the priority for this segment of our population and they may be the group most hurt by increasing the cost of labour.  It also isn’t the answer for the boomers that have been responsible in saving for retirement as well as most of our public service employees that have been provided with generous programs to assure a comfortable retirement.

Over the past 25 years during which I have worked with sponsors of defined benefit registered pension plans, I have watched our governments systematically ignore the challenges faced by plan sponsors all in the name of protecting plan members, or worse, engaging in cross jurisdictional politics to show each other which of them is the smartest.  A system that worked perfectly well as the 1980s came to an end has been destroyed through neglect and ill founded tinkering.

So now, the government wants to swoop in and correct the damage, not by fixing private pensions, but by abandoning them completely and instituting ‘Big CPP’.  The merits of this action is supposedly the economies of scale the CPP has that will somehow allow it to provide adequate retirement income on an affordable basis and without risk which is something the private sector has figured out that it cannot do.  This is the moment that everyone should get nervous – my father always told me that “you can’t get something for nothing” and I have yet to see his wisdom disproved.

So how are they going to do it?  The answer lies in actuarial magic.  When I went to the University of Waterloo, we called it actuarial science.  We had a belief that our skills in mathematics would help us develop systems that could smooth the impact of market ups and downs.  We believed that on one hand that equity returns could generate affordable pensions and on the other hand our science could level the cost of the pensions through time.  Unfortunately, academic actuaries like Jeremy Gold have alerted us all to the fact that the magic doesn’t exist and as Malcolm Hamilton is apt to say “if someone is receiving a guarantee, then someone is extending a guarantee”.  Sadly, our governments saw fit to punish the private employers that extended those guarantees in good faith.

In the case of the CPP, it is the next generation that is extending a guarantee to the last, and it is that next generation that bears the financial risk of that guarantee.   I am one of a small number of Canadians that has read the recent actuarial report on the CPP.  I don’t encourage you to read it but I do ask that you trust me when I tell you that the projections that conclude that the current CPP program is affordable at the current contribution rates are based upon dozens of assumptions many of which have the potential to significantly affect the cost, up or down, if they aren’t realized.  I just don’t think that this is the time for the post-baby boom population to ‘double down’ on this bet in a misguided attempt to bail out the boomers.

If my fundamental rationale for avoiding an expansion of the CPP isn’t enough to convince you, add in the fact that expanding the program, assuming Canadians pay for the extra benefit they receive, will take 47 years or so to complete.  In this regard, it isn’t a solution for today’s problem rather it is a solution for a problem we might have in three to five decades.  Add in the fragile state of the current economy around the world and ask yourself if you think this is a good time to increase payroll taxes.

So does expanding the CPP solve anything?  In some sense it does, if we expanded CPP then the kids who are 20 to 30 years old now would need to rely on less themselves and could rely more on the government (and really their children and grandchildren) to secure their retirement.  So shouldn’t we vote in favour of that idea even though it will take almost 50 years to be realized?  The short answer is no.

Many Canadians between the ages of 20 and 30 don’t need help saving for retirement.  They need help finding a decent job and an affordable house.  There is a real possibility that this new cohort of workers will never have the economic success of the boomers – globalization has changed their prospects.  For this group, it may be that the norm becomes longer periods of education and lower wages throughout their career.  The 3,000 square foot 4-bedroom house with three cars in the driveway may never be realized.  This is hard news and I am sure many in that cohort that did what they were told, going to school and getting good grades, are pissed off.  I feel for them.  What we shouldn’t do is anything that will cause employers to cut back on hiring and/or wages at the entry level, something expanding the CPP is certainly going to do at least at the margin.

Unfortunately, I can’t solve the problems that the next generation are going to face – but neither can expanding the CPP and I think it is time that we put away this idea and get back to basics.  If the problem is that boomers aren’t going to be able to afford to retire, what is the answer?  Simply, they can start saving rapidly or they can plan to work longer.  Neither of these solutions needs the heavy hand of government to be effected – the former needs self discipline and sacrifice, while the latter needs good health and a willing employer.  Boomers need to take responsibility for solving the problems they have created for themselves and we shouldn’t pass this along to the population as a whole.