Bad Idea #17 – Expanding the CPP

Bad Idea #17 - Expanding the CPP

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.

 

 

 

Joe Nunes
Joe Nunes
Joseph Nunes, Co-founder and Executive Chairman of Actuarial Solutions Inc., has practiced in the area of pensions and retiree health plans for over 30 years. He has experience with many types of plans including single-employer, multi-employer, private sector, government, unionized, non-unionized, as well as registered and non-registered executive plans.

10 Comments

  1. Avatar Bill Loucks says:

    Nicely said, Joe. I am in total agreement with you on this one.

  2. Finally someone has the sense to say what needed to be said – we, as individuals, need to take care of the problem and not the government. Government involvement will only create negative effects.

    The best advice I received was to plan my retirement with the assumption there will be no CPP or OAS when I retire.

    PS – nice article Joe

  3. Avatar Neil Craig says:

    Great article Joe couldn’t agree more

  4. Avatar Paul Scott says:

    A great article that speaks to the fact that the government cannot and/or should not look to provide a solution to the retirement dilemman. As individuals, we need to take a hard look at our goals/plans for retirement, take ownership of these goals/plans, and take the steps necessary (save more, work longer, etc)in order to achieve these goals/plans.

    Thanks for the article.
    Paul.

  5. Avatar Scott Sadler says:

    Great article! Can I get your permission so I can send this to my MP?

  6. Avatar Mike Duggan says:

    At last – a voice of reason! It’s amazing what politicians will try in a desperate plea to stay in office. Canadians better start saving for the future rather than paying interest on debt or the situation will only worsen.
    Pay attention to the actuaries! A fatter CPP is not the answer. More payroll taxes are not the answer. The government at both levels needs to face reality.

  7. Avatar Guy Poliquin says:

    Joe,

    Thanks for the article – I agree with parts of the article regarding the “boomers” … for most of us, we had time and jobs to provide for our retirement … those that enjoyed the lifestyle you described should now live with the consequences of their decisions … however, for the “working Joe”, retiring on 25% of pre-retirement income (assuming heshe remained fully employed) is also not the right answer …

  8. Avatar Jason Reed says:

    I enjoyed reading this very thoughtful article Joe.

  9. Avatar Shari McNeill says:

    Well said, Joe. I see the Nov. 1st announcement…

    November 1, 2013

    Toronto, ON: CARP members will welcome the fresh step taken by the provincial finance ministers to move ahead on CPP enhancement to improve the retirement future for Canadians.

    After their meeting in Toronto, Provincial and Territorial Ministers of Finance issued a news release stating that they:

    “…[found] common ground, including agreement on objectives that would underlie options to enhance the CPP. Ministers agree that any CPP enhancement should:

    •Be responsible and fully funded and focus on today’s workers;
    •Moderate the short-term effects on businesses, families, and the economy;
    •Improve the future retirement incomes of middle-income earners; and
    •Protect lower-income workers.
    “And that further discussion to help improve the retirement income system must include options for CPP enhancement.

    Your thoughts?

  10. Avatar Jim Cochrane says:

    Joe I enjoyed your articles. I was reminded that placing the blame/credit on the Boomers is something we find too easy to do. However like you I wrote a letter 18 years ago to a Depression era (kid) now in their 80s. I reminded, that Health Care reductions were a necessary solution to first over promising and later overspending programs of Governments. Also reminded that their era had continued to elect these Govts.. I was appalled that now they wanted to transfer the cost to my Kids., Boomers and Gen X’ers, and Keep the existing HC programs. And of course I warned them that the retirement income programs of their day would in no way be as adequate to fund our retirement. I hoped they had enjoyed their politicians splurge at our expense.

    Well once again it is too easy to blame boomers about to be retirees. Once again they are faced with consequences of our inability to address, a problem we have been aware of for at least 25 years. It is also a problem that savings alone will not solve in spite of the actuarial hocus pocus we use to enlighten them (pun intended). If we continue to allow the financial services and advice industry (includes you and I ) to skim the entire growth of the last 25 years out of the contributors investment income there is no chance for the boomers.. And if the solution to the financial debacle is increased inflation (and decreased Bond Rates)we pass it to another generation . We cannot use “actuarial magic formulae ” to justify another scam unless of course we insist on restricting “registered” investments to only those CARP recommended financial services providers.
    At least thanks to them, CARP/Zoomer doesn’t need to raise our subscriptions do they?

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