ORPP: Cost-benefit Analysis

mistakesThe ORPP: Cost-Benefit Analysis

Just in time for the holidays, the Associate Minister of Finance for Ontario issued the following statement:

“Today, we fulfilled our legislative requirement to table a cost-benefit analysis of the ORPP.  The report is clear – accounting for all factors, it shows Ontarians and the economy will be better off under the ORPP.”

Yummy – Cost-Benefit Analysis – Fantastic News!  We “will be better off” — that sounds pretty sexy and when you are ‘accounting for all factors’ it sure sounds like we have mathematical proof that the ORPP is good for us.  I suddenly have come to realize that the ORPP must be just like Buckley’s cough syrup – “it taste’s awful, but it works!”

But just for kicks, in between football games on TV and card games with the family at the kitchen table, I decided I would read the Conference Board of Canada report backing the Associate Minister’s claims so that I could see the ‘proof’ for myself.  Many of my readers know that deep inside I am a math nerd and certainly this is going to be a proof for the ages.  Not since Andrew Wiles managed to solve Fermat’s Last Theorem in 1994 has there been such a grand opportunity for the academic community to gain fame solving the seemingly unsolvable.

The report, authored by a group of economists, is a ‘light’ 49 pages including Appendices.  With that said, I could write nearly that number of pages in commentary.  So to keep things brief I will just give you some highlights of assumptions in the report and my questions that should be considered before declaring this proof ironclad.

Report – “Although Tax Free Savings Accounts (TFSA) have become a complement to RRSPs as a vehicle for retirement savings in recent years, including them in the analysis has no substantial impact on the picture.  While 4.4 million Ontarians held a TFSA, the average value of these savings was only $10,700 per person in 2013”.  Response – really? 4.4 million Ontarians are already paying the administrative costs of these 4.4 million accounts and the redundancy of millions of new accounts under the ORPP has no ‘substantial impact’?  These savers have managed to sock away an average of $2,140 a year in the five years following the inception of the program in 2009 but somehow that isn’t material savings when you think about the fact that the ORPP will see a taxpayer earning $50,000 a year socking away almost $900 – plus another $900 from their employer.  I guess actuaries define materiality differently than the economists.

Report – “Although the provincial and federal governments have done a good job of eliminating poverty among seniors, the decline in workplace pension and a lack of private savings suggest an increased role for government”.  Response – if we have done a good job eliminating poverty among seniors then what problem are we solving anyway?  Do we as taxpayers in Ontario expect every fellow citizen to enjoy the comfortable retirement we afford our school teachers?  What is the standard we are trying to meet?  And by the way – ‘suggest an increased role for government’?  Where is that theorem in economic theory?  One of my favorite economists F.A. Hayek would have reached the opposite conclusion – the data doesn’t suggest we need to do anything – but if we do, individuals should take action appropriate to their goals.  Of course what would Hayek know, as far as I know he only has one Nobel Memorial Prize in Economic Sciences – and he had to share it with Gunnar Myrdal!

Report – “The ORPP is expected to change the behaviour of economic agents. In this analysis, we considered several distinct responses as a result of the ORPP implementation…{long explanation}…However, this reduction in savings does not represent an economic loss: if individuals are not saving this money, they are spending it. As such, the reduction in savings is assumed to result in an increase in consumer expenditures.”  Response – no, if they are not saving it in an RRSP they are likely paying down a mortgage.  That is the classic discussion each February, contribute to an RRSP or pay the mortgage?  You rarely see the advice that you should blow the cash.  I think what bugs me most about this part is the admission that after spending the dough to setup the ORPP we are just going to syphon off funds from other accounts that we have already paid to setup?  Anyone who took accounting in first year knows that you have fixed costs and variable costs – getting rid of variable costs just means you have to spread the fixed costs over fewer dollars invested.

I am about half way through the report and I am going to stop here.  I might write more in a second instalment but readers probably need to get back to work.  In a nutshell, if you believe the press release this ORPP is a slam dunk golden goose for Ontario taxpayers.  If you dig into the details you see that it is still a crap shoot.

Happy New Year!  I hope 2016 brings you success as you personally define it.





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