

Troubled Tomorrows – Looking Back 30 Years

“fat, drunk, and stupid is no way to go through life son”
Dean Wormer, Animal House
Troubled Past
One of the most important things that I learned in university was that I was “high school smart”. What this means is that leaving high school with good grades simply meant you were about average intelligence of the people you were about to meet entering university. I still remember in second year realizing that there was another gear of smart that I would be unlikely to attain – that moment started the wheels in motion to become a practitioner rather than an academic.
But I have always admired the work of academics (the good work at least) and since ending my fat, drunk, and stupid phase in my early 20s, I have found myself reading every day – almost always non-fiction, trying to better understand the world in which we live and work. Over the past dozen years, I have tried to write commentaries and the occasional paper sharing the insights I have gleaned reading the semi-technical publications that hit my desk (these days it’s really ‘arrive in my inbox’).
One of the reasons I wasn’t successful at Mercer was because this thirst for knowledge resulted in lots of reading which cut into the time I had for billable work. It turns out that billable work is what keeps the lights on, and I just wasn’t productive enough to justify my seat at Mercer. When you are young, they don’t want to hear your ideas, they want you to crunch the numbers. In fairness to the folks at Mercer that kicked me off the bus, I didn’t understand that to be an outstanding practicing professional, it took more than 40 hours a week of effort and you needed to do billable work by day – continuous professional development by night. I learned this after I went out on my own.
Troubled Tomorrows
One of the last things I was able to do before leaving Mercer was to work with Malcolm Hamilton on the paper Troubled Tomorrows, published by the Canadian Institute of Actuaries back in 1995. Interestingly, the paper doesn’t list its authors, so I don’t know who else was on the committee. I only know that Malcolm worked on the paper because I was in his office showing him my work that ultimately ended up as a little more than a footnote in the paper.
I thought it would be fun to look back at the paper published 30 years ago to see what cautionary tale the report provided and to see how the world has unfolded. Note, the paper makes frequent mention of 2030 which was 35 years after publication. It might be neat so save this review for 2030, but I am not sure I will still be writing these commentaries in five years, so here we go…
The paper is focused on Canada’s aging population and its retirement savings programs. It is long with six bulky sections followed by a breezy seventh section looking outside of Canada and then several appendices just to make sure you don’t think the numbers are pulled out of a hat. This depth of investigation reflects Malcolm’s detailed mind. On the other hand, my shorthand summary to follow reflects my ‘get to the point’ mind.
Aging Society
You have already read this story 100 times – maybe 1,000. The baby boom in Canada ended in 1964 and combined with increasingly longevity, Canada was then and is still now projected to get older and older. The paper showed that in 1995 senior citizens numbered about 20% of the number of working age citizens which was projected to rise to 40% by 2030. Although not a perfect comparison, the last CPP Actuarial report estimates that today we are at about 33% outside of Quebec. A little handwaving (one of my favourite academic terms) to add Quebec and age us another five years to today and it looks like we will be very close to 40%. It will be interesting to see if the next CPP Actuarial Report, due out at the end of this year will show if increased immigration has slowed the aging of our population.
Social Security
This section of the report starts with a reminder that social security is designed to alleviate poverty among seniors and it’s the additional pillars of private pensions and personal savings that provide the resources for retirees to maintain some or all their pre-retirement standard of living. This is an important reminder that I will address later.
This section of the report predicts “to maintain social security benefits at the present levels will require either significant spending cuts or significant increases in taxes and social security contributions” and “similar pressures will arise from efforts to address Canada’s national debt”. This statement was made while already knowing that CPP reform meant that we were on schedule to increase CPP contributions to 4.95 percent by each worker and matched by their employer.
Surprise – starting around the time the paper was published Jean Chrétien’s Liberal government started running surpluses and paying down the debt. This success continued until around 2008-10 when the world’s economies had a collective meltdown due to ill-advised risk taking by the world’s financial institutions. Canada survived that catastrophe relatively well due to its reduced debt and a government commitment to prudent risk taking by our financial institutions. Our banks and insurance companies came out of that mess better than most.
Unfortunately, that moment of chaos in the markets caused governments to turn on the taps to the money supply and no Canadian government since has figured out how to turn off the tap. Canada will soon have a federal election half a year ahead of schedule, largely caused by a finance minister that was embarrassed to present a fall economic update showing a $60+ billion deficit.
The end to this story is that the nickels and dimes of trouble being projected in the Troubled Tomorrow’s paper have been dwarfed by huge deficits which no matter how you do the math will fall to many future generations to come.
Retirement Savings Programs
If I were organizing themes, retirement savings programs would be one. The paper, however, digs in with four sections: Retirement Savings and Capital Formation, The Retirement Savings System, The Cost of the Retirement Savings System, and The Level Playing Field. There are 30+ pages there for you if you need some help falling asleep. I will shorten the story for those that sleep well without any help.
Canada’s retirement system is a mix of public programs, employer sponsored plans, and individual savings. The paper quotes the 1984 Federal Budget Papers as follows:
“Canadians in the middle and higher income brackets must supplement their public pensions with income from employer-sponsored pension plans, individual retirement savings plans, or other investments to assure maintenance of living standards after retirement. Tax assistance for retirement savings is the government’s means of encouraging and helping them to do so.”
The scanned copy of an old report doesn’t give as clear a picture I would like for some of the graphs. But section 4 is where you will find my limited genius on display. Four graphs that show how income replacement is supported by OAS, CPP, individual savings, and the Guaranteed Income Support (GIS) program. I still remember the recursive exercise of clawing back GIS and OAS as personal savings increased.
In a nutshell, as time passes, workers will need to increasingly rely on personal savings for retirement income as the GIS and OAS increase more slowly than wages. Workers earning less than $20,000 in 1995 (about $37,000 today) probably shouldn’t save outside social security. However, average savings rates mask the fact that public sector workers are saving at much greater rates than workers in the private sector. What the paper didn’t anticipate is that recent governments have figured out that the way to improve the retirement income of workers was simply to grow the public sector. If you think about it, if we all become public sector workers, everyone will have adequate retirement income.
The paper nears the end with an examination of the ‘Factor of 9’ that we use in our system of RRSP Room and Pension Adjustments. Suffice to say that in the tug-o-war between equity and simplicity, simplicity won out. Lots has changed in 30 years in terms of interest rates, mortality, government debt, etc. The Factor of 9 remains unchanged. I have thought about writing a paper on our current system and changes that might make sense. Governments’ unwillingness to change something as outdated as the Factor of 9 or reel in the excessive early retirement benefits in many of our public service pension plans is a disincentive to spend any time imagining and promoting a better system.
The paper closes with a look around the world and notes two trends of importance. Governments looking to reduce government sponsored social security and a trend away from defined benefit plans to defined contribution. I will admit that when the paper was published, I thought that defined contributions plans might one day make up half of employer sponsored pension plans with defined benefit plans making up the other half. I didn’t at that stage see the continued march away from defined benefit plans would leave almost all workers in the private sector in the defined contribution bucket.
Anecdotally, the average DC plan that I see has lower contributions than the average DB plan still hanging on in this brave new world. After you sort out the optimization of investment returns and operational costs for these two different vehicles, you are left with the primary truth – more money in means more money out later. I am not sure if tomorrow’s tomorrow is more troubled than it looked in 1995 – but I do know that our society seems more tuned out to the problems of government debt, personal debt, and inadequate savings. I am not sure if the signal we are seeing is that things aren’t as bad as they once were or whether things are worse, and people are too busy scraping by today to even spend time worrying about tomorrow.
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