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Canada Pension Myths?
More pension politics up here in Canada. On Monday, New Democrat Leader Jack Layton said an elected NDP government would double the Canada Pension Plan benefits that Canadians receive and provide $700 million annually to help low-income seniors. Mr. Layton also complained that Michael Ignatieff's Liberal platform mirrors a lot of NDP ideas, including pension reform and increases to the Guaranteed Income Supplement for poor seniors.
Once again, the National Post publishes an article attacking these proposals, this time from Neil Mohindra, director of the Centre for Financial Policy Studies at Simon Fraser Institute who writes on Canada pension myths:
Proponents of expanding the Canada Pension Plan (CPP) have spread inaccuracies and myths about the risks and costs associated with it. These misrepresentations are now being spread by political parties in the run-up to the federal election in newly announced plans on retirement security.
The Liberals’ plan includes an undefined “gradual” increase in premiums and benefits, as well as a Secure Retirement Option in which Canadian workers can opt to save an additional 5% to 10% of their pay in a retirement fund “backed” by the CPP. They claim the CPP provides enormous advantages to both employers and employees because it avoids the risk, complexity, and hidden management fees that too often drain retirement savings from plans that are administered by the private financial sector.
The Liberal plan does not explain why it describes private-sector plans as complex, but if it means that Canadians have a broad range of choice in the investment products they can select to meet their individual needs at different stages of their life, it is difficult to see why this is bad. The New Democrat Party goes even further and has announced plans to double the CPP, in addition to making it possible for Canadians to top up their public pensions with personal savings.
The reality is that the CPP is not risk free or as low cost, as advocates of expansion pretend. The Canada Pension Plan Act, governing the CPP, includes an automatic mechanism to adjust benefits and contributions to bring the plan back on track if at any point it is no longer considered sustainable in meeting its obligations. Every three years, federal and provincial finance ministers must review the financial state of the CPP and provide recommendations to the ministers as to whether benefits or contribution rates or both should be changed. Hence, there is risk. There is no guarantee that the CPP will deliver what is expected.
The Liberals argue that their Secure Retirement Option will benefit the millions of Canadians who “can’t afford the risk of the stock market or RRSPs.” This is simply not true. Close to 40% of the CPP’s current assets are in public equities that trade on stock markets; over a quarter of its assets are in alternative asset classes considered riskier than equities, including private equity, real estate and infrastructure. Hence, the Secure Retirement Option is an option is for those who want more of the exact same risk associated with their mandatory CPP pension unless the CPP creates a separate portfolio, in which case who knows what the portfolio will consist of.
Advocates of CPP expansion describe the fund as low cost. For example, the Canadian Labour Congress notes on its website that the Canada Pension Plan Investment Board has a “low” fee of 0.5% in comparison to other investment options. However, the CPP Investment Board is strictly the investment manager for the CPP so its costs do not include all the administrative costs of the CPP such as the costs involved in collecting premiums and paying benefits. Those costs are charged to the CPP from various government departments such as Human Resources Development Canada and the Canada Revenue Agency.
Figures on the CPP’s full costs can be found in the public accounts and show that CPP costs are in line with what the Canadian Labour Congress calls “lower cost investments.” The Canadian Labour Congress webpage does not describe what this term means. But presumably it refers to investment options such as exchange traded funds or low cost mutual funds purchased through channels that do not include financial advice, as opposed to mutual funds that include a charge for providing professional financial advice.
The cost performance of these “lower-cost investments” is pretty impressive, since they face expenses the CPP does not, such as regulation and taxes. Moreover, the CPP Investment Board’s costs are growing fast. In 2005, administrative expenses and external management fees as a percentage of total average assets came to 11 basis points. By 2010, the figure reached 56 basis points, a five-fold increase.
The CPP is currently doing exactly what it should: providing income for basic needs in retirement. Other pillars, such as tax-sheltered plans, are in place and have helped Canada create one of the best systems in the world for ensuring Canadians meet their financial objectives, including having adequate savings for retirement. The CPP Investment Board expects to be managing $700-billion in assets by 2038, a sum that will be challenging enough to manage without unnecessarily adding to it.
Last week it was Jonathan Chevreau of the National Post who criticized the Liberals' proposal, dragging "Big CPP" into Canadian politics. I ripped into that analysis, and I'm going to rip into this one too. The National Post should be ashamed of itself for publishing this drivel. I'd love an opportunity to openly debate the likes of Jonathan Chevreau, Neil Mohindra and anyone else who blindly supports the private sector "solution" and openly questions the benefits of Canada's large defined-benefit (DB) plans without basing their analysis on facts. Then again, what else do you expect someone from the Simon Fraser Institute to write? It would be nice if he disclosed how many banks and insurance companies fund this institute.
I'm too tired and cranky to go through all the arguments I went over last week. Do the large DB plans take too much equity risk? Yes, they do, both in public and private equities. Do they invest in alternative assets like hedge funds, real estate and infrastructure? Yes, most of them do invest in all these asset classes (except hedge funds; a few funds don't invest in external hedge funds) and they also have internal alpha strategies to lower their costs. Are these alternative asset classes "riskier" than bonds? Yes, but over a long period, they're typically a lot less risky than stocks and they offer important diversification benefits.
As far as the "administrative costs" of the CPP, they are shared by Human Resources Development Canada and the Canada Revenue Agency, which is good. These agencies are delivering great service at a very low cost. The private sector wouldn't do a better job at administering the CPP.
Finally, as I mentioned in my comment on the "Big CPP," most Canadians are clueless about CPPIB's investment partners, but I assure you that no defined-contribution (DC) plan can invest in Brevan Howard, Bridgewater, Apax, Lone Star, Texas Pacific Group or any of the other top public and private funds listed on their site. This is an important source of alpha, on top of the internally generated alpha, adding basis points on their policy (benchmark/ beta) portfolio. Over the long-term, all that alpha adds up, which is why CPPIB pays these managers big fees for delivering meaningful alpha.
If Mr. Mohindra and Mr. Chevreau can find me a low cost ETF that delivers a performance remotely resembling that of these top fund managers, then I will listen to their arguments. Till then, I suggest the National Post stops publishing these spurious comments from biased "experts" who spread disinformation and perpetuate myths claiming Canada's large DB plans can't do a better job than the private sector in managing our retirement savings. They are doing a better job and they should be given increasingly more responsibility to continue delivering low cost pension fund management to as many Canadians as possible who are willing to pay premiums for a secure retirement.
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"These agencies are delivering great service at a very low cost. The private sector wouldn't do a better job at administering the CPP."
Not for Leo to carry his cronyism on his sleeve now is it? Not like every article Mr Kockup writes (cribs off others) is talking up the crappest institution ever devised (Govt)
Nope, Leo has found the only Govt agencies to out-perform the private sector in economic history. How did you benchmark this Mr Kockupalotis, over lunch from the horses mouth by any chance??
Chevreau is just a greasy moron, I know the National Post well.
Goverments and Dairy Queen....
If you are competant,you can NOT work for niether.
''Goverments and Dairy Queen....
If you are competant,you can NOT work for niether.''
Thanks for that insight, genius!
Leo, stop being a fool. Can't you see sarcasam from a mile away?
Are you alwasy the smartest gui in the room?
It's all betting on the come to me. The other side of the trade has already won, you get numbers on paper, and absolutely no wealth.
What's wrong with saving for retirement instead of blindly saving for entitlement?
End goverment crossing with pensions - it's a guaranteed total loss. Government crossed with anything always [always] screws the citizenry twice.
Wake up Canada.
Canada has tar sands, it has Vancouver, it has Montreal and the french Canucks who can sing in funny french. It has Banff and the rocky mountains. It has the ice cap full of oil, which I hope it'll never touch. But its biggest plus is it's big neighbor and his juicy market.
I hope one day it wont become it's biggest handicap in the future!
as a US citizen with a Newfie mom, can I collect a Canada pension if social insecurity craps out?
OK, so here's the deal. You pay this "tax" on your wages throughout your working life on the promise that you will be able to recoup "your money" at a later date. Yes, that was the PROMISE that made it somewhat palatable. Now of course, when times get tough, a certain element in society wants to renege on that "promise". The government has taken your money and now they don't want to give it back because TPTB allowed the money to be "invested" in the ponzi banking crap that has brought down the economies of the west. So let's blame the victim for being "lazy", "unenlightened future planners" because we all should have known that governments never keep their promises. So much for the social contract, we're all on our own now, despite what we've been told. I find it incredible that people don't see this for what it is. It's every man for himself, and you are stupid for believing anything government tells you. You greedy disengenous bastards don't feel you owe anything to the very people that made this country what it is, fuck 'em, they're old now, we don't need them any longer, put them all on the nearest ice flow.
You can call it a social contract or you can call it making promises to yourself through the political system that future generations will have to pay for. The people that are getting screwed by the system largely voted for the system and if the system is screwing them over now they should have recognized that you can't get something for nothing and demanded a better class of politician from all parties. if the majority of the voters are fools so will the majority of their leaders be.
The people I feel sorry for are those that saw this comming, never voted for it, still had to pay, saved for their own retirement and now are getting screwed out of their savings by low interest rates, inflation caused by money printing, higher taxes and a bankrupt social safety net.
I wish I lived in Canada where the government officials are more productive and moral than private workers, you can get something for nothing, loonies grow on trees and there is a free lunch, AND dinner, and everyone is equally brain dead from the mental disorder known as liberalism.
you prefer the US oligarchy? Or some Utopia called a free market, without string pulling!
Doesn't matter what country anyone comes from, all humans suffer from incurable stupid. 195 countries in the world and all of them are loaded to the brim with stupid. So the obvious answer to solve this is to make more people, to exponentially increase the amount of stupid.
What isn't discussed is figuring out what actually works well in terms of process and return. Mainly because we all suffer from truckloads of stupid as a species.
CPP to me is nothing more than a tax. I do not expect to be able to collect on it. Period.
Anything that expands on it will not get my vote. As if I'd vote for giving the job of investing for my future to the government - A HAHAHA !!!!
Exactly, in terms of services, at what point in time did you ever agree to foot the bill? At birth? Somehow society requires someone to be at least 18 to accept any type of terms and conditions of any agree. However, it wasn't ever agreed to. Ever.
I didn't agree to it and I'll guess neither did you. If either you or I were billed for a service we neither asked for but was pretty much shoveled down our throats, how is that fair? It's not.
CPP...actually any pension (ponzi) scheme is ridiculous and built to fail. The math never supports them, printing money to save them destroys them and paying out from them severely weakens them.
Show me the math.
I'm seeing a lot of opinions and/or bias in these comments but no data to support them.
generation N+1 pays in to the system, which pays the benefits for generation N. Each successive generation, when it retires, collects benefits based on money paid in to the system by the next generation. But remember that the point of the Ponzi/Social security is to (A) trick people into thinking that they're making an incredibly profitable investment/social contribution.
A ponzi scheme may skim a huge amount of money for the ponzi owner from the top. That's not what social security does, at all. It's a zero-balance tax-funded benefit, only if the collections can be made in the same an meaningful way. It is at that point it goes from benefit to deficit.
Let's make some one up. Bob. Bob works minimum wage in Ontario over a lifetime and he's retiring this year. We don't care that Bob owns, rents, jerks off on tuesdays to Pokemon video. We only want to look at the contributions Bob made for 45 years of labour.
Over that lifetime of minimum wage Bob and his employer contributed around 110 thousand dollars. 127 dollars a year (if it was collected) to currently 2457 (between both bob and employer). For the sake of arguement, let's just say Bob always contributed 2457 a year, every year for 45 years.
Bob's CPP pay out per month is defined by this scheduel.
http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/rates.shtml
504 per month is what Bob is getting back. At 65 if Bob is lucky, Bob is going live another 20 years (knock wood). If Bob makes it, he'll be ahead of the system by costing 120k in the system. If he drops dead earlier than that, he and his employer are out a small fortune. More than likely though if Bob makes it to 65 his life expectancy jumps to 81 years old for men and 87 for women in Canada. Most of everyone you meet is more likely to die before 65, doubly so for men. Reason why insurance of men is usually nearly double that of women, even if we have better health, eating habits, blood pressure, on less pills...anycase.
Of course I'm using the top end of the fence in costs. Bob and his employer really only contributed around 56k in total. All the expensive theft CPP theft didn't take place until recently when statists understood they needed to jack the rates. Couldn't do it fast enough to catch inflation.
If they want to "catch" up to the inflation/social age distribution/budget fuck ups, we need taxation, all of it in Canada at around 70% of all income. Not just personal income. I'm talking you buy a pack of gum for a dollar, it should cost 1.70. Buy gas, it should cost around 5 dollars a litre like europe. Buy a bike, it should cost 3400 for a decent mid range bike, just like europe. Only paying 5000 a year on personal income tax, time to learn to love the job you are in while only taking home 6 grand of it. Want it to work. It takes money. Not printed money. Made money. Money from labour and trade. Your labour and trade and Leo's.
Want to fix something that can only be fixed with shit loads of cash, then you have to take shit loads of cash to fix it. How to do that? TAX it all to death, even the CPP given out.
Sound good to you?
Leo how do you expect the plans to grow without a heavy interest in private sector growth?
Seriously now. Where is the growth in a pension plan going to come from? Wishes and unicorns that shit commodities. Unless the pension plan is going to be a buck in and a buck out type of system please inform us of where economic growth comes from?
Taxes? No, they are a deficit to growth.
Selling anything that isn't nailed down? Already been done, judging by the size of the Canadian derivatives market, it's been done around thirty times.
Increase minimum wage to tax the shit off of working families? nope that causes inflation.
How about the totally obvious. Shut it down and everyone work until they are dead. If they were too stupid to plan their lives, how is that anyone's problem but the person suffering from mental retardation that they are the shining bright light of the universe.
With the state of affairs being what they are Leo, we all gave the government a dollar and were given .54 cents back. How is that equitable, just, fair, enterprising or useful.
It's not. Time to just scrap it. Besides most of that CPP is leverage to offset direct costs in Medicare for elderly long term care patients. Wouldn't it just be easier to cut out the bullshit of CPP to extend the Medicare expenses to obtain a REAL number on the costs. (one of Canada's hidden tricks to say how cheap Medicare is here, we offset the cost with the pensions of others.)
CPL
That is exactly the point. How are these pension funds going to grow faster than the economy ? It is all smoke and mirrors.
There is no investment fund big enough to pay for the coming boomer retirement. Only taxes can make up the difference. And higher taxes kill the economy. Ergo, we are fucked.
Government Employee Pensions, seperate from Social Security and the Canadian CPP, are there for the mandarins, and like the banking criminals, they don't give a rat's ass about the private citizen who must carry the load.
Everyone thought the US social security plan was a good idea too. Then they changed the rules took all the money and replaced them with IOU nothings. Now the people who paid into this ponzi scheme all their lives are being called greedy because they won't face reality and and accept a lower payout if they have saved some money of their own.
There are differences in the way the CPP is administered but there are no differences in the way governments view a big pile of money just sitting there. If Canada gets into a financial crises the government will find a way to get their hands on it to help the disadvantaged people and the majority will support it.
Just because someone works for the government does not mean they wake up and put on a halo in the morning. Greed is a human condition and big piles of cash in government hands don't last.
Leo, you are a fool. Pick another line of work. I can understand why you were let go.
You understand squat. You know absolutely NOTHING about why I was let go. And as far as pensions, I can dance circles around you and all the other fools here who think managing billions is an easy game, just like prop trading. Prop traders make the worst pension fund managers!
How come pension fund managers don't buy gold and silver?
(Years ago, I had a neighbor who was a dumb fat too)
(And don't reply fact dated after May 2010; even a dog will follow the smell of the burned JPM meat)
Pension fund managers won't buy Gold until the entire herd has joined then they'll buy in at the peak ...when pension funds (or Leo) start buying, it's time for you to start selling!
Leo's latest hot tip is green energy and ethical investing in, yes you've guessed it, green energy
Sell green energy, leave Leo carrying the eco-crap
Leo, I understand why you were let go. You can be read from a mile away.
Do your conflicts of interest related to your current contracts and the publishing of this drivel bother you? I think not.
Leo, you do not give straight answers.
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Canucklehead,
No conflicts of interest whatsoever related to my current contracts, which again you know NOTHING about. I can be the biggest pension prick on earth, and have slammed pretty much all the large Canadian public DB plans at one time or another. But I also give them credit when they deserve it and I'm pissed off at the ideological warfare going on right now to destroy public DB plans. Moreover, I'm not against private sector funds! Far from it! Read my comments more carefully and please if you can find me a low cost ETF that mimics the performance of Brevan Howard, Bridgewater, TPG, Apax, Lone Star, or any of the other top funds Canada's large DB plans are investing with, then let me know.
Why ride his back ? As you financially benefitting from his job loss?
Careful - don't get between someone on a kool-aid sugar high and their idealistic fantasy world.