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The Pension Debate?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Terence Corcoran of the National Post reports on the pension debate:
In
Whitehorse today, Canada’s finance ministers meet to discuss the future
of Canada’s pension system. No agreements are expected on how to
enhance Canadians’ retirement savings. A pension summit is expected to
take place later this year.Today, FP Comment launches
the first in a series on The Pension Debate. Is Canada’s pension system
a shambles, as some argue? Are Canadians ill prepared to meet their
financial futures post-retirement? Is the private defined-benefit
system permanently impaired? Are mutual funds and other savings
vehicles, including RRSPs, up to the job of protecting Canadians?Do
we need a new, government-backed secondary pension regime to accompany
the Canadian Pension Plan and associated government retirement relief?The Canadian pension management industry, in today’s first commentary, argues against new government intervention and in favour of reforms to enhance the role of the private sector. Our second commentary, from the C.D. Howe Institute, raises another volatile issue: the high cost of federal pension plans for government employees.
Tomorrow: How bad is our pension system?
How
bad is our pension system? It depends who you ask. If you're a senior
pension officer at a large public pension fund, claiming to add value
(alpha) over their policy portfolio by beating bogus benchmarks in private markets which you don't bother disclosing to the public, then you're doing very well for yourself.
bad is our pension system? It depends who you ask. If you're a senior
pension officer at a large public pension fund, claiming to add value
(alpha) over their policy portfolio by beating bogus benchmarks in private markets which you don't bother disclosing to the public, then you're doing very well for yourself.
But for the rest of society who is seeing more job insecurity and is facing pension poverty, things aren't so rosy. And even if stocks keep grinding higher, the situation isn't getting any better. Their pensions are at risk.
Let's go over a brief summary of some key proposals for national pension reform:
Finance
ministers hope to come up with a shortlist of options to make Canadians
save more for their retirements. Possibilities are many, but some key
ideas have emerged:
The problem - Comfortable retirements for many
Canadians are at risk. While the Canada Pension Plan, the Guaranteed
Income Supplement and Old Age Security provide retirees with about
$11,000 a year, that's not enough to live on. Company pension plans are
becoming less generous, and coverage less widespread. Personal savings
for many people are minimal. The financial crisis and an aging society
mean it's getting harder for seniors to scrape together a decent income.
The
debate - Alberta and British Columbia have been concerned about
retirement income for long enough to study the issue and come up with a
plan. They want national reform, but say they'll go their own way if
Ottawa doesn't get up to speed fast. Labour groups, seniors' advocates
and opposition parties want quick action that would build on the Canada
Pension Plan.
Ottawa says there needs to be a better
understanding of the facts before taking action. And it is emphasizing
the need for the financial services sector to come up with solutions
before governments twist themselves in knots to step in.
Probable
Results - Ottawa and the provinces will likely agree to a time-table to
study options, hold public hearings and make a decision for reform
within a year. Options are likely to include:
-A private-sector
solution. Possible changes to federal and provincial regulations so
that banks and insurance companies can offer companies ways to pool
their pension plans at lower costs; tweaking government taxes to
encourage people to save more. But management fees in proposals put
forward so far are still quite high.
-Supplementing the Canada
Pension Plan or some other new federal agency. The plan would likely be
voluntary, but enrolment would be automatic for all people with no
corporate pension plans, with a choice to opt out. The supplement could
be made up of individualized accounts, much like a giant defined
contribution plan open to anyone.Management costs would be higher than
today's CPP, but not as high as private-sector solutions.
-Expanding
the CPP. Contributions would rise, but so would the benefits. Enrolment
would be mandatory, keeping management costs to a minimum. The existing
framework would stand, so set-up costs would be low. But not everyone
in Canada needs more retirement income, so critics say one size does
not fit all.
Quote - "The way to make it cheap is to deny
choice.... But it's very difficult to have a scheme that mandates a
sensible set of rules for everybody." - Pension consultant Malcolm
Hamilton, Mercer Human Resource Consulting Ltd.
It's
amazing seeing how politicized the pension debate has become. Arguing
on behalf of private interests, you have the C.D. Howe Institute, a
conservative think tank, which just published its study, Supersized Superannuation: The Startling Fair-Value Cost of Federal Government Pensions.
But I've already warned you that the insurance industry's pension fix is no fix at all. And you should be very weary of bankers claiming that they want to protect you.
The private sector solution to our pension woes all boils down to one
thing: profits. They're going to charge you outrageous fees - just like
they've been doing for years - and provide you with a choice of
products that deliver mediocre results (relative to low cost index
funds).
When it comes to the pension debate, Norma Greenaway reports that the public is well ahead of politicians on need for pension reform:
As
Canada's finance ministers gathered Thursday to talk about pension
reform, a leading seniors group warned they are behind public sentiment
on the need to bolster Canadians' retirement nest eggs.
"The public is way ahead of the politicians now," said Susan Eng, a spokeswoman for the seniors' advocacy group known as CARP.
"What really matters is that the public discourse has moved away from
whether there should be a new retirement-savings vehicle to what shape
it should take and how much it would cost."
The call was echoed
in a full-page advertisement in the Yukon News by the territory's
Federation of Labour, which demanded action to give Canadians a chance
to "retire with dignity."
Federal Finance Minister Jim Flaherty
and his provincial and territorial counterparts were meeting for dinner
Thursday in this wintry and picturesque Yukon capital before digging in
at a formal meeting Friday to discuss everything from the state of the
recession-plagued economy to the state of Canadians' retirement income.
A
key item on the agenda is a report from economist Jack Mintz of the
University of Calgary on the health of Canadians' retirement income and
savings. Sources say his report will not paint as bleak a picture on
the subject as some provinces, opposition politicians, unions and
seniors' advocates have.
Such an analysis could help persuade provinces that they have some time to put together an effective package of reforms.
British
Columbia and Alberta have been the most aggressive in pushing for
pension reform. Although they say they would prefer a national
approach, they also say they are prepared to go it alone with a
voluntary supplemental pension plan above and beyond the Canada Pension
Plan if there is not a national consensus soon.
They point to
statistics in their own provinces that suggest as many as eight in 10
workers in the private sector have no company pension plan. Other
studies have shown one-third of Canadian families have no retirement
savings.
Flaherty told Canwest News Service on the eve of the
meetings that "all options" would be on the table, and that the Harper
government had not ruled anything in or out.
Among other things,
the options being considered include increasing contributions to the
CPP, which covers 93 per cent of workers, with the goal of doubling the
annual pension, creating a new national pension plan for those who have
no workplace pension, increasing tax breaks for Canadians who invest in
RRSPs and Tax Free Savings Accounts, and beefing up efforts to educate
Canadians about the importance of saving for retirement.
Banks
and other financial-services companies are urging finance ministers to
stay away from pursuing government-imposed pension options and to focus
instead on building up private-sector choices for Canadians.
Flaherty
and other finance ministers have said they hope to narrow the list of
options during their discussions and set out a timeline for studying
them and agreeing on action. Flaherty said the process could take up to
a year.
Pressure on politicians has been mounting since the
market meltdown of last year took a serious chunk out of many
retirement nest eggs. The stubborn economic recession, complete with
painful corporate bankruptcies, has also exposed gaps in the system and
left many workers in the lurch over the value of what they once thought
of as a secure pension.
Let me end this
comment by urging the finance ministers to do what's right for
Canadians. The pension debate permeates every facet of our democracy.
It's crucial that we get this right. I have listened to proposals from
all three federal parties and I think each party has something to
contribute to this debate.
But I warn politicians not to succumb
to petty politics, trying to assuage the concerns of your constituents
in order to score political points. The pension debate is way too
important and there are far too many gaps in the current system to keep
the status quo. If inaction and indifference is all that comes out of
Whitehorse, I am afraid that in the not too distant future, Canadian
taxpayers will find out the true cost of pension reform complacency.
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I agree that management fees and charges, plus taxes, changes in legislation, changes in longevity all make pensions solutions complicated. it is true also that income - consumption = savings. were these savings to be simply accumulated then there would be certainty of amount to live on in retirement. Here's the rub though, savings are not accumulated risk free. If they were, the full extent of the rip off perpetrated on the economy by middle men, government and central banks would be apparent. Will you live for 20 years in retirement? Then forget about interest rates, you have a drawdown rate of 5%. Simply put $100,000 buys you $100 a week. You choose how many $100's you need. If you want the average wage of $35,000 a year or $700 a week as a reasonable retirement goal you need $700,000. If you have 35 years to go, that $20,000 a year or $400 a week. That is pension savings for a 30 year old out of net salary before health care, holidays, mortgages, cars, food, utilities etc. There is no con, only desparation by most people trying to get past this massive hurdle, trying to get a rate of return on savings instead of the zero that is the result of taxes, fees and poor markets. Note here again that savings does not = investment, unless the markets allow the recycling of capital to on-going business formation. Once the Government/Fed screws up the system and sponsors zombie banks and coporates like in Japan, then there is no hope of reducing the burden, only deferring it. This is why intervention cannot work and there should no Fed and a law that says Governments cannot run deficits. All they do is create a new political class of those who benefit from intervention or lower interest rates (banks, those heavily in debt and politicians who engage in profligate spending on wars etc) and those who deserve a fair interest rate for the risk they are taking (pensioners and those with savings) . The arguments are simple. The more words that are used and themore complex the argument that is put up, the more you know it is bullshit designed to protect the vested interests.
The pension crisis is only one of many symptoms -- the problem is a lack of wealth creation. The solution is to become more productive and create greater wealth. That means slashing, or even eliminating taxes on capital, and replacing them with taxes on consumption. It means an end to borrowing for the purpose of consumption, notably by governments.
But most importantly, it means establishing a sound money and ending the manipulation of interest rates by central banks. Monetary inflation is always and everywhere a road to economic ruin. It allows governments to squander money on wars and political boondoggles. It robs from the middle class and enriches the bankers. And it destroys the moral fabric of a nation.
Sound money ended when governments refused to live within the fiscal disciplines it imposed. Politicians from the Left to the Right, and of every stripe in between, have all been complicit in debasing the currency and building staggering pyramids of debt that no nation can ever hope to repay. To say that government can devise a solution without ending its own fiscal irresponsibility, or even so much as acknowledging its complicity, is to betray either one's total lack of intelligence, or one's total lack of moral decency.
In the aggregate, IRA, 401K, and pension plans can never work because there will always be too many Wall Street predators creating new ways to steal from the plans. So much better to simply buy gold systematically as you work and then sell the gold systematically to pay your bills after you retire. All of Wall Street is not capitalism but socialism in disguise, socialism which subsidizes Wall Street predators at the expense of everyone who works.
The only moral way to do it, in my opinion, is a 401k-like program; meaning that your retirement savings is "your" retirement savings. Take away all the ponzi-finance. Many plans in the US have come a long way with respect to the elimination of hidden fees and open architecture allowing for more freedom in individual investment options.
Public pensions (or private pensions guaranteed by the public) are Ponzi schemes, period.
We have to stop rewarding failure (if it's not too late already).
This does not work because just like DC plans, you are throwing the responsibility on the shoulders of individuals who are not prepared to make wise investment decisions. Telling people "your pension is your problem" will ensure pension poverty. We need a much better game plan, one based on effective governance, to deliver safe, affordable public pensions to all our citizens.
"Telling people "your pension is your problem" will ensure pension poverty."
What specifically are people suppose to be responsible for?? Not health care. Not retirement. Not education. Not their own children.
So let's encourage people not to be responsible, because they don't seem to be naturally inclined toward such.
There won't be anything to redistribute to all of these poor souls.
Re-indoctrinating people to believe that they are responsible for themselves is essential and, despite whatever the outcome vis a vis this retirement issue, is the right thing to do.
Perhaps this would empower people to fight for more realistic supporting wages?
Will there be people who are irresponsible? Yes, but treating everyone like they are is a bit over-kill.
In the capitalist system (which I'm really not a big fan of), money would be better invested in actual production than the middle-men of the financial world (whose risk management schemes have proven to have been more irresponsible than perhaps all the irresponsible "poor" folks combined!).
A not-for-profit management of funds should be a minimum. For those who insist on profit-driven solutions, then perhaps such entities should be mandated to reflect the gains/losses in their employees, especially at the corporate level.
No matter, all of this is really moot when considering that creation of new wealth is all but dead. And with an increasing population (just about everywhere), that can only mean one thing: reduced standards of living.
In all of human history, retirement is a freak thing. I don't expect to retire (even though I have been fiscally conservative [zero debt]).
They already have GICs and other assorted guaranteed investment choices, government bonds for older, near-retirement safety.
They don't need anything else.
"Wise investment decisions"??? Just give me all of my FICA contributions which I could have just put in CDs and I will be much happier than what I am going to get from the government. So CD bank deposits will easily beat the "wisdom" of the government.
I am always amused when government takes such a low view of people -- who really have no ability to find their way through life. Sad.
So instead of "your pension is your problem", "your pension is one of my many problems"?
I'll tell you the truth, I've never hated my "fellow Americans" before the financial crisis as much as I hate them now and the main reason is because before they were paying for their own shit.
All this discussion on reforms seems to dodge around the main problem that hasn't even been acknowledged. People don't have enough retirement savings because they don't have enough money to do so at the end of the day, and the money that was invested isn't growing at the assumed rate of return. We don't need to be lectured to by the government or financial advisers who have done a dismal job of managing money themselves. This obsession with saving for retirement does not trump present needs. And after having lost a fair bit of hard earned money invested by 'professional money managers' once, I'm reluctant to give them more of my money. Everyone needs a reality check. Having pensions managed by the private sector, or trimming management fees is all window dressing and won't guarantee improved return on capital. We are trying to squeeze more money out of a sponge that has already been wrung dry. But then again, I'm a pessimistic ZHer. I hope I'm wrong.
"People don't have enough retirement savings because they don't have enough money to do so at the end of the day"
At first glance, this statement is merely maddening. Upon further observation, it becomes clear that this is both the root of the problem and the usual, trite, ineffective solution.
Problem: people don't make enough money
Solution: transfer payments
If you are not saving enough for retirement, you must reduce consumption or increase your income today. Income - Consumption = Savings
I agree with you that rates of return are an issue (most people are not up to the job of managing their investments), as are complicated tax matters related to savings vehicles; however, don't let people off the hook for failing at the simple act of saving.
An average double income household with a few children living in Toronto is an expensive life without excessive spending. After taxes, mortgage payments for a modest sized home, education savings, two vehicles for the often neccesary commute and rising food and fuel bills, blah, blah. Not much to trim down I'm afraid. It's that nasty inflation that is killing so many of us. On top of that we then need to gamble the savings in some rigged market that may not perform even with the best laid investing strategies. In principle I agree with you. Perhaps if the banks and government would just stay out of managing the economy, saving might be easier. I'm no where close to retirement and like many people my age, I have little hope of a comfortable retirement in the traditional sense. C'est la vie.
My solution? Less government and Central Bank tinkering to start with. Let's consider this a zero sum game. One person's gains are another's losses. Perhaps a new mindset might repair the imbalance. Work toward self reliance. You gamble. You lose. That includes professional money managers. The government can provide a social safety net to allow for some compassion. Gosh I don't have the answers but this mass delusion of endless wealth for all is going nowhere.
I like the way you think Seer. It's closely aligned with my sentiments.
In order to make gains it is essential that there is an imbalance.
Wealth distribution is way messed up (I'm from the US, in which case it rings truer). Since not everyone can be massively wealthy, some have to be massively poor. The argument about a person making lots of money because she/he has more "value" is BS: http://articles.moneycentral.msn.com/SmartSpending/blog/page.aspx?post=1...
The entire system is predicated on rewarding those who allow others to work less! (again, read the above link)
" People don't have enough retirement savings because they don't have enough money to do so at the end of the day, and the money that was invested isn't growing at the assumed rate of return. "
100% correct so we need to rethink how we deliver pensions and ensure that we are not creating a generation of pension paupers.
People don't have enough retirement savings because they spent too much during their pre-retirement years. All other causes pale in comparison.
They did not save enough. They thought they were entitled to have more than virtually 98% of other people in the world, including two cars, a big house, a big screen TV, a cell phone, vacations, movies and restaurants, cable TV, 40 hour work week, 5-50 pairs of shoes, etc.
And so, responsible people will once again be asked to pay for the irresponsible.
Can those that attempt to perpetuate the non-perpetual?
I'm guessing that you'd say no. And, you'd be right. Unfortunately, you're also in that camp if you champion the capatalistic ideology, as it relies on perpetual growth, which isn't possible on a finite planet!
The solution? Anyone familiar with Logan's Run?
When a population has fewer people working, fewer people producing, then the equation is not stable. The fact that we as a people have to acknowledge is that there are not enough children around to pick up the work (pay into the retirement pool). The underlying current, however, is that of diminishing resources with which to amass wealth from: Canada is fairly well endowed, but one acquires wealth via external trade, and the external to Canada is in pretty bad shape (esp the US, the biggest "consumer" ofthings Canadian).
So what you are saying is that is we had not aborted 40 million babies in the US, we would be better off today.
Socialism always destroys the people it proclaims to be helping. The follow the leader game of - if you work your ass off today I'll gladly take care of you tomorrow. Only works until the first serious economic down turn. Just like every other ponzi scheme.
LOL!
Socialism is about equality. Capitalism is about in-equality. Further, the last couple of years should prove beyond any reasonable doubt that capitalism is a dead-end, that it is, to use your very own words a "ponzi scheme" (refer to all the financial "instruments" that capitalism drummed up; hm, I don't hear of economic hemoraging going on in Cuba, I wonder why...)
ANY system that requires perpetual growth (on this finite planet) is a really bad idea.
Just pointing out the facts...
NOTE: I'm anti-statist.
Once upon a time a Marksist named Keynes. Decided to ride the coattails of some left over Natzi's that established the Federal Reserve. What your referring to is not capitalism. It's failed Keynesian economics!
The corpse that is now Cuba stopped hemoraging shortly after daddy USSR pulled the I.V. drip in the early 90's. Cuba is a begger society, if you want to call that an economy, have at it!
Socialism as a philosophy is about equality. Equality is the lie the statist uses in the name of socialism.
Retirement savings, funding and management should be handled by individuals and not by the government or corporations. Everyone's idea of what standard of living they want pre-retirement vs post-retirement is different. And portability is a must. And we need to do more to require people to take responsibility for themselves and not rely on government or their employer for such long range personal financial planning (certainly the US government provides no evidence of long term financial planning wisdom). We should never have the disciplined, frugal, responsible people have to pay for those who do not save and scrimp during their pre-retirement years.
Personal financial responsibility is a solution in the same way that absolute personal chastity is a solution: Perfect in theory, but not really practical for most people in the reality-based world. All too often, it gets used as a code-phrase for "Fuck everyone who isn't smart enough to do what I do".
You want to "retire with dignity" yo? Then here's a piece of advice - stop living beyond your means in your earning years and save your own earned money for retirement! Stop counting on the rest of us to fund your golden years!
I continue to be befuddled by the fact that ZH actually continues to post your rubbish!
B. Frank
@B. Frank
Great thinking B Frank. I'll pass that on to the cashier at the local grocery store (woman in her 40's just divorced), my cleaning staff and the guy who pumps gas at the corner store.
Weird. I keep trying to explain savings, derivatives, swaps, CDOs, inflation, hedging, alpha and the importance of gathering quality information from a variety of sources - but they are just a tad too busy surviving to get into it.
Leo hit it right on. Public Pension funds buying quality bonds and index funds. No risk, no overhead and it promotes productivity in the economy. Just like the Public Option in Health Care (look at the stats, not the rants).
Personally, of course, I'm a bit upset at the money printing. The average "saver" is getting burned right now by the morons at the central banks. Compound interest works both ways. The dollar a young man saves today will be worth 1 cent by the time they retire. They might as well burn the "retirement saving" for heating. Better ROIC. Living within his means is a stupid strategy. Get a bankruptcy lawyer, max out the credit to buy stuff and then default is the winning way in the Ponzi go-go-and-plan-on-going-broke economy.
And the CFAs (certified financial advisors) are nothing more than commissioned salespeople on a used stock-car lot. The average schmuck doesn't stand a chance in the market. I can imagine the fun they will have with your pension savings.
If Canada's Prime Minister (George W. Harper) goes with the "private" option then Canada is doomed. They already raided the pension funds with the fancy crapola. Now that there is nothing left to steal/hussle the "private" groups want to tax the profits from the pensions into their accounts *in advance*.
About Leo : I find his perspectives useful. I don't always agree but Leo is onto the key problem - stability of pension plans as an intergenerational wealth-building mechanism that ensures a stable base of capital for productive investment over time with an absolute minimum of overhead.
Thanks Leo. Always keep in mind that those lovely "private interests" that are trying (so far - successfully) to sabotage any and all responsible policy pay people to blog and comment against quality discussion like the discussion that you provide. Those seemingly random rude people may actually be paid, skilled and professional rude people with an agenda.
And thank you to all the comment gang at ZH. Most of it is really fun and useful.
End of rant.
Namke von Federlein
Yo? You must be part of the pension club that I keep slamming. I am the only person in the world with the guts to post the truth on what's going on at the big public pension funds. Everyone else is on the take.
I consider retirement plans and investing in mutul funds as waste of time and money. What happened last year is not a unique incident. It happened in 2000,and it will happen again in probably less than 8 years this time. And every time this happens,banx come back to goverments to pump liquidity in the system,because simply they keep on building pyramides ,except it is upside down. And when they decide to give you back some of your money,then they bankrupt your goverment or drive your country into hyperinflation. So it is a lose-lose situation...
There is no pension debate - there is political posturing but in Canada like in most countries the debate is long over. The public sector has a great pension plan and if the managers blow the capital - who cares - the taxpayer is on the hook anyway. These new schemes are nothing but a way to transfer money to managers (or insurance companies). At some point, people must realize that they are on their own - look in China the savings rate is in the 30% range because they have to look after themselves. Look at aging, we may live 10-years longer but it's from 80 to 90, you don't get to do your 20's twice. Canada's tax laws (like the US) encourage gambling (the markets) not saving and capital accumulation.
"Canadian taxpayers will find out the true cost of pension reform complacency".
The whole world is finding out the true cost of corruption complacency. Put your trust in the banks and politicians... they will take care of you and your money, don't worry. Its beyond reform, a house cleaning would be a start.