CPP’s False Alternatives

Commentary, Frontier Centre, Pensions (historic), Uncategorized, Workplace

Federal Finance Minister Paul Martin is criss-crossing the country trying to sell the public on his government’s changes to the Canada Pension Plan (CPP). It is a difficult job.

The reforms, which were announced last February, take effect on January 1, 1998. Since contribution rates will rise sharply in each of the next five years and almost double over that time, Mr. Martin’s PR effort is quite understandable. It is a tough sell.

When Mr. Martin’s performance with the federal budget is compared with that of his predecessors, he comes out looking very good indeed. He has restored the integrity of the national purse. Nevertheless, all his talents notwithstanding, his effort to market the "new" CPP rings hollow.

His major argument is that pensions are good, and Canadians want them. These statements are true, but they beg the question. The choice is not between the Canada Pension Plan and no pension at all. Better alternatives exist.

The CPP was conceived and brought into existence more than 30 years ago, a time when people tended to think that government monopolies were the cat’s pyjamas. The original deal, which directed the fund to bankroll provincial debt, seemed eminently reasonable. What could be safer than government bonds?

Over time, it became clear that leaving the CPP fund in the public sector was a mistake. The money would have captured a far higher rate of return if it had been invested almost anywhere else. In fact, if private markets had handled the money Canadian retirees could have enjoyed pensions that are close to double the present level.

Research has also revealed a striking difference in the potential for economic growth when a privately managed pension system is substituted for a pay-as-you-go state-managed system. A technical study published by the World Bank in 1995 discussed the mechanics. Higher savings rates, more employment and production, and more extensive development of job-creating capital markets flow from private pensions compared with CPP-style arrangements.

Economics can explain why this is so, but practical proof is also at hand. The Chilean government converted its state plan into private pensions in 1981 and the results have been outstanding. Sixteen years later, the national savings rate has reached 29% of the Gross National Product. Not coincidentally, Chile’s unemployment rate is half ours. Given the choice of staying in their old, CPP-style pension plan or converting to private management, 90% of Chilean workers took the latter option.

The Chilean success has spawned imitators. Argentina, Colombia, Italy and Peru have adopted some form of the Chilean model. Other countries are preparing to do so. The federal treasury is intimately familiar with the public desire for secure retirement funds. Canadians now deposit about $24 billion a year into RRSPs. In 1978, Britain split its pension system into two parts. A payroll tax still funds a basic government pension, and RRSP-style accounts were authorized. That private pension pool now tops $1 trillion.

The Organization for Economic Co-operation and Development cites this as a factor in the elimination of Britain’s pension debt. Countries like Germany and France, stuck with pay-as-you-go systems, will see these debts double.

Recently, when we were telling the CBC all this, a researcher asked the perennial question, "What about the poor?" A computerized model generated this spring by the Cato Institute answered this question by comparing the payments low-wage earners will receive from Social Security (the American equivalent of the CPP) with returns from mutual funds.

The difference is staggering. An $18,000-a-year waitress would receive, upon retirement, six times more from a stock fund than she would from Social Security. If she contributes the same amount she pays into Social Security, after 20 years she would accumulate assets of $746,000, a far cry from the $1,089 a month payable under the government plan (all U.S. dollars).

Is any more proof needed?