Take a close look at your first pay cheque in 1998.
You’ll find it’s lighter by almost two dollars a week, the first stage in a series of hikes in contributions to the Canada Pension Plan. When the increases are complete, in 2003, each Canadian worker will toss the federal government $1,650 a year in premiums, matched by their employers. Overall, the CPP tax will rise more than 70% and take 10% of your income.
But it’s for a good cause, right? Pensions make sense because there’s nothing worse than being old and poor. Over the last 30 years, we all paid thousands of dollars into the CPP to avoid that sorry plight. Trouble is, the money’s gone.
Those dollars were used to finance provincial social spending during the ascendancy of cradle-to-grave safety nets, or paid out to those already retired. We’re left with promises to pay, which is why the feds are hiking premiums. So they can keep their promises.
Pay more, they tell us, and we’ll ensure your money is wisely handled from now on. Twelve appointed experts will invest it in financial markets. It will not be used for political aims, vows the Finance Minister.
Tell that to Québecers. That province controls the CPP on its own, through the Caisse de dépôt et placement, which is supposed to invest the pension money in "non-political" ways. In fact, QPP returns underperformed private plans by 24% between 1971 and 1989. (This was much better than CPP which generated a return 49% lower than the private market during the same period.)
The Canadian fix-higher premiums and cosmetic changes in the way they are spent-pales in comparison with the method used in Australia. In 1986, faced with a similar set of circumstances, a Labour government applied an entirely different approach.
As in Britain and Chile, the Aussies kept a mandatory provision in place, with pension dollars deducted from pay cheques. But workers now can choose where the money lands. They can decide to stay in the government scheme or they can direct the pension premiums into a variety of private, low-risk superannuation funds.
A new study by the Heritage Foundation assesses the results: "Average-wage workers who made no voluntary contributions and earned only 4 percent in real returns each year . . . will be able to retire with nearly twice as much income as they would have had under the old government-run system. More realistic assumptions, such as higher average returns and some degree of voluntary savings, have demonstrated that privatization could easily mean more than twice as much, and perhaps about three times as much, retirement income for the average Australian worker."
As in Britain and Chile, savings rates have soared under the new system. Funds in superannuation accounts have jumped from 17% of GDP in 1985 to 55% today, and are projected to hit 100% by the year 2020. This phenomenal leap means more investment, more jobs and more prosperity.
The Australians also strengthened means testing for its basic old-age pension. Because returns from private pension plans are so superior, the government can lower its payouts for the needy and use the cash for other programs.
By privatizing its state pensions, Australia accomplished three goals: more income for retired folks, increased national savings and reduced pressure on its budget. Key to this feat is distancing pension funds from the diversions of the political world.
Our latest "quick fix" to the Canada Pension Plan is illusory. Are twelve people on some investment board smarter than the combined wisdom of millions of Canadians seeking the best return on their pensions in a competitive marketplace?
Never.
We are all poorer for this conceit of central planning.
