New rules for the Canada and Quebec Pension Plans will take effect in the new year, mostly to make it more advantageous for us to work longer and defer collecting benefits, and consequently keep the plans solvent for longer. Meanwhile, a more fundamental debate about their future is gathering speed.
A collection of organizations, including the NDP, the Canadian Labour Congress and the Canadian Centre for Policy Alternatives, have recently proposed to double the benefits that Canadian pensioners receive from the CPP/QPP. Without this, they claim, the next generation of pensioners will not have accumulated enough savings and the level of poverty will rise among our old age population.
Several groups from Quebec gave their support to the proposal recently. Louis Roy, president of the Quebec trade union confederation CSN, told the news conference that asking citizens to invest in TFSAs and RRSPs "will not work, because people are too heavily indebted right now." The head of the Quebec Federation of Senior Citizens, Danis Prud'homme, wondered how people can prepare for their pension years when they don't have the means to set money aside voluntarily. "With the pension plan, employees and employers are forced to participate. It's a good system."
This is typical of the magical thinking that is often exhibited whenever new government programs are being proposed. Canadians have too much debt and don't make enough money to save for their retirement? No problem. If we only forced everyone to save more — poof! — the problem would disappear and pensioners would get government cheques twice as generous.
The downsides to this proposal are numerous but tend to be forgotten when only the purported benefits get reported. Let's review some of them.
First of all, public pension plans are being funded by "contributions" — or, more accurately, taxes. Granted, employees only pay half of them, but this still means they will have to cut spending correspondingly on other items if this tax goes up. That "good system" thus simply creates a problem in the present to deal with a problem in the future. It imposes a specific choice on how to apportion their budget on people who may decide otherwise if they were allowed to care for their own well-being as they see it.
This fact that employers pay the rest of the contributions doesn't mean that we get that other half for free. To manage their business profitably, employers have to balance various kinds of costs and demands. They allocate a certain budget to labour costs, which includes salaries but also benefits and payroll taxes. If you increase one payroll tax, the money will more likely be found by reducing other types of labour costs, not by cutting on maintenance or customer service. So, employees will end up actually paying most of those contributions too, even if indirectly.
Those taxes are not without more general economic consequences. When you raise the cost of labour, just as when you raise the cost of any other good, it becomes less appealing. Other things being equal, this means that employers will tend to create fewer jobs. How helpful will a more generous pension plan be for those who won't be able to find a job because of it?
There are other considerations that have to do with the advantages of using private retirement vehicles (in TFSAs or RRSPs) as opposed to being forced to fund a plan run by the government. Most important, funds that you invest privately belong to you. You can use them throughout your life for other purposes. You can use them up faster or slower through your retirement years depending on circumstances. You can bequeath them to whomever you want. That's not possible for the money you are forced to pay into the CPP/QPP, which doesn't belong to you anymore.
Moreover, if you so choose, you can also get the help of a financial adviser to adjust your investments depending on your level of risk, family situation, and other considerations. That may result in higher management fees, but at least you get a service with an added value for this. Like other social programs, the public pension plans instead offer a uniform service and are managed by bureaucrats accountable to politicians, not to the beneficiaries. There is no place here for individual preferences.
Finally, from a public policy perspective, the major problem with non-fully funded public pension plans such as Canada's is that they are in some respects akin to a Ponzi scheme. The benefits you get are only partially dependent on the money you put in. To fulfill all the promises made to previous generations of workers, there has to be a sufficient inflow of money from current workers. If there are fewer workers, if retirees live longer, or if the plan incurs investment losses, then "contributions" have to go up — which is precisely what has happened, from 3.6 per cent of gross employee income in 1966 to 9.9 per cent by 2003. And that upward trend should continue in coming decades. Just as in a Ponzi scheme, the earlier participants benefit, while those who join later get screwed.
Despite their disadvantages compared with private pension vehicles, I recognize that these public pension plans are part of the pension systems of most developed countries and are not about to disappear. But a reform to bring them closer to a model such as the one in Chile, based on individual capitalization and savings accounts over which each worker has control, would at least mitigate their worst features. Sweden for example has allowed workers to invest 2.5 per cent of their wages (out of a total compulsory contribution of 18.5 per cent) in such personal accounts. Why not try something similar?
All this being said, critics may be right when they say that many people don't save enough today to enjoy the comfortable retirement they expect to have in the future. The fundamental reasons for this have to be found in other types of government intervention, though: excessively high taxes and artificially low interest rates. If we want to insure a better future for Canadians, be they of working or retirement age, those are the policies we should be debating.
Michel Kelly-Gagnon est président et directeur général de l'Institut économique de Montréal.