Personal Business

A new plan for pensions

Privatizing the CPP would reduce the risk of tampering by vote-hungry politicians

Ross Laver July 1 1997
Personal Business

A new plan for pensions

Privatizing the CPP would reduce the risk of tampering by vote-hungry politicians

Ross Laver July 1 1997

A new plan for pensions

Personal Business

Ross Laver

Are Canadians ready for a privatized Canada Pension Plan? Probably not, judging by the cool response to the Reform party’s pension proposals during the recent federal election campaign.

Reform’s Fresh Start platform promised to phase out the 31-year-old national pension plan and replace it with a mandatory system of self-directed retirement savings accounts—a policy based on the concept of individual responsibility rather than shared risk. On the hustings, however, the idea proved as popular as Ellen DeGeneres at a convention of Southern Baptists. Reform Leader Preston Manning rarely mentioned it in his speeches, no doubt fearing that the Liberals would accuse him of an assault on pensioners—the closest thing in Canadian politics to a herd of sacred cows.

Kim Campbell was right: an election campaign is no time to debate serious issues. But now that the election is over and the Liberals are forging ahead with their own plan to overhaul the CPP with what amounts to a massive tax hike, it only makes sense to consider the alternatives.

Privatizing the CPP would reduce the risk of tampering by vote-hungry politicians

One man who already has is James Pesando, an economics professor at the University of Toronto. In a paper published this month by the C. D. Howe Institute, Pesando presents a compelling argument in favor of privatizing the CPP. With luck, Canada’s parliamentarians will take time to read it in between their summertime golf games and trips to the beach.

Like everyone else who has examined the CPP, Pesando agrees that it urgently needs revitalization. Together with the Quebec Pension Plan, it is run on a pay-as-you-go basis, meaning that each generation’s benefits are funded by the contributions of younger workers. On the stock market, this type of arrangement is called a Ponzi scheme: a swindle in which early participants are paid off with money put up by later investors. Over the years, vote-hungry politicians have allowed benefits to far outpace expected revenues, so

Pesando’s idea is more complicated but also a lot more equitable. Ottawa, he says, should split the CPP in two. Existing contributions would finance the disability, death and survivors’ benefits provided by the plan and shore up the unfunded liability. Money from the proposed rate hike, however, would be directed to a system of mandatory personal RRSPs similar to those proposed by Reform. Pension benefits now being paid to retirees would be honored in full, while active workers would receive full credit for CPP benefits earned prior to privatization.

that the CPP now has an unfunded liability of $570 billion, roughly equal to the entire federal debt. Left unchanged, the plan will go broke in less thah 20 years.

The Liberals’ proposal, unveiled in February, but still not debated in Parliament, is to raise CPP premiums by 70 per cent over the next six years—to $3,270 in 2003 from a maximum of $1,890 this year. (Those costs are split between employees and employers; self-employed workers pay the full amount.) In addition, future benefits will fall by an average of 9.3 per cent, with the result that young contributors will pay far more into the plan than they will ever collect.

One advantage of Pesando’s proposal is that, by creating an obvious link between contributions and benefits, it would greatly increase public confidence in the pension system. Right now, CPP premiums serve as a payroll tax, discouraging job creation and creating an incentive for workers to join the underground economy. But in future, employees would know that their contributions were purchasing a retirement benefit on their behalf, rather than merely propping up a system that might or might not still be around when they turn 65. A privatized CPP would also reduce the risk that politicians might try to tamper with the system for short-term electoral gain.

In today’s political environment, with the Liberals scurrying to regain the left-ofcentre vote, Pesando’s idea is a non-starter. Chances are, however, that it won’t go away.