Pension puzzles

A meeting between Canadian federal and provincial finance ministers has failed to agree on a deal to improve Canada's meager public pensions.  Most of the provinces, led by Ontario, argue that improvements to the Canada Pension Plan (CPP) are essential in order to avoid rising poverty levels as baby boomers enter retirement.  The federal government argues, as it has for the past half decade, that the economy cannot currently sustain the  higher employee and employer contributions that would be required.  Who's right?

Let's start with the federal claim that higher pension contributions would be a "job killer".  Can businesses afford to pay more. or would they have to cut back on investment in order to do so?  For larger companies the answer is very clear.  As Mark Carney famously said when he was at the Bank of Canada, Canadian corporations are sitting on hoards of cash -- "dead money" -- and refusing to undertake new investments anyway.  Raising pension contributions and allowing the CPP administrators to invest the extra cash would arguably liberate some of that cash.  Small businesses may have a harder time of it, but the scale of any contribution increase would likely be too small to have any major impact on job creation.

What about consumers?  Economic theories of consumption behaviour don't generally posit that current consumption spending is driven entirely by current income.  Other factors -- time of life, the nature of income at any particular time, and so on -- also play a role.  It's true that higher pension contributions reduce current income.  However, most economists would argue that in the absence of adequate pension provision, rational individuals will curb their current consumption and increase their savings in an effort to provide for their needs in later life.

That word "rational" is doing a lot of work there.  Much mainstream economic theory is based on the assumption that individuals act rationally, in their own best interests.  It can often seem like a heroic assumption, and the facts as they relate to Canadians' efforts to provide for their own retirement place it under extreme stress, to put it mildly.  Consider:

* The individual savings rate has fallen from about 20% of income a couple of decades to about a quarter of that now.

* Only about a third of workers contribute to tax-efficient personal retirement plans, known in Canada as RSPs, even though such plans have been around for better than three decades, and even as the inadequacy of both public and company pensions has become more and more apparent.

* Those who do contribute to RSPs don't contribute anything close to the allowable maximum.  The aggregate RSP "pot" is less than 10% of the size it would theoretically be if everyone had "maxed out" each year.

* The average individual RSP portfolio is only about $37000, or only about two-thirds of the average annual wage.  That's not a pension "pot" -- more of a thimble.

So how are new retirees coping?  Tales of outright poverty are mercifully few, but there's plenty of evidence that a large number of boomers are continuing to work past normal retirement age in order to make ends meet.  That's certainly the case in our own geezer-heavy neighbourhood.  So is the time-honoured practice of cashing out on the family home in the city and moving to something cheaper and more bijou out in the sticks.  Whether that can continue to work as the flood of retiring boomers starts to outnumber the cohort of young workers looking to buy city homes remains to be seen.*

Given that many boomers have ignored decades of advice to save more, you can easily argue that it's nobody's fault but their own if they find themselves strapped for cash in retirement. But boomers vote, so politicians have to pay attention.  Ontario has reacted to the failure of this week's ministerial conference by pledging to start its own pension plan to supplement the CPP.  The Liberal government will no doubt make this a central plank of its campaign for the election that's expected in the spring, and woe betide the opposition party that dares to say nay.

We can only hope that the Liberals resist the temptation to buy boomer votes with millenials' money.  Piling higher pension contributions on the young in order to pay for their own far-off retirement is one thing, but penalizing them in order to cosset their feckless elders is something else altogether.**

*Especially as a lot of younger workers seem to want to live in downtown condos rather than the big suburban family homes that the boomers will be selling.

** In case this is your first time reading this blog, and in case you think I'm "talking my own book" here, be advised that I will be 64 years old on my next birthday, which is a month from now.