Quotulatiousness

September 11, 2011

The Canada Pension Plan and moral hazard

Filed under: Cancon, Economics, Government — Tags: , , , , — Nicholas @ 11:37

An interesting post at Worthwhile Canadian Initiative looks at the overlooked failure in pension markets. I found this bit of information to be quite interesting, as it addresses a conversation I had with Dark Water Muse a few months ago:

Governments provide pensions in one of two ways. Pay As You Go (PAYG) plans use current contributions to fund current benefits. The Canada and Quebec Pension Plan were, when they were first introduced, PAYG plans. The moral hazard risk a worker faces with these plans is political: a politician will design the plan so as to maximize his or her chances of re-election.

The design of Canada and Quebec Pension Plan has created large benefits for the first generation of recipients (current voters) and a much lower rate of return for future recipients (future voters). Now those gainers were the generation that entered the labour market in the Great Depression and fought in World War II, so one could argue that the windfall gain they experienced was merited on equity grounds. The point here is merely that the design of PAYG pension plans reflects the interests of the designers (for re-election) as well as the interests of the contributors and recipients.

The Canada and Quebec Pension Plans are now transitioning into fully-funded plans. The Canada Pension Plan Investment Board was, as of June 30th 2011, managing $153 billion in assets. Some is managed directly by the board, the rest is managed by “partners” ranging from Istanbul-based Actera Group to New York-based Welsh, Carson, Anderson & Stowe. I suspect that the CPP, roaming the world with billions to invest, is able to negotiate low management fees, and there must be savings associated with economies of scale in investing. But the possibility of moral hazard — someone getting rich by diverting away a tiny percentage of the return on $153 billion, or a politician exerting pressure on the CPP investment board to make electorally-sound investments — remains.

In sum, while private pension markets suffer from moral hazard, it’s not clear that governments can solve the problem.

In my discussion with DWM, I claimed that the CPP was a PAYG system (in extreme examples, like the US social security system, this can be compared to a Ponzi Scheme), while DWM — claimed that the system was fully funded from investments. As the quoted section above shows, we each had part of the answer.

It’s hard to believe that the CPPIB (the organization that handles the investments of the CPP) can remain immune to government meddling — buy this company’s stock, invest in that company’s risky-but-located-in-a-marginal-riding new venture, etc. As long at the CPPIB can remain independent of political pressure, the system might work.

QotD: Comparing September 11, 2001 to December 7, 1941

Filed under: History, Media, Quotations, USA, WW2 — Tags: , — Nicholas @ 10:52

On Dec. 8, 1951, the day after the 10th anniversary of Pearl Harbor, The New York Times‘ front page made a one-paragraph mention of commemorations the day before, when the paper’s page had not mentioned the anniversary. The Dec. 8 Washington Post‘s front page noted no commemorations the previous day. On Dec. 7, the page had featured a familiar 10-year old photograph of the burning battleships. It seems to have been published because a new process made possible printing it for the first time in color. At the bottom of the page, a six-paragraph story began: “Greater Washington today will mark the tenth anniversary of the Pearl Harbor attack by testing its air raid defenses.” The story explained that “the sirens are part of a ‘paper bombing’ of Washington” that would include “mock attacks by atom bombs and high explosives.”

The most interesting question is not how America in 2011 is unlike America in 2001, but how it is unlike it was in 1951. The intensity of today’s focus on the 10th anniversary of 9/11 testifies to more than the multiplication of media ravenous for content, and to more than today’s unhistorical and self-dramatizing tendency to think that eruptions of evil are violations of a natural entitlement to happiness. It also represents the search for refuge from a decade defined by unsatisfactory responses to 9/11.

George F. Will, “Commemorating the past to forget the present”, National Post, 2011-09-11

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