Quotulatiousness

December 18, 2012

Don’t expand the Canada Pension Plan: reform it

Filed under: Cancon, Economics, Government — Tags: , , , — Nicholas @ 10:52

Andrew Coyne briefly praises the CPP before advancing a plan to (eventually) supplant it entirely:

By most measures, Canada’s retirement income support system is an outstanding success. The poverty rate for Canadian seniors, with just 4.4% living below half the median income, is among the lowest in the world. The Canada Pension Plan, once careening towards insolvency, is now on a sounder footing. Millions of Canadians contribute to their Registered Retirement Savings Plans every year, with a view to replacing more of their income than the 25% covered by the CPP; Tax-Free Savings Accounts are a fast-growing alternative. For most people, then, the pension system works well. There is no evidence of a generalized pension “crisis.”

[. . .]

Suppose an additional levy were tacked onto CPP premiums. Only instead of going into the regular CPP pot, the funds would accumulate in the contributor’s own personal fund — like an RRSP, only compulsory. To avoid wasting money on management fees, funds would be invested strictly passively (ie buying the indexes), with the particular asset mix varying as the investor aged: more stocks when younger, more bonds when older.

Any increase in benefits would thus have to be fully funded; at the same time, since legal title to the funds would rest with the contributor, there would be no way politicians could raid the kitty. Moreover, with such a direct link between contributions and the size of their nest egg, contributors would be less likely to see the rise in premiums as a tax increase, and more as savings, mitigating labour market effects, at least on the supply side.

On its own, this would be vastly preferable to CPP expansion. If we liked the results, we might even think of going further. Over time, one could imagine migrating more and more of the regular CPP over to these mandatory personal accounts, allowing the CPP fund to be slowly wound down. Rather than simply expanding the CPP, the challenge of population aging presents an opportunity to reform it.

October 16, 2012

Early Baby Boomers had it much easier than those who followed

Filed under: Cancon, Economics, USA — Tags: , , , , , — Nicholas @ 10:44

Depending on where you draw the demographic line, I’m either a (very) late Baby Boomer or an early arrival from the next generation. I “get” the anger that some younger folks feel about the BB’s, because I came along too late to benefit in the same way that the early boomers did:

But, have baby-boomers really enjoyed a cozy ride through life? The truly lucky were their parents, who worked in the post-Second World War “Golden Age” of low unemployment, rapidly rising real wages, rising house prices, and expanding public and private pension plans.

The postwar boom was petering out by the late 1970s and early 1980s, just as many baby boomers were entering the job market. The 1980s and 1990s were marked by two severe recessions, and by an increase in jobs which often did not provide steady wages or a decent pension.

The unemployment rate for the baby-boomers, then mainly in their early thirties (age 30-34), was more than 10 per cent from 1983 to 1985, and over 8 per cent for the boomers in their late thirties during the recession years of 1992 to 1994.

Many baby-boomers never managed to find the secure and well-paid jobs characteristic of the 1960s and 1970s that lay the basis for a decent retirement. A recent study by former Statscan assistant chief statistician Michael Wolfson found that one-in-four middle-income baby boomers face at least a 25 per cent fall in their standard of living in retirement. (He looked at persons born between 1945 and 1970, and earning between $35,000 and $80,000 per year.)

The proportion of all persons age 65 to 70 who are still working bottomed out at 11 per cent in 2000 and is now 24 per cent, and about one half of persons aged 60 to 65 are still working today.

In my entire career, I’ve worked for only one company that provided a pension plan — and I was laid off before my contributions vested anyway. I don’t expect to ever voluntarily retire: I won’t be able to afford it. And I’m far from alone in that.

July 30, 2012

Federal government cracking down on Old Age Security applicants

Filed under: Bureaucracy, Cancon, Government — Tags: , , — Nicholas @ 16:55

An interesting story in the Toronto Star:

After 40 years as a registered nurse, Yvonne Gardner never thought she’d have to beg to get her federal pension benefits.

For 14 months, the Toronto retiree has been struggling to prove to Service Canada that she’s eligible for the $500 monthly Old Age Security (OAS) pension.

In the latest twist, she was asked for copies of plane tickets for all of her travels in and out of Canada since moving here from England in 1975 — a mission impossible — as proof she has lived here the minimum 10 years required to qualify.

Deprived of the pension she was counting on, Gardner, a native of Suffolk, England, is 10 months behind in rent on her one-bedroom downtown apartment and faces eviction.

If this woman’s issue is typical, then I will probably also have problems claiming OAS, as my family came to Canada in 1967 and I know for certain that we did not retain any of our travel documents from that far distant time.

However, the story is in the Toronto Star, which certainly has been willing to creatively tell stories that make the government look bad in the past. Here’s a comment on the story that has to be a joke:

I have no idea why this person thinks the story has anything to do with Capitalism, but he or she is certain that the answer is Socialism. Doesn’t much matter what the question is, I guess.

June 18, 2012

Who’s afraid of austerity?

Filed under: Economics, Europe, Government, USA — Tags: , , , , — Nicholas @ 08:17

At the BBC News website, Niall Ferguson on why young westerners should welcome austerity:

The heart of the matter is the way public debt allows the current generation of voters to live at the expense of those as yet too young to vote or as yet unborn.

In this regard, the statistics commonly cited as government debt are themselves deeply misleading, for they encompass only the sums owed by governments in the form of bonds.

The rapidly rising quantity of these bonds certainly implies a growing charge on those in employment, now and in the future, since — even if the current low rates of interest enjoyed by the biggest sovereign borrowers persist — the amount of money needed to service the debt must inexorably rise.

But the official debts in the form of bonds do not include the often far larger unfunded liabilities of welfare schemes like — to give the biggest American schemes — Medicare, Medicaid and Social Security.

The most recent estimate for the difference between the net present value of federal government liabilities and the net present value of future federal revenues is $200 trillion, nearly thirteen times the debt as stated by the U.S. Treasury.

Notice that these figures, too, are incomplete, since they omit the unfunded liabilities of state and local governments, which are estimated to be around $38 trillion.

These mind-boggling numbers represent nothing less than a vast claim by the generation currently retired or about to retire on their children and grandchildren, who are obligated by current law to find the money in the future, by submitting either to substantial increases in taxation or to drastic cuts in other forms of public expenditure.

[. . .]

It is surprisingly easy to win the support of young voters for policies that would ultimately make matters even worse for them, like maintaining defined benefit pensions for public employees.

If young Americans knew what was good for them, they would all be in the Tea Party.

A second problem is that today’s Western democracies now play such a large part in redistributing income that politicians who argue for cutting expenditures nearly always run into the well-organised opposition of one or both of two groups: recipients of public sector pay and recipients of government benefits.

January 31, 2012

Andrew Coyne on the sudden appearance of Stephen Harper’s “hidden agenda”

Filed under: Cancon, Economics, Government, Politics — Tags: , , , , — Nicholas @ 12:19

We’ve been waiting for it to appear since the 1990’s, so it’s about time that it finally put in a cameo:

At last, the hidden agenda, and not a moment too soon. Vague, indirect and overseas as it was, Stephen Harper’s Davos speech was perilously close to a vision statement, of a kind the prime minister has seldom made until now, and will henceforth have to make often.

It would be nice if he had shared with us his concerns about the ageing of the population, and the threat it poses to our long-run social and economic health, sometime before the last election, rather than joining in the all-party consensus that there was nothing wrong with Canada that could not be fixed with more and richer promises to the elderly.

[. . .]

How serious is the cost side of this conundrum? The president of the C. D. Howe Institute, Bill Robson, has projected the “net unfunded liability” implied by this unprecedented demographic shift — that is, promises to pay benefits out of public funds for which we have made no provision in taxes, “net” of any savings from having fewer children about — at about $2.8-trillion. With a T, ladies and gentlemen: about 160% of GDP. (That’s in addition to the $800-billion unfunded liability in the Canada Pension Plan and its Quebec counterpart — yes, they are pulling in enough each year to meet their current obligations, but that does not mean they are “fully funded,” the prime minister’s claims to the contrary — to say nothing of the $600-billion national debt.)

January 12, 2012

QotD: When a figure is too high to be repaid, it won’t be repaid

Filed under: Bureaucracy, Economics, Government, Quotations — Tags: , , — Nicholas @ 15:31

It’s hardly news anymore that public-sector pension promises will be made good (or not) on the backs of taxpayers, but I still think that the average private-sector packmule has no idea of the amount they’re going to have to pony up to vouchsafe the various municipal, state, and federal pension promises. The amount required over the next several decades beggars the imagination. In fact, the amount is preposterous: there’s no way the money is ever going to be paid out as promised. Even if it were mathematically possible (which it isn’t), taxpayers would revolt over the massive increases that would be required. If I were a public-sector worker, I’d be making a point of saving every dime of my own money that I could, because that fat public sector pension is unlikely to ever be paid out in full. (And I’m not even getting into the healthcare benefits, which are even more onerous than the pension benefits.) Basically, the bedrock truth is this: money that can’t be paid out, won’t be, no matter what agreements were signed or what the courts say.

Monty, “The Daily DOOM”, Ace of Spades HQ, 2012-01-12

December 27, 2011

Retirement age will have to rise: The Economist

Filed under: Economics, Government, Health — Tags: , , , — Nicholas @ 10:38

In a development that should surprise nobody at all, governments around the world are slowly, reluctantly, grudgingly starting to make changes to their state pension systems:

Put aside the cruise brochures and let the garden retain that natural look for a few more years. Demography and declining investment returns are conspiring to keep you at your desk far longer than you ever expected.

This painful truth is no longer news in the rich world, and many governments have started to deal with the ageing problem. They have announced increases in the official retirement age that attempt to hold down the costs of state pensions while encouraging workers to stay in their jobs or get on their bikes and look for new ones.

Unfortunately, the boldest plans look inadequate. Older people are going to have to stay economically active longer than governments currently envisage; and that is going to require not just governments, but also employers and workers, to behave differently.

October 27, 2011

Postponing retirement: late Boomers and Gen X’ers face reality

Filed under: Cancon, Economics — Tags: , , — Nicholas @ 00:04

Jonathan Chevreau shows that those of us getting a bit closer to retirement will have to wait longer than the previous generation before retiring:

The “double whammy” of falling stock prices and low interest rates has impacted members of DC pensions and RRSPs, who must cover the deficit through reduced personal spending and/or deferred retirement.

Towers Watson has issued its first quarterly DC Retirement Age Index, which it describes as a pension freedom tracker. It tracks the performance of a balanced portfolio of a DC plan member who has contributed to the plan from age 40 to 60. At that point, an annuity would be purchased but its value and monthly payout would depend on the performance of the plan over those 20 years.

[. . .]

With recession threatening, ongoing market volatility and falling interest rates, Towers Watson expects the Pension Freedom Age could move up to 67, or two years after the traditional retirement age (when Old Age Security and full Canada Pension Plan benefits commence).

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.

September 5, 2011

False ideas about investment risk

Filed under: Economics — Tags: , , , , — Nicholas @ 10:25

Dan Ariely points out that most people have no idea at all about some of the key questions on investment risks:

To this point, we’ve run a number of experiments. In one study, we asked people the same question that financial advisors ask: How much of your final salary will you need in retirement? The common answer was 75 percent. But when we asked how they came up with this figure, the most common refrain turned out to be that that’s what they thought they should answer. And when we probed further and asked where they got this advice, we found that most people heard this from the financial industry. Sort of like two months salary for an engagement ring and one-third of your income for housing, 75 percent was the rule of thumb that they had heard from financial advisors. You see the circularity and the inanity: Financial advisors are asking a question that their customers rely on them for the answer. So what’s the point of the question?!

In our study, we then took a different approach and instead asked people: How do you want to live in retirement? Where do you want to live? What activities you want to engage in? And similar questions geared to assess the quality of life that people expected in retirement. We then took these answers and itemized them, pricing out their retirement based on the things that people said they’d want to do and have in their retirement. Using these calculations, we found that these people (who told us that they will need 75% of their salary) would actually need 135 percent of their final income to live in the way that they want to in retirement. If you think about it, this should not be very surprising: If you add 8 hours (or more) of free time to someone’s day, they will probably not want to spend this extra time by going for long walks on the beach and watching TV — instead they may want to engage in activities that cost money.

You can see why I’m confused about the one-percent-of-assets-under-management business model: Why pay someone to create a portfolio that’s 60 percent too low in its estimation?

And 60% is if you get the risk calculation right. But it turns out the second question is equally problematic. To show this, we also asked people to tell us how much risk they were willing to take with their money, on a ten-point scale. For some people we gave a scale that ranges from 100% in cash on the low end of the risk scale and 85% in stocks and 15% in bonds on the high end of the risk scale. For other people we gave a scale that ranges from 100% in bonds on the low end of the risk scale and buying only derivatives on the high end of the risk scale. And what did we find? People basically looked at the scale and said to themselves “I am a slightly above the mean risk-taker, so let me mark the scale at 6 or 7.” Or they said to themselves “I am a slightly below the mean risk-taker, so let me mark the scale at 4 or 5.” In essence, people have no idea what their risk attitude is, and if they are given different types of scales they end up reporting their risk attitude to be very different.

July 17, 2011

Federal government to unveil new retirement scheme

Filed under: Cancon, Economics, Government — Tags: , — Nicholas @ 12:09

Jonathan Chevreau looks at the federal government’s plan to introduce Pooled Registered Pension Plans (PRPPs):

This is a giant potential opportunity for the nation’s banks, mutual fund companies, insurance firms and a growing number of manufacturers of exchange-traded funds. Pension consultants, actuaries, financial planners and investment advisors will also see various business opportunities created as PRPPs catch on — primarily with small- and medium-sized businesses that never before offered its workers a pension plan. Mr. Menzies, the cabinet minister responsible for PRPPs, says he’s travelled the country consulting with the provinces.

“When the concept of the pooled RPP was shared with the provinces and territories they all came together to agree this makes sense.”

[. . .]

PRPPs will be (hopefully) low-cost defined contribution schemes run by the private sector where ultimate benefits will depend on how financial markets perform. The PRPPs would resemble the United States’ 401(k)s or Australia’s superannuation scheme.

They will be administered by financial institutions rather than employers, which is why Bay Street views them as a potential bonanza. As the “pooled” part of their name suggests, assets are co-mingled for investment purposes to keep down costs.

The original idea was that PRPPs would be mandatory for employers that don’t offer their own registered pension plan but Mr. Menzies says that decision would be up to the provinces. “We’re putting it out there that there is an option for the employer and for the employee. I’ve spoken to many small businesses that said ‘finally here’s a low-cost affordable plan I can enroll my employees in.’ It will be a retention and enticement tool.”

Employers won’t be forced to make contributions, but may choose to do so. Employees will be automatically enrolled at a base contribution rate, but they can opt out.

There will be two types of members: Employed and individuals. The latter include the self-employed and employees of organizations that do not offer PRPPs. Benefits are portable. Employers offering PRPPs can move to a new plan if they wish. There are fewer portability restrictions for individual members, making them convenient if they later change jobs and want to take their pension with them.

That portability is key: I’ve wondered for years why unions have not been hammering on that aspect in their negotiations with big employers (although unions generally pay most attention to the needs of current union members at the expense of both retired and future members). By the time you’ve worked at a company long enough to qualify for their pension scheme, you’re often locked in due to the lack of portability of your pension. If you leave the firm, voluntarily or not, you lose much of the potential return on the pension contributions you’ve already made (if you don’t lose them altogether).

This proposal may well solve much of that problem.

June 10, 2011

With extended lifespans . . . will come later retirement dates

Filed under: Economics, USA — Tags: , , , — Nicholas @ 16:49

For all of us who’ve spent our working lives assuming that 65 was the age of retirement (or 55 for those of you who paid closer attention to retirement planning 20 years earlier than the rest of us), you won’t like this:

Americans better get used to working longer, even until they are 80 years old, according to a study by the Employee Research Benefit Institute (via Robert Powell at MarketWatch).

Naturally, those with lower incomes will need to work longer.

Here’s how it breaks down (via MarketWatch):

  • If you make around $11,700 dollars a year you have to work to age 84 to have a 50% chance of affording retirement.
  • If you make between $11,700-$31,200 a year you have to work to age 76 to have a 50% chance affording retirement
  • If you make between $31,200-$72,500 a year you have to work to age 72 to have a 50% chance of affording retirement.
  • If you make $72,500 or more a year you have to work to age 65 to have a 50% chance of affording retirement.

This study does point out one bright spot for those working past 65 though. If you are putting your money into some kind of retirement fund, your chances of saving enough increase substantially.

April 13, 2011

Delaying retirement: expect to see lots of articles like this

Filed under: Britain, Economics — Tags: , , , — Nicholas @ 07:57

This Guardian article is a pattern for lots to follow in the next few years, as would-be retirees discover that they can’t afford to retire when they’d hoped:

Two-fifths of people who intended to retire this year will have to work for an extra six years because they cannot afford to stop working, according to a study by Prudential.

The pension provider’s Class of 2011 report found that 38% of people are delaying their retirement, and 40% of those say they will have to work until they are 70 to have a comfortable income.

It also shows that 22% of those delaying retirement are doing so because they can’t afford to stop working, up from 15% last year. They had intended, on average, to retire at 62, but now believe they will be at least 68 before they can draw a pension.

Governments in the western world are slowly moving the mandatory retirement age (where it exists), but even in some unionized environments, the benefits workers depend on start to phase out before retirement age. The expectation is that government programs would be there to cover older workers, but governments have little chance of expanding programs during tough economic times.

September 22, 2009

Retirement planning

Filed under: Cancon, Economics — Tags: , , — Nicholas @ 11:24

Dark Water Muse had a post a few days ago about the troubles with retirement planning (he’s just gone through the process).

I guess what only just in recent days became DWM’s “trailer park” retirement lifestyle, which he can almost afford, becomes his “cardboard box” retirement lifestyle. Assuming the healthcare system can afford then to cover the costs of treating paper cuts.

The scary part. DWM is one of the “lucky” ones, in a really good position, according to financial advisors. If this is true then how can anybody, in the past 30 years, have realistically expected “average” North American to be able to afford to retire? Aren’t these the same bong puffers who have been trying to eradicate the poppy fields in Afghanistan?

I guess addiction really is an irrational behavior, even when you dress it up and call it economics.

I wrote a comment, and then thought it might be a useful thing to expand on it a bit here:

This is a multi-pronged problem that will yield to no single solution.

The mere existance of the Canada Pension Plan (and the regular payroll deductions that fund current retirees) lull far too many Canadians into thinking that they’re going to be receiving enough money from CPP to carry on their pre-retirement lifestyle. That’s a huge, unconscious reason for people to fail to save for retirement.

Many Canadians have pension plans that are tied directly to their current employer. For the tiny fraction who successfully keep working for that firm/organization all the way to retirement age, it’s a winning bet. For far too many, three years in one plan, five years in another, seven years in a third will yield three miniscule pension cheques (far less than the amount if they’d been fifteen years in a single plan), as most pensions are geared to long-term employment. Given the commonly quoted notion that most Canadians will have three careers between entering the workforce and retiring, planning on putting in 20-25 years of pensionable work with a big firm is a pipe dream.

The banks and other finance organizations don’t help, either, as many of their print and online offerings for potential customers over-estimate financial needs (“What? I need $3 million to retire at 55? That’s impossible!”).

Schools don’t even attempt to provide financial planning information for students, and even if they did, who among us thought about retirement before age 35? It would likely be a wasted effort, unless it was a mandatory part of the graduation requirements. And even then, everyone under 25 thinks they’ll either live forever or be dead by 30, so it wouldn’t make much practical difference.

I’ve been in the working world for nearly 30 years, yet I’ve only ever worked for companies that had pension plans twice. In neither case did I work there long enough to accumulate any worthwhile seniority in the pension scheme (and given that neither company is still around today, I probably didn’t lose much). Among the other companies I’ve worked for, only two had Group RRSP plans (I think the closest US equivalent would be a 401(k) account). . . which paradoxically have been great for my long-term financial health. The broker for the plan at the first company is still the guy I call to get investment advice (each of us has moved on to different firms more than once, but it’s the personal relationship that matters).

I lost a lot of paper wealth in the last 12 months (at the worst, I was down over 45%). My investments — my retirement savings, that is — are back up to about 85% of their peak. If I hadn’t had to withdraw cash during periods of unemployment, I’d be closer to 95%. I’m nowhere near the multi-millions that the bank “planning software” says I should have at this point in my career, but I’m not panicking, yet.

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