If your entire knowledge of economics and finance theory is “free markets good, big government bad,” the above might rank as progress. Savings are being liberated from the dead hand of bureaucracy! But it turns out that a free market in retirement savings is nothing like a free market in, say, groceries. Most people aren’t going to forget to eat lunch. But what about planning for an event, like retirement, that may happen 20, 30 or 50 years hence? A growing literature in behavioural economics shows how the rational person is anything but when it comes to planning for a distant, uncertain future. Which may explain why Canadians on the edge of retirement, aged 55 to 64, have an average of just $55,000 in their RRSP. That’s enough to pay out maybe $300 a month. Pre-tax.
My own experience sadly confirms the short-termism of Homo Canadensis. Way back when, starting my first job, I had the option of taking part in my new employer’s defined benefit pension plan. I didn’t. Why not? Because like most 20-somethings, I wasn’t too concerned about saving for retirement. After two years, my collective agreement forced me to join—subjecting me to forced biweekly deductions, about which I constantly complained. A few years later, I moved to a job with no pension plan. No more deductions! I felt richer. But I was really just spending in the present by borrowing from my future.
And even if you have the discipline to save regularly and sufficiently on your own, you’ll run into another problem: Bay Street is not a safe space for individual investors. It’s sort of like that movie Dinner for Schmucks: if you can’t figure out who the schmuck is, it’s probably you. This country’s mutual fund fees are among the world’s highest, with the average equity fund carrying a management expense ratio of 2.3
Given that long-term market returns aren’t likely to exceed six or seven per cent, you could wind up losing a third of your portfolio growth to fees.
Don’t blame Bay Street for overcharging you. The market charges what the market will bear. Don’t even blame corporations for getting rid of their defined benefit pension plans. Offering a DB plan means taking on risk and volatility, which will from time to time negatively shock the company’s earnings statement and balance sheet. Transferring those risks back to employees may be bad for society, but a CEO’s job is to do right by shareholders. He or she isn’t responsible for the well-being of society. Our elected
Ottawa and Queen’s Park are where the solution to our pension crisis lies. CPP is a defined benefit pension plan. Back in the mid-’90s, in an act of political cooperation that needs to be repeated, the provinces and the feds came together to save the Canada Pension Plan from insolvency. They prepared it for the baby boomers. Premiums were nearly doubled, bringing them into line with benefits. The plan is now solvent as far as the actuarial eye can see. CPP’s only remaining defect is its modesty: it was designed two generations ago, at a time when employers were expected to do much of the heavy lifting. As a result, CPP aims to provide a pension worth just one quarter of the average industrial wage. The maximum CPP pension at age 65 is currently less than $1,000 a month, and the average pension is just $512.64. It’s peanuts.
The Conservative government has been beating the drum, repeatedly and loudly, on the need for Canadians to save more for retirement. But there appears to be fundamental ideological discomfort with doing so through an expanded CPP, even though it’s obviously the cheapest and most efficient way to make sure we have more savings now, and more income later. A bigger CPP would even help the Tories accomplish their goal of lowering Old Age Security costs. The more we ramp up CPP, the more we can eventually scale back on taxpayer-funded OAS. A dollar saved today for retirement adds up to dollars worth of taxes that won’t have to be raised tomorrow to support indigent retirees. Stephen Harper even touted CPP’s virtues this year in Davos as an example of where Canada gets it right. But he never suggested that we needed more of this good thing to solve our retirement problem. Instead, he fell back on the usual mantras about less government.
More retirement savings through CPP looks, to those who aren’t looking carefully, like more government. Bad, bad, bad. And what about Joe Lunchpail, scratching together a few cents to take a flyer on one of Bay Street’s speculative, high-fee mutual funds? Why, that looks like freedom.