Thursday, January 26, 2012

'Major' Changes to Canada's Pension System?

Prime Minister Stephen Harper is in Davos touting 'major' changes to Canada's pension system:
Prime Minister Stephen Harper has signalled his government will bring forward “major transformations” to the country in the coming months — in areas such as the retirement pension system, immigration, science and technology investment and the energy sector.

Of those reforms, Harper said, getting a grip on slowing the rising costs of the country’s pension system is particularly critical.

In the wake of Harper’s speech, it now appears that the Conservative government could be poised to gradually change the Old Age Security system so that the age of eligibility is raised to 67 from 65.

Harper made the revelations in a major keynote speech Thursday at the World Economic Forum, the annual gathering of the world’s political and business elite.

As expected, the prime minister was critical of Europe and the United States for not adequately dealing with the economic problems that have gripped them in recent months and years.

But it was Harper’s assessment of the major changes that lie ahead for Canada that stood out in the speech.

“In the months to come, our government will undertake major transformations to position Canada for growth over the next generation,” said Harper.

The Conservative government will table a budget in the coming weeks that is expected to set the stage for years of deficit-slashing and government reform.

“Under our government, Canada will make the transformations necessary to sustain economic growth, job creation and prosperity now and for the next generation,” said Harper.

He said that means two things: “Making better economic choices now. And preparing ourselves now for the demographic pressures the Canadian economy faces.”

Harper said the country’s aging population has become a backdrop for his concern about how to keep the country strong over the long term.

“If not addressed promptly, this has the capacity to undermine Canada’s economic position and, for that matter, that of all western nations well beyond the current economic crises.”

Indeed, Harper said the country’s demographics — an aging populating and a dwindling workforce — constitute “a threat to the social programs and services that Canadians cherish.”

For that reason, he said his government will “be taking measures in the coming months.”

Harper did not specify what those measures will be, but he said they are necessary — not just to bring the government’s finances back to a balanced budget in the medium term, “but also to ensure the sustainability of our social programs and fiscal position over the next generation.”

“We have already taken steps to limit the growth of our health care spending over that period,” said Harper.

“We must do the same for our retirement income system.”

Harper said the centrepiece of the public pension system — the Canada Pension Plan — is fully funded, actuarially sound and does not need to be changed.

But he added: “For those elements of the system that are not funded, we will make the changes necessary to ensure sustainability for the next generation while not affecting current recipients.”

So far, the government has come forward with a plan to create a private pooled pension system to encourage Canadians to prepare for their retirement.

Still, there are concerns that as baby boomers approach retirement, the cost to government of providing public pensions will skyrocket.

In December, the National Post reported that there was internal debate within the government about increasing the age of eligibility for the other major element of the public pension scheme — Old Age Security — from 65 to 67.

Internal government documents project the cost of the OAS system will climb from $36.5 billion in 2010 to $48 billion in 2015. By 2030 — when the number of seniors is expected to climb to 9.3 million from 4.7 million now — the cost of the program could reach $108 billion.

Among the other priorities where change is coming:

Energy

The Conservative government will make it a “national priority” to ensure the country has the “capacity to export our energy products beyond the United States, and specifically to Asia.”

“In this regard, we will soon take action to ensure that major energy and mining projects are not subject to unnecessary regulatory delays — that is, delay merely for the sake of delay.”

Harper did not explain what he has planned, although he and Natural Resources Minister Joe Oliver have complained that foreign-backed “radical” opponents of the $5.5-billion Northern Gateway project have threatened to slow down hearings by the National Energy Board.

Immigration

The system faces “significant reform,” said Harper.

“We will ensure that, while we respect our humanitarian obligations and family reunification objectives, we make our economic and labour force needs the central goal of our immigration efforts in the future.”

Science

The government will continue to make “key investments in science and technology” that are necessary to sustain a “modern competitive economy.”

“But we believe that Canada’s less-than-optimal results for those investments is a significant problem for our country.”

In future, he said, there will be changes to rectify that problem.

Trade

Harper expects to complete negotiations on a Canada-European Union free-trade agreement this year.

Furthermore, he said, his government is committed to also completing negotiations for a free-trade deal with India by the end of 2013.

And Canada will begin talks to become a member of the Trans-Pacific Partnership while also pursuing opportunities to trade in the emerging market of Asia.

Harper arrived Wednesday at the World Economic Forum determined to tout Canada as a trading nation with a solid economic record and massive oil resources which are ready to be sold and shipped to customers worldwide.

Other members of cabinet who are attending the conference in the exclusive mountainside resort in the Swiss Alps are Finance Minister Jim Flaherty, Foreign Affairs Minister John Baird, International Trade Minister Ed Fast and Bank of Canada governor Mark Carney.

The Canadian delegation used private meetings in the corridors and backrooms at the forum to promote Canada’s hopes for a free-trade deal with Europe, and also break into the emerging marketplace in Asia.

The forum, which dates back to 1971, has drawn 2,600 participants, including 40 political leaders and more than 1,600 senior business leaders.

While the economic uncertainty of Europe gripped the discussions, participants — at the urging of the forum’s founder, Klaus Schwab — also discussed whether capitalism itself needs to be fundamentally reformed to ensure greater social responsibility.

On Thursday morning, British Prime Minister David Cameron told the conference that Europe’s economies had entered a “perilous time” and called for European leaders to avoid “tinkering” with the eurozone debt crisis.

Cameron boasted of his government’s actions to get British debt under control and said the countries in the eurozone (Britain is not a member) must also take “bold and decisive “ action if they want to solve the debt crisis.

Harper issued a scathing criticism of countries in the developed world, which he suggested had forgotten about the importance of creating economic growth.

“Is it the case that, in the developed world, too many of us have in fact become complacent about our prosperity?” Harper asked.

He suggested that developed countries had taken wealth “as a given . . . assuming it is somehow the natural order of things.”

As a result, he said, countries in the western world had become focused primarily “on our services and entitlements.”

As a result, he said, it’s not surprising that, in addition to banks facing debt, countries themselves were also facing sovereign debt crises.

The problem, he suggested, could be “too much general willingness to have standards and benefits beyond our ability, or even willingness, to pay for them.”

Harper warned that the wealth of western economies “is no more inevitable than the poverty of emerging ones.”

He said the problems afflicting Europe and the U.S. threaten to become even more serious in future.

“Each nation has a choice to make. Western nations, in particular, face a choice of whether to create the conditions for growth and prosperity, or to risk long-term economic decline.”

The solution, he said, is for countries to make the sometimes tough, but correct, decisions now.

“Easy choices now mean fewer choices later.”

Easy choices now? Like pandering to banksters and insurance hacks, banking on PRPPs? Thanks but no thanks, that is a recipe for pension poverty, higher debt and less growth down the road.

As a Canadian who blogs on pension issues every single day, I stand against "easy solutions" which will only exacerbate income inequality and reduce retirement security for all Canadians.

If our PM and Finance Minister are serious about solving Canada's pension enigma, they would recognize the need to bolster our public defined-benefit plans, the envy of the world. Some of our smartest pension leaders have made the case for boosting defined-benefit pensions, but they're being completely ignored by our government who panders to banks and insurance companies.

And Canadian banks and insurance companies are being advised by shortsighted fools. If they had any vision and thought about what is best for the country and their long-term profits, they'd be pushing hard to expand CPP and defined-benefit plans for all Canadians. They simply don't get it.

I'm tired of our politicians and corporate leaders telling us that pensions are "too expensive" and that we can't fix pensions and make them better. NDP interim leader Nycole Turmel says MP pension reform should be handled by independent group and that the government should focus on the retirement security of millions of Canadians. Great idea from another MP with her snout in the pensions trough, but who will form this independent group of thinkers?

I know who I would recommend to lead such an independent Royal Commission. Bernard Dussault, the former Chief Actuary of Canada, and John Crocker, the former President and CEO of Healthcare of Ontario Pension Plan (HOOPP), one of the best defined-benefit plans in the world.

Instead our government is going to take the easy route. Canada is facing serious issues, including a major housing bubble about to burst (high end condos are first to go), and all the government can think of is cut everywhere and replace defined-benefit plans by defined-contribution plans.

Don't get me wrong, I'm a fiscal conservative (social liberal) and believe we need serious pension reform, but we are not going about it in an intelligent manner and it's going to end up costing us a lot more in the future.

Every single day I tweet about some company that suffered a pension bomb. Today, it was AT&T who lost a whopping $6.7 billion in the fourth quarter due largely to a change in how it accounts for its employee pension benefits and the breakup fee it was required to pay after scrapping its bid to buy T-Mobile USA.

AT&T is not alone. Many U.S. and Canadian companies are unable to deal with their employee pension benefits. Many have opted out of defined-benefit plan for 'low cost' defined-contribution plans but this is not in the best interest of their employees or in the best interest of their country.

If the leaders at Davos are serious about growth, debt, inequality and other social issues, they have to start thinking hard about retirement security and coming up with a sustainable solution for the long-term.

In a nutshell, here are some of my 'radical' proposals:

  • Increase the retirement age to 67 (people are living longer; some economists think we need to raise the retirement age to 70)
  • Review cost-of-living adjustments (COLAs) and cut when necessary
  • Scrap all private companies' defined-benefit plans and consolidate them into a few large public defined-benefit (DB) pension funds. Companies should focus on producing goods and services, not managing pensions.
  • Consolidate all municipal and city pension plans into large public DB plans
  • Consolidate all Crown corporations DB plans into one large DB plan
  • Expand CPP to all Canadians and get the funding right
  • Cap CPPIB and all large public DB plans at a certain size and create new ones as needs arise
  • Make pensions portable so no matter where people work, their pensions are safe, secure, well managed and will follow them
  • Last but not least, get the governance right and improve it continuously.

I wasn't invited to speak at Davos but that's fine, I'm not into schmoozing with billionaires. But some very powerful people do read my blog and they are there, hobnobbing with the world's power elite. Hopefully they will pass on my message.

Below, World Bank President Robert Zoellick talks with Bloomberg's Erik Schatzker about the economic woes facing Italy. And Kenneth Rogoff, an economist at Harvard University, talks about the European debt crisis and the impact of a Greek default on the region.

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