Wednesday, May 6, 2015

Another Dumb Attack On The ORPP?

The National Post weighed in on Canada's pension debate in an editorial comment, The Ontario Retirement Pension Plan Act — a costly, unneeded plan:
Unnoticed amid the budget hoopla last week, the Ontario Retirement Pension Plan Act was passed into law, authorizing the provincial government to annex a portion of the wages of millions of Ontarians, totalling $3.5-billion annually, to invest on their behalf. You will forgive us if we do not cheer. This is bad policy, as unnecessary as it is misconceived, and destined to cause much harm.

To its alleged necessity, first: the Wynne government continues to claim there is a pension “crisis,” on account of the vast numbers of Ontarians who are said to be chronically “undersaving.” There is no evidence of this. Between the Canada Pension Plan, Old Age Security, Registered Retirement Savings Plans, and other private savings vehicles, the vast majority of Ontarians are not only in no danger of indigence when they retire — poverty, at record lows for the population at large, is even lower among the elderly — but can maintain themselves at a standard of living comparable to that of their working years.

Experts advise this requires a retirement income of one half to two thirds of earnings. According to a study by economists Kevin Milligan and Tammy Schirle, virtually every Canadian household in the bottom two fifths of the income scale meets or exceeds the 50 per cent threshold. At higher incomes, it is true, you find greater numbers with inadequate savings, particularly where neither spouse has a workplace pension: overall, these account for about one in six households.

And that’s only if you ignore the increasing amounts of savings held outside RRSP-type instruments, or in the equity in people’s houses. So it’s not clear there’s any need to force even these individuals to save more, let alone forcing everyone to, even assuming one could: many will simply save less through their RRSPs to make up for the income the government takes from them.

And that, remember, is what’s involved here. The Wynne government likes to make it sound like a gift they are giving Ontarians. But the money workers will receive, eventually, is only money the government takes from them, now: it’s a forced savings plan, not a redistribution scheme. Which might be tolerable, if the government had a halfway sensible plan to invest it. There are disturbing signs it does not.

While the plan is often said to be based on the CPP — indeed, it is touted as a substitute for expanding the CPP — the government has often cited the Quebec Pension Plan approvingly. The CPP’s runaway costs, wildly inflated salaries and exploding payroll are themselves a source of concern, but it is at least notionally focused on maximizing returns to pensioners (even if it underperforms the market as often as not). But the QPP is something else again: through the Caisse de Dépot et Placement du Québec, it is mandated to use pensioners’ savings to support Quebec’s “economic development,” meaning whatever schemes come into politicians’ heads.

So when we read in Ontario budget documents that the plan, starting in 2017, will provide “new pools of capital for Ontario-based project such as building roads, bridges and new transit,” we may be excused for feeling the government has something other than pensioners’ best interests in mind. And to the extent that Ontarians realize this, they will be less inclined to see it as a savings plan, and more as a tax grab by another name. But by then it will be too late.
Wow! The imbeciles at the National Post have really outdone themselves. They must be pissed the NDP just booted out the Conservatives in Alberta in an election upset, and now they're targeting Ontario's new pension plan which just received legislative approval to begin collecting contributions from large companies starting on January 1st, 2017 (not sure when the plan begins operations).

To be fair, the National Post comment raises some good points but completely bungles up most others. First, I met Kevin Milligan and Tammy Schirle at a conference in Ottawa back in November 2013 and wrote about it in my comment on whether Canada is on the right path:
I think the presentation that got a lot of us thinking was the one by Kevin Milligan, an associate professor of economics at the University of British Columbia. He argued convincingly that lower income Canadians are better off in retirement now and forcing them to pay more into the CPP will leave them worse off. You can read the paper he co-authored with Tammy Schirle of Wilfrid Laurier University by clicking here. The two main conclusions of their paper are:

1) CPP reform that expands coverage for lower earners can do them harm--it transfers income from a period they are doing poorly (while working) to one in which they were already doing better (retired).

2) An expansion of the CPP that simply expanded the year's maximum pensionable earnings (YMPE) upwards would have nearly the same impact on combined public pension income as the PEI proposal, but with greater simplicity.
But there was no debating that expanding the CPP would benefit the bulk of working Canadians who don't have a workplace pension. Premier Kathleen Wynne said the province had to create its own retirement plan for the more than two-thirds of Ontario workers who don't have a pension at work because the federal government refuses to enhance the Canada Pension Plan.

Where else does the comment above fall short? It attacks the CPPIB's "runaway costs, wildly inflated salaries and exploding payroll" as a source of concern but fails to put it into proper context. I've also criticized Canada's pension plutocrats, some of whom I think are outrageously overpaid, but there is no denying that the Canadian governance model is the envy of the world and this is the main reason why Canada's large public pensions are global trendsetters.

The problem with compensation is that pretty much everyone working in finance is way overpaid and grossly self-entitled, some a lot more than others. And when you're a pension based in Toronto trying to attract talent, competing with big banks and Canadian hedge funds, you have to pay up or risk hiring mediocre/ inexperienced employees who won't help you deliver strong performance. At the end of the day, it's long-term  performance that counts and even though I take shots at some of Canada's senior pension executives for padding their compensation by beating their bogus private market benchmarks, they still have to deliver on their targets or else they can't collect their hefty payouts.

And there is no denying that Ontario has the best pension plans in the world. Go read my comment on Ontario Teachers' 2014 results as well as that on the Healthcare of Ontario Pension Plan's 2014 results. There are a lot of talented individuals working there that really know their stuff and you have to pay up for this talent. The same goes for CPPIB, OMERS, and the rest of the big pensions in Canada. If you don't get the compensation right, you're basically condemning these public pensions to mediocrity.

What else does the National Post comment miss? It completely ignores the benefits of Canada's top ten to the overall economy but more importantly, it completely ignores a study on the benefits of DB plans and conveniently ignores the brutal truth on DC plans.

But the thing that really pisses me off from this National Post editorial is that it fails to understand costs at the CPPIB and put them in proper context relative to other global pensions and sovereign wealth funds with operations around the world and relative to the mutual fund industry which keeps raping Canadians on fees for lousy performance. It also raises dubious and laughable points on the Caisse and QPP with no proper assessment of the success of the Quebec portfolio or why our large public pensions can play an important role in developing Canada's infrastructure.

But the National Post is a rag of a national newspaper and I would expect no less than this terrible hatchet job from its editors. The only reason I read it is to see what the dimwits running our federal government are thinking. And from my vantage, there isn't much thinking going on there, just more of the same nonsense pandering to Canada's financial services industry and the brain-dead CFIB which wouldn't know what's good for its members if it slapped it across the face (trust me, I worked as a senior economist at the BDC, the CFIB is clueless on good retirement policy and many other policies).

Below, Bradley Safalow, Founder and chief executive officer of PAA Research, joins BNN to discuss why it's time to short the Canadian housing market. I have no idea who this guy is but I've been short Canada and the loonie for a long time and think the crisis is just getting underway (never mind the recent pop in oil prices, they're heading lower once global deflation hits us hard).

This is another reason why I can't accept asinine arguments against the new Ontario pension plan or enhancing the CPP for all Canadians.  In my opinion, the longer we wait, the worst it will be down the road for millions of Canadians retiring in poverty.

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