Tuesday, March 29, 2016

Shifting the Focus on Enhancing the CPP?

Andy Blatchford of the Canadian Press reports, Next on the Finance Minister’s to do list: Get provinces to support a Canada Pension Plan expansion:
With his first budget behind him, rookie Finance Minister Bill Morneau seems comfortable in his new surroundings — he’s even quick to highlight the symbolism of the boardroom artwork at his department’s headquarters.

Morneau points to a series of framed pictures featuring etchings of $1 coins. The artist, he explains, flipped each of the loonies repeatedly to identify which might be considered the luckiest of the bunch.

That coin, now encased, also hangs from the wall.

“So, that’s the lucky loonie,” Morneau told The Canadian Press before a recent roundtable interview.

“We thought that was an appropriate piece of art for the Finance Department.”

Just days after tabling his maiden budget, good fortune seemed to be on the former Toronto businessman’s mind as he explained what his private-sector expertise brings to one of his next big tasks: enhancing the Canada Pension Plan.

One’s ability to retire in dignity is often driven “partially by luck,” said Morneau, who has advised Ontario Premier Kathleen Wynne on pensions.

There’s a role for government when someone in a private, defined-contribution plan — and who hasn’t saved enough — happens to retire at a time when the stock market’s down, he continued.

The Liberals repeated their support for strengthening the CPP in last week’s budget, which noted the dangers of things like failing private-sector pension plans and the risk that healthier Canadians could outlive their savings.

Until last fall, Morneau was executive chairman of the human resources firm Morneau Shepell, a company that describes itself as Canada’s largest provider of pension-administration technology and services.

He said he understands the financial challenges seniors face and that any CPP enhancement should be fully funded by those who will actually use it to avoid an “intergenerational wealth transfer.”

Morneau said he hopes to eventually get some consensus on enhancing the CPP, a goal outlined in the Liberal government’s election platform. Doing so would require the support of seven of the 10 provinces representing two-thirds of the country’s population.

The provinces and territories are scheduled to reconvene in June to continue talks that began in December on the polarizing subject of CPP reform. The aim is to reach a collective decision by the end of the year.

But it’s still unclear how much support the Liberals will garner, even though the provinces agreed in December to continue discussing the subject.

Wynne, for one, supports CPP expansion and plans to proceed with mandatory payroll deductions starting Jan. 1, 2017, for the new Ontario Retirement Pension Plan. That plan essentially mirrors the CPP for anyone who doesn’t already have a workplace pension.

Other big provinces like Quebec and British Columbia remain unconvinced. Quebec already has a public pension plan and B.C. has expressed concerns about the country’s fragile economy.

Saskatchewan has opposed CPP enhancement over worries about the negative consequences of the oil-price slide on the provincial economy.

But Morneau said he remains “cautiously optimistic” about the next round of CPP talks — an issue he’s unwilling to leave up to a simple toss of a coin.

“The devil is in the details, but there’s a recognition of the challenge that we face and there’s a recognition that CPP’s been a very effective vehicle over the last 50 years,” he said.
I certainly hope Bill Morneau convinces his provincial counterparts there is no better time than now (at least from a political standpoint) to expand the CPP.

The Liberals have already bungled up two things on retirement policy. First, they scaled back the TFSA limit, a dumb move which penalizes many Canadians with no pension whatsoever who are just trying to save for retirement. More recently, they scaled back OAS eligibility from 67 to 65 years old, making Canada the odd man out as far as global pensions are concerned.

Morneau concedes Canadians are healthier and living longer, so why not recognize longevity risk and leave OAS eligibility at 67? Answer: pure political pandering at its worst except now it's not the Harper Conservatives pandering to big banks and insurance companies, it's the Trudeau Liberals pandering to Canada's "working poor" (but implementing stupid policies in their name).

Now, the Trudeau Liberals have a golden opportunity to rally the provinces around a very important retirement policy -- perhaps the most important one in the history of Canada -- and get on to enhancing the Canada Pension Plan so more Canadians can retire in dignity and security and not be held hostage by the vagaries of global stock markets (if they're lucky enough to have saved anything for retirement).

Importantly, good retirement policy is good economic policy for the long-term. The more people retire in dignity and security, the better they can plan for retirement and spend accordingly. It all comes down to a theme I harp on in this blog, namely, rising inequality and deficient aggregate demand.

What about concerns from Quebec, British Columbia and Saskatchewan on oil and the economy? Let me address these concerns head on. Canada is going to face its worst economic crisis ever, ushering in negative rates here, but that is not a reason to avoid enhancing the CPP. Quite the opposite, that's a big reason to get on with bolstering the country's retirement system.

In fact, when I read Andrew Coyne's critique on the federal budget or that of John Ivison, I understand their concerns on spending but when they state Canada is not in a recession, they're either dreaming or completely delusional.

Let me give all you private sector economists, many of which are former colleagues of mine who I respect a lot, a word of advice. If you can't forecast trends in global stock, currency, commodity and fixed income markets, much like I regularly do on my blog, you have no business whatsoever trying to forecast where the Canadian economy is heading.

When I read articles on how New York's real estate market is headed for a crash, my mind immediately goes to Vancouver's red hot real estate market and how it's set to crash hard as house prices there hit new highs, no thanks to unscrupulous real estate agents preying on foreign buyers or worse still, helping them conceal their ill-gotten gains (a lot of black money is entering Canada and regulators are looking the other way).

But the same global pressures that are hitting New York and London's red hot real estate market are also going to hit that of Canada's. Add to this banks and hedge funds shedding thousands of high paying trading jobs, and you quickly realize that Vancouver and Toronto's real estate market are next in line to fall hard (in Montreal, Bombardier's woes is hurting this city's real estate market as many engineers lost their job).

And once Canada's real estate market implodes, I guarantee you Bank of Canada Governor Stephen Poloz will be going negative and not waiting to see what happens with federal spending on infrastructure. He might even move rates to negative a lot sooner if oil prices keep declining or crash.

In fact, my former colleague, Brian Romanchuk, wrote a very thoughtful comment on the radical status quo of the Canadian federal budget where he questions whether all this stimulus spending is going to make a difference once the Canadian housing market crashes (it won't but it's better than doing nothing!).

Brian ends his comment on this sobering note:
I fail to see anything in the budget that directly addresses the problems created by the two-tier labour market, and so there is no reason to expect the problems with persistent underemployment going away. This underemployment helps create the economic drag that has been diagnosed as "secular stagnation."
I've said this before and I'll say it again, Canadians live in Dreamland. They're either hopelessly delusional or they simply don't realize what's going on out in the global economy and how it's going to severely impact the Canadian economy (Albertans are the first to taste this bitter new reality).

And these problems aren't unique to Canada. Chronic underemployment or structural unemployment is threatening the U.S. economy too where a staggering 23% of Americans in their prime working years are unemployed. Worse still, those that are working aren't saving money enough for retirement and are making a dangerous retirement gamble on their future.

So, if the U.S. economy isn't in great shape (far from it), and China, Japan and Europe are mired in deflation, what are the prospects for a small open economy like that of Canada? I'm afraid they're not good and the worst is yet to come.

But don't use the poor economy as an excuse not to enhance the CPP for all Canadians. While volatile stock markets disproportionately impact the portfolios of individual Canadians, large, well-governed public pension funds like the Canada Pension Plan Investment Board relish at the opportunity to buy global public and private market assets at a discount.

Below, Finance Minister Bill Morneau says the government has an 'important role' to play in helping people save for retirement, highlighting three challenges the Liberals will be addressing.

Bill Morneau is absolutely right to shift the focus on to enhancing the CPP. It's now or never, period. If politicians squander a golden opportunity to enhance the CPP once and for all, they will be condemning another generation of Canadians to pension poverty.

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