The Big CPP Clash?

Charles Lammam and Hugh MacIntyre of the Fraser Institute wrote an op-ed for the National Post, The big CPP clash: Who’s fuelling pension myths now?:

The “agreement in principle” to expand the Canada Pension Plan (CPP) is a major change to one of the key pillars of Canada’s retirement income system. While we encourage an informed debate about the costs and benefits of the change, it’s disappointing that a respected pension expert such as Keith Ambachtsheer has fuelled further misunderstanding over CPP expansion.

In a memo published by his consulting firm, which was covered by the Financial Post (“Fresh take on CPP myths,” by Barry Critchley, July 7, 2016), Ambachtsheer, director emeritus of the Rotman International Centre for Pension Management, criticized a column we wrote summarizing a longer report and numerous studies that dispelled common myths surrounding the arguments for CPP expansion. Like the myths we dispel in our report, Ambachtsheer puts forth arguments that rely on incomplete analyses or flat out incorrect assumptions.

For starters, the best available evidence shows most Canadians are well prepared for retirement. While Ambachtsheer agrees this is true for current retirees, he claims that future retirees will suffer a different fate, though he provides no evidence to support his assertion. Presumably Ambachtsheer bases his assertion on model projections. However, many of these projections suffer from several important problems.

For one thing, they tend to consider only the savings accumulated in the formal pension system such as the Canada and Quebec pension plans, registered retirement savings plans (RRSPs), and registered pension plans (RPPs). This narrow focus on pension assets overlooks the substantial non-pension assets that Canadians accumulate in stocks, bonds, real estate, and other investments. In 2014, savings in non-pension assets totalled $9.5 trillion, dwarfing the $3.3-trillion worth of assets in the formal pension system. Moreover, consumption needs tend to decline as a retiree ages and retirement income adequacy depends on individual circumstances and preferences.

There are other problems. Ambachtsheer raises concern about those people who lack a workplace pension. But that does not doom someone to a financially insecure retirement. Research from Statistics Canada shows that, relative to their pre-retirement income, retirees without a workplace pension have a higher average retirement income than those with a workplace pension (although the median is slightly lower).

A point that Ambachtsheer does concede is that higher mandatory CPP contributions will be offset by lower private savings. In the end, the overall amount that workers save won’t change but there will be a reshuffling, with more money going to the CPP and less to private savings such as RRSPs, TFSAs, and other investments. This is exactly what happened the last time mandatory CPP contributions increased in the 1990s and 2000s.

Ambachtsheer calls this a “plausible outcome” but then asserts that the CPP offers a higher “quality” of savings than other forms of retirement savings. This is not a foregone conclusion. While the CPP does provide a defined benefit in retirement, lower private savings mean Canadians will lose choice and flexibility. For example, all money saved privately can be transferred to a beneficiary in the event of death. In the case of RRSP savings, Canadians can pull a portion of their funds out for a down payment on a home, to upgrade their education, or if they need it in case of a financial emergency. These benefits are not available through the CPP.

Ambachtsheer’s assertion that the CPP is a superior investment vehicle hinges on the rate of return earned by the CPP Investment Board (CPPIB), which manages CPP assets. But here Ambachtsheer makes the fundamental mistake of suggesting that future retirees will benefit from the strong investment performance of the CPPIB. This simply isn’t true.

There’s no direct link between the investment performance of the CPPIB and the retirement benefits received by eligible Canadians. In fact, the rate of return under the current system for Canadians born after 1956 is a meagre three per cent or less — declining to 2.1 per cent for those born after 1971. We re-calculated the new rate of return based on the limited details available on the proposed CPP expansion. While the results point to a slightly higher comparable long-term rate of return (2.5 per cent), this rate is still well below three per cent and hardly the great investment deal Ambachtsheer suggests.

Given the important changes being made to the CPP and the wider implications for Canada’s retirement income system, it’s unfortunate that an expert of Ambachtsheer’s stature has fuelled misunderstanding over CPP expansion.

The folks at the Fraser Institute are worried. Now that Canada's finance ministers have wisely agreed to expand the CPP, they're desperately trying to publish one paper after another trying to make the case against such an expansion.

The problem? These experts from the Fraser Institute are completely biased and are missing the much bigger picture in order to focus on an ideological stance that favors "less big government" (even though expanding the CPP isn't expanding the government, something they misunderstand).

And what is the bigger picture? Without a doubt, working-age Canadians are much better off in the long run with an expanded CPP because most of them aren't saving enough for retirement and they're living longer and risk outliving their meager savings soon after retirement.

What else are these Fraser Institute policy analysts missing? When we expand the CPP, more Canadians will be able to retire in dignity and security, allowing them to spend accordingly in their golden years because they can count on their CPP payments no matter how well or poorly the market is performing. Governments will be able to collect more in sales taxes and the deficit and debt will be lower because they won't have to spend as much money on social welfare programs to take care of seniors living in poverty.

It all boils down to something I've long argued in my blog, regardless of your political or economic views, expanding the CPP is a winning retirement strategy for Canadians and for the Canadian economy over the long run.

The crucial points these Fraser Institute analysts are missing are the following:

• They conveniently overlook the benefits of defined-benefit plans and the brutal truth on defined-contribution plans, namely that the latter are an abysmal failure in terms of providing safe, secure pension benefits for life, leaving many people exposed to the vagaries of markets which is why pension poverty is on the rise.
• They claim that Canadians are well prepared for retirement, stating there have "substantial non-pension assets," but the reality is most working Canadians can barely save anything meaningful after they make the mortgage payment on their insanely overvalued house, which is yet another reason to worry about retirement in this country. Canada's housing crisis is just getting underway and if you think your house is going to save you in retirement, you're in for a nasty surprise.
• They claim that Canadians are getting less bang for their CPP buck but fail to realize that interest rates around the world are at record lows and that we should be building on CPPIB's success. Moreover, the job of pension managers at CPPIB is to ensure they're properly diversified across global public and private markets in order to make sure the Canada Pension Plan is sustainable over many years and if you look at their long-term results, they're delivering on their mandate to maximize returns without taking undue risk. The question of raising CPP benefits is up to the federal and provincial governments but in order to discuss this the plan has to be on solid footing to begin with, which it is.
• The Fraser Institute has published a dubious study on the costly CPP which was thoroughly discredited by yours truly and by the folks at CEM Benchmarking, a firm co-founded by Keith Ambachtsheer, so it shouldn't surprise you they're attacking his views. I'm not always in agreement with Keith Ambachtsheer and have openly questioned some of his views on my blog but when it comes to pension policy, I listen to him over anyone at the Fraser Institute.
• Last but not least, they fail to appreciate the caliber of the pension managers at CPPIB and other large Canadian defined-benefit plans. There's a reason why Mark Wiseman is leaving CPPIB to join Blackrock, and it speaks volumes about his competencies and those of other senior managers at CPPIB and other large Canadian pensions. They're very good at what they're doing and are delivering stellar long-term results.  

These are the key points I want people to remember the next time they read about some biased study from the Fraser Institute claiming that expanding the CPP is a terrible idea which will jeopardize the Canadian economy.

This is total rubbish and if I had a chance to privately meet with the CEOs of major Canadian banks and insurance companies, I would tell them to stop funding such nonsense and support the expansion of the CPP. In the end, it's in their best interest too but they're failing to see this which is a real shame.

Below, a clip from Sun Life Financial Canada on the difference between defined-benefit and defined-contribution plans. Notice how they play up the benefits of DC plans, ignoring the brutal truth about them or the fact they can't compete with Canada's large well-governed defined-benefit plans.

As I've stated before, in my opinion, companies shouldn't be in the pension business. They should focus on their core business and match any excess pension contributions employees make to their CPP account (future policy change I would implement).

We have a lot of talent across private and public defined-benefit plans in Canada and we should build on their success in order to improve our retirement system. Expanding the CPP is a big first step but it's only the beginning.

In the future, a lot more can be done to ensure Canadians will retire in dignity and security and that our economy will thrive as the population ages, lives longer and people want to enjoy their golden years without worrying about pension poverty and volatile stock markets.