Expanding the CPP, and the Big Lie of Defined Benefit
I've had this story about the Big Lie of Defined Benefit fermenting in my head since long before I heard anything from the Canadian Labour Congress (CLC) about expanding the Canada Pension Plan (CPP). For those not in the know, Canadians have to give up a small percentage of their income which goes into a huge pot that pays them a meagre sum of money every month, once they retire. At present we pay in about 5% of our salary to an annual maximum of about $2200. I believe at present the CPP benefit for the retired is around $1100 or $1200 a month, which is not much at all. Hey, who wouldn't want more than that? So when I first started seeing friends on facebook posting links to CLC material on the matter, I started to follow those links. And in doing so I became rather concerned, because it became clear to me very quickly that the CLC is trying to change something they clearly do not understand in the least. The only other alternative is that they do understand it, but are choosing to lie about it.
One of the first things I saw on the matter was this video from Ken Georgetti, the president of the CLC. Boy does he demonstrate a very fundamental misunderstanding of how the CPP works. He spends a good bit of time demonizing "the markets", since he seems to equate this with private RRSPs, an alternative to the CPP that far too few Canadians take advantage of. In that much Mr Georgetti is entirely correct - far too few Canadians do take advantage of an RRSP. But the way to fix this problem, is not with a big lie. The basic thrust of his argument seems to be that a couple of decades ago it was recognised that Canadians did not have enough saved for retirement, so they were encouraged to set up their own RRSPs (Registered Retirement Savings Plans - similar to a 401K in the US). The problem is that far too people have done this, which leads Mr Georgetti to declare like he does just past the 2 minute mark in this video "putting the money in the market has not done what they promised it would do" . Markets bad, for a good socialist, right? The problem is that putting the money in the market most certainly has done what "they" promised it would do, and this is right under Mr Georgetti's nose in the form of the very CPP he wants to reform. So either he does not have the slightest understanding of the very thing he is so keen to reform, or he is outright lying about it. There are no other possibilities.
In order to understand this, we need a bit of a lesson in recent history.
Today's CPP is the Stock Market
Any Canadian in their mid 30s or older will remember the doom-and-gloom stories of the CPP that were being told in the early and mid 90s. According to nay-sayers, it was a massive pyramid scheme that was set to collapse in on itself. It was heavily underfunded and was not growing fast enough to meet the needs of an increasingly aging population. The ratio of people paying it to people drawing out was becoming smaller and smaller, because people were living longer. This is why the premiums we as Canadians needed to pay into the CPP were slowly raised over the years from the initial 1.8% of income, to the near 5% we see today. But what Ken Georgetti and his ilk either do not understand, or do not want to tell you, is that this is not the only change that was required to make the CPP work. The real change that made it all work was huge - so enormous, in fact, that the internals of CPP today is nothing at all like what it was just 15 years ago. Back then, the CPP consisted of little more than investments in government bonds, such that nay-sayers were quite justified in calling it a "pyramid scheme". The problem was that government bonds while safe, were pretty low yield and did not have the "growth" required to make this thing work. And I put that in quotes because this notion of "growth" is key to my criticism of any and all defined benefit plans, as well as my criticism of old-school Socialists like Mr Georgetti, for that matter (I call myself a "neo-Socialist"). Anyway, I'm not going to get into the (flawed) matter of "growth" just yet.
In order to fix the CPP (an accomplishment largely attributed to then Finance Minister Paul Martin), the financial architects of the day had to do far more than just raise rates. What they did was move most of the money into the very stock markets that Mr Georgetti likes to poo-poo in his speeches. As the CPP Investment Fund sits today, it is really no different whatsoever from a typical Mutual Fund that a Canadian citizen would invest in within their private RRSP. What is a mutual fund? It is a collection of stocks, bonds and other assets, meant to diversify one's investments. The problem with the CPP prior to Paul Martin's Big Fix was that is was grossly under-diversified - almost entirely invested in government bonds. And the fix was to both increase rates as most of us remember, but also to restructure the whole plan top-to-bottom and turn it into a giant Mutual Fund for all Canadians. So while Mr Georgetti may claim "putting the money in the market has not done what they promised it would do", the truth of the situation is precisely the opposite. This link to the CPP Investment Board's website gives details on just where the money of the CPP is invested. It says very clearly that 53% is in corporate equitiies - i.e. stocks. i.e. the Stock Market. And of the remainder, a sizable chunk is still in Government Bonds - but the total being perhaps 1/3 of the total value of the fund, versus the near 100% of the total value prior to the Big Restructure. And the remaining bits outside of this are the typical wheeling-and-dealing investments that while not properly part of the "stock market", are probably part of what an average lay person probably understands as such. e.g. real estate investments, corporate bonds, etc. Ironically, the CPP Investment Board website lists real estate investments under the category "Inflation Sensitive Assets" with the implication being that they are safer investments. Nevermind, of course, that the global financial crisis from which we still have not emerged, was caused largely by the real estate market!
And speaking of the global financial meltdown, the people promoting the expansion of the CPP seem to like to use it to bolster the notion of expansion. They point to example of people whose pensions have shrunk as part of the meltdown, and say "see, this is why we need an expanded CPP, because this is what happens when you have your money in the big evil markets". OK, never mind that I find the markets evil too, and nevermind that the CPP today is in for a penny, in for a pound as far as stock markets go. In fact, so much in for a pound that the value of the CPP shrunk during the meltdown, just as did the value of most people's pension plans. If we take a look at results page of the CPP Investment Board website, we see that the CPP experienced zero growth in 2008, and shrunk by a whopping 15% in 2009, just like peoples private RRSPs and private pension plans! This of course should not be surprising to anyone who understands that today's CPP is really no different whatsoever from a typical RRSP or pension fund. So what's good for the goose, is good for the gander - your private plan shrunk during the recession, and so did the CPP. Anyway, the main point is that the global financial meltdown has shown us why defined benefit plans are a bad idea. and the CPP is just such a defined benefit plan, not really any different from any other one.
For the record, I like the idea of being forced to save more money, and I like the idea of an expanded CPP. What I don't like is the fact that the main champion of this expansion - the Canadian Labour Congress - either fundamentally does not understand the very thing it is lobbying to expand, or even worse, it does understand but is lying to us all about it. Yikes!
Defined Benefit versus Defined Contribution
I want to say a few words about defined benefit plans, and just why it is they are a massive lie. Ironically, the people promoting an expanded CPP often point to the likes of Nortel and say "see, this is the problem with private pension plans". Hey, I was part of that Nortel ride, and I know more about this stuff than most of those using it as an example of what not to do. The basic problem with defined benefit plans is that they tell us that they can predict the future, when any fool should know the ridiculousness of such a claim. What is more ridiculous about it in fact, is that really all it does is hide the reality of the situation from the beneficiary, and in my books hiding reality is almost always a bad thing. And worse still, pointing to Nortel as an example of what not to do, is contrary to the expansion of the CPP. The Nortel debacle is a clear example of what is wrong with a defined benefit plan, so should be held up as an example of why NOT to expand the CPP. Anyone who uses this as an example in favour of an expanded CPP clearly does not understand the nature of the very thing they are lobbying for. The problem at Nortel was that people put their faith into a giant lie, and ended up having the carpet pulled out from under them as a result because all the details of their money were hidden from them.
Let's take a look at this a bit more.
With a defined contribution plan, you know how much money goes into it, but gawd only knows how much will be there in the end and how much you'll be able to draw out. That is to say that you get your money up front, and then you have to manage it into retirement. The default location for you money would be in a plan that is not at all dissimilar from the CPP in terms of where the money is actually invested. Most of these plans - like the one I participated in at Nortel - have a few "big basket" options that you can put your money into. Each of these funds like basically a mutual fund, and you can typically assign a percentage of your holdings towards each fund. Nortel's plan had a "large cap fund", "small cap fund", "money markets" and a few others to choose from. If those funds do not perform well, your money does not grow. Very simple. If you choose the wrong fund, you blew it.
So what does a defined benefit fund look like, by way of comparison? Well, actually it looks exactly like the defined contribution plan, except someone else is making all those financial decisions for you on which stock market gambles are better and which are worse, and trying to hide it all from you. And in addition to trying to hide reality from you, they are making the promise that they are so good at gambling on the stock market, that they'll be able to get you a certain percentage of returns on your investments. Defined benefit plans are based on a massively complex mathematical formula which boils down to "we promise we'll be able to take this money and make it grow by X% every year". So they say they can predict the future, eh? And in cases like Nortel when the worst possible outcome is what we get, we end up with an awful lot of people whose unrealistic expectations have not been met. Expectations foisted upon them by someone like Ken Georgetti who is trying to hide the truth from them. Bad. Evil. Bad.
There is no magic to a defined benefit plan which makes it immune to market forces. The only difference is that the plan member is "protected" by a massive lie. Which in the end as many Nortel employees have seen, is not much protection at all. Oh, and something I did not fully explain earlier - the true irony of using Nortel as an example in favour of an expanded CPP is this - Nortel had several pension plans depending on when you got into the company. There was the "old-old" plan, as we insiders called it, which was the big juicy defined benefit lie. Then there was the "new-old" and the "new-new" plans. I happen to know quite a bit about this because the only employees who were free to choose the "old-old" plan were those who started employment at Nortel on or before the last day of 1996. And I started work there the first day of 1997 - so I missed the big juicy defined benefit plan by exactly 1 day. And in my early years of employment there, I often moaned about it, because all I got was the lousy old defined contribution plan. Well, who was moaning in the end? For those of us in the defined contribution plan, we already had Nortel's money deposited into our fund every month, so there was no way for Nortel's bankruptcy to take it away. For those on the defined benefit plan, however, the news was not so great. Along with the collapse of the company came the collapse of their benefits, proving once and for all what a massive lie this line of thinking is.
And just so we are not singling out Nortel here, let's talk about another company whose pension plan collapsed for completely different reasons - General Motors. There are more differences than similarities between the two cases - not the least of which being that Nortel had no union and GM had a really great one. The biggest similarity, however, is that they were both defined benefit plans, and the employees were being lied to just like any member of any defined benefit plan is lied to. This gives them completely unrealistic expectations about the future.
Really what this all comes down to is a simple expression we all learn as kids : a bird in the hand is worth 2 in the bush. It really is that simple. I'd much rather have my money right now, thanks. Then at least I know exactly how much I have. No surprises.
Why anyone in their right mind would want their so-called financial security hidden behind a massive lie like this is completely beyond me. Only to have the rug pulled out from under them 30 years in the future when it is too late. The people doing the lying are typically just serving their own ends - trying to buy your present-day compliance with their way of thinking, in exchange for some big future promise they really cannot guarantee. Big companies want you to work hard for them, for your big return when you are ready to retire. Big unions want to you believe they are responsible for the big pension promises, so stay with your union today for that big juicy pension 30 years from now. These are nice lies - the kind we all really want to believe which is what makes us all easy targets and makes most people fall for it. But they are lies just the same, and personally I'd sooner have the uncertainty of the truth, than the "certainty" of a lie. Lest we all end up like Nortel and GM employees.
What is worse is the way this is being presented - ohmygosh look at what happened to Nortel - let's make sure that never happens again. OK, on that much I agree completely - but the way to make sure that never happens again is to abolish the lie of defined benefit plans. Period. Done. You don't fix the lie^H^H^Hproblem of big corporate defined-benefit pension plan collapse, by moving to an even bigger lie of a state-owned defined benefit plan. The way to protect people from the collapse of their defined-benefit pension plans, is not to offer them an expanded defined benefit pension plan!
My Reformed CPP
My reformed CPP would work much like the Nortel defined contribution plan did. It worked - I am living proof of this since I still have all my money. You get your money now to do with as you wish in terms of investments, but you cannot touch it until you retire. By default, your money goes into "the default plan" which is a certain mix of investments as determined by some financial wizards hired to manage the plan. Let's call this mix "the current mix of the CPP". See how I did that? My plan could be largely just like the current plan. Anyone who did not want to make their own financial decisions would be in exactly the same place they are today. But there could be other different investment mixes, too. And people could choose the mix that best suited them. Like maybe there was a "green energy mix" or an "ethical fund mix". Incidentally, the current investments of the CPP are not very ethical. I've looked at them in great detail. Anyway, people would have their money alloted to them up front, but collectively all that money is still in one big pot so you get similar benefits of scale. You just give them more freedom in where they want their money, and they always know exactly how much they have right now. It is a concrete, real number, not a lie about some fanciful future.
Want to protect people from doing something really stupid with their money? That's easy. Just establish some sort of national financial literacy test and say that anyone who wants to move their CPP investments out of the default slot, has to pass this test. Done.
I'm not going to go too deeply into this except to say that this is the even bigger lie which underpins all the rest of it. And the problem with old-school socialists is that they work with the same basic assumptions (and massive lies) as the capitalists. They want us to believe they are different, but there is no possible way they can be when they are working with the same basic economic theories of growth. To see what's wrong with that, watch this 8 part Youtube series. Here is the first of 8 - to get the rest just click through to Youtube and it should list the other parts for you.