The Pension Debate
I’ve read many articles on the debate over whether we need an improved pension system, and I’ve noticed some patterns. The two sides rarely address each other’s issues.
Arguments for Change
Supporters of change usually point to the alarming number of Canadians who save little and are headed to a dismal retirement where their standard of living will drop significantly. They rightly point out that the only remedy is forced savings. They call for an expansion of CPP or support Ontario’s plans to create a new pension system. Either option leads to higher payroll taxes as a form of forced savings.
Status Quo Side
Supporters of the status quo say that Canadians are doing just fine with their retirement savings. They say that the average level of retirement savings among Canadians is quite healthy. They observe that few retired Canadians live in poverty. They say that forced saving would just reduce voluntary saving.
Who is right?
These two arguments seem to contradict each other, but they don’t. Average savings levels are quite good. However, the average includes those with substantial savings along with those with little or no savings. So, it’s possible for the average to be good and still have many people with inadequate retirement savings.
The statements about many Canadians facing a big drop in their standard of living in retirement and few retirees living in poverty don’t really contradict each other either. Most Canadians facing a big drop in their standard of living will still have an income above the poverty line.
The claim that forced saving would just reduce voluntary saving appears to be at odds with the claim that forced saving would help people. But there really isn’t a contradiction here either. It’s true that people who are saving some money now for retirement would likely save less voluntarily if they were forced to save more in a government-run plan. However, those who save nothing now can’t save any less voluntarily; they would benefit from forced saving.
Entrenched Interests
If it were possible to aim a new savings plan only at those who save little or nothing now, there would be little opposition. However, with expanded government retirement savings plans, everyone who works would contribute more involuntarily. This would take a significant bite out of voluntary savings. The money management industry would face a big drop in assets under management and a corresponding drop in total income. This is their real concern.
Conclusion
I think we would be better served if the two sides of this debate were to directly address each other’s issues instead of talking past each other. We’re weighing the benefit of forced saving for those who don’t save voluntarily against the reduced choices for those who are already saving enough. I suspect that many who struggle with how to invest their RRSPs would welcome forced savings in a government plan, but others prefer to handle their own money.
Arguments for Change
Supporters of change usually point to the alarming number of Canadians who save little and are headed to a dismal retirement where their standard of living will drop significantly. They rightly point out that the only remedy is forced savings. They call for an expansion of CPP or support Ontario’s plans to create a new pension system. Either option leads to higher payroll taxes as a form of forced savings.
Status Quo Side
Supporters of the status quo say that Canadians are doing just fine with their retirement savings. They say that the average level of retirement savings among Canadians is quite healthy. They observe that few retired Canadians live in poverty. They say that forced saving would just reduce voluntary saving.
Who is right?
These two arguments seem to contradict each other, but they don’t. Average savings levels are quite good. However, the average includes those with substantial savings along with those with little or no savings. So, it’s possible for the average to be good and still have many people with inadequate retirement savings.
The statements about many Canadians facing a big drop in their standard of living in retirement and few retirees living in poverty don’t really contradict each other either. Most Canadians facing a big drop in their standard of living will still have an income above the poverty line.
The claim that forced saving would just reduce voluntary saving appears to be at odds with the claim that forced saving would help people. But there really isn’t a contradiction here either. It’s true that people who are saving some money now for retirement would likely save less voluntarily if they were forced to save more in a government-run plan. However, those who save nothing now can’t save any less voluntarily; they would benefit from forced saving.
Entrenched Interests
If it were possible to aim a new savings plan only at those who save little or nothing now, there would be little opposition. However, with expanded government retirement savings plans, everyone who works would contribute more involuntarily. This would take a significant bite out of voluntary savings. The money management industry would face a big drop in assets under management and a corresponding drop in total income. This is their real concern.
Conclusion
I think we would be better served if the two sides of this debate were to directly address each other’s issues instead of talking past each other. We’re weighing the benefit of forced saving for those who don’t save voluntarily against the reduced choices for those who are already saving enough. I suspect that many who struggle with how to invest their RRSPs would welcome forced savings in a government plan, but others prefer to handle their own money.
I don't quite understand how 'not living in poverty' is the benchmark for successful retirement. And yes, the big money management firms will fight this tooth and nail.
ReplyDelete@Anonymous: I'm deliberately not taking a side here, but some would say that you're not owed a successful retirement; you're just protected from a very unsuccessful retirement. But that would be one side actually addressing the other side's argument instead of how the debate has been going so far.
DeleteOur current economy is based on the idea of spending "tomorrow money". Forced saving imposes a limit on such spending along with decrease in in voluntarily saving. Therefore, a few more industries will fight against the move: real estate, car sales, luxury goods, etc.
ReplyDeleteIMHO, a solution is rather simple: I should have a choice of either saving voluntarily myself (RRSP, TFSA, any other mechanism) or the forced saving being imposed on me.
In addition I strongly support a need to reform bankruptcy law: state should administer debt restructuring, but not debt redistribution to prudent citizens.
Too many people live way beyond their means. And who is paying for this by the end of the day? We do. I do not want to pay for social assistance for a woman I saw yesterday: she works as an office cleaner, while her partner picks her up in Acura MDX (leased obviously).
@AnatoliN: You may be right that other industries would fight pension reforms, particularly if they come with an implicit pay raise from payroll taxes contributed by employers.
DeleteI'm not sure I follow your comment about bankruptcy laws. It seems to me that losses from bad debts should land on the creditors who made bad loans. Making it harder for people to declare bankruptcy just encourages creditors to keep making bad loans.
If it weren't for my pension, how else could I continue to support my consumer debt after I no longer have a job?
ReplyDeleteMight be a truer statement than many think...
You seem to be promoting something quite similar to Quebec's new Voluntary Retirement Savings Plan (VRSP). Have you looked at it?
ReplyDelete@Anonymous: I was aiming for avoiding promoting any position and just showing that the debate is dysfunctional. In any case, I haven't looked at the VRSP enough to have an opinion. Whether there are low-cost options is an important factor.
DeleteI'd like to see this - everyone who expresses a position on the topic should be given no credibility until he/she discloses how they personally stand to gain or lose from whatever change occurs. Politicians, bankers, academics, bloggers, "activiists", everyone has a win/lose outcome. For me, status quo or new voluntary plans mean a higher chance I will be required to pay more taxes for those who have not saved enough (and/or who get shorn by the financial services industry). I want forced savings for that large cohort.
ReplyDelete@CanadianInvestor: It would be nice for people to disclose their interests, but I'd settle for commentators discussing the pros and cons of each option instead of discussing the pros of their favoured option and the cons of all other options.
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