Tuesday, June 15, 2010

Canadians: A Bad Investment

According to the National Post that is.

Behold the Church of the Free Market in all its glory. Looks like the NP let the intern, possibly a first year economics undergrad, write today's editorial. I've always found it interesting that the National Post is considered an expert on financial and economic issues. In this case they take aim at the rather intelligent and necessary idea of increasing CPP contributions, something all the major parties seem to agree needs to be done. But not those cute, cuddly, libertarians. No, according to the National Post the CPP is baaaaaaad.


Even with oscillations in the market, over time private retirement plans produce post-employment incomes double or more those of public pensions. If workers were able to take the more than $3,000 they and their employers pay into CPP on their behalf each year and invest it in a conservative private fund, at the end of their working lives their private pension income would be nearly $26,000 annually. With CPP, the same $3,600 taken every year yields annual benefits of only around $10,000 at age 65.

Well at least if the NP finally dies at some point in the future the editors can get jobs as mutual fund salesmen. You don't need any financial planning accreditation to figure out the problem with the above paragraph.

Nonetheless, let's pretend the NP actually has any idea what they're talking about. What's their solution to the retirement quandry so many Canadians face and will face if, realizing the CPP is apparently a bad investment, work hard to invest their money in the right place and plan it so they turn 65 at the height of the market?

He could start by increasing the amount workers can shield in their RRSPs.

Yup. Higher RRSP contribution limits. You remember RRSPs don't you? That's that measly savings account you have that you're sometimes able to chuck a toonie or two into after paying your daycare bill, your hydro bill, your mortgage, your car payment, etc., etc. What? You haven't been maxing out your contributions? Yeah, neither have at least another quarter of the population.

Have no fear though, the NP assures you that trickle down economics will do the trick. Throw your money into, say, Nortel. Then, according to the NP, jobs will be created, resulting in more wealth for everyone!!! Hooray!!!

Yet it's not just the NP that's talking this way. A google news search will give you a bunch of hits from the similarly brain damaged about the evils of government pension plans. The idiots are out in force on this issue, and it's one that's too important to ignore.


  1. The raising RRSP limits and increasing CPP contributions have the same problem. Somehow the investment has to come out of our paychecks.

    For a lot of people, there isn't that much left over.

  2. True enough, but Canadians will retire, and the reality is that the CPP is all we have, and will continue to have. Under the CPP we at least have a forced contribution and a defined benefit. RRSPs guarantee nothing, they're almost exclusively a tool for the upper-middle class, and even people who can afford to make contributions will usually fail to do so.

    The idea that Canada is even approaching this debate, had a few years earlier to the south, over privatizing the public pension plan is incredibly disturbing to me.

  3. In principle I'm with you. But when I look at my RRSPs, and the true pittance the CPP is (and will be, even if increased) I ain't gonna retire. The math don't add up.

    Or I'm just being too pessimistic.

  4. Do you prefer a different type of public pension scheme?

  5. I think we need to truly take a big picture look at everything. Not just pensions. The problem is quite simply that all taxes and fees are personal takes and fees. (If you tax a corporation it passes on those taxes to the individual in the form of increased prices).

    Say my income is $1000 a month. Out of that must come taxes to support my community, my province and the nation. Also out of that $1000 I have to pay for food, clothing, housing, my retirement etc. If I have any left over, that is my "free to do whatever I want with money".

    Any increase in any one of those categories causes a reduction in one of the others. Ideally, all of us have a large pool of "free to do whatever I want with" that can be reduced to meet increased needs in the others. In reality that is just not so. Whether legitimately or not, the average Canadian is mired in debt and has no room to move. Their pool of income is not increasing in proportion to the demands being placed on it. This is a pressing issue in much of the western world. Other than environmental chaos, this (IMHO) is the single greatest threat to western society. The reason we need greater help with our retirements is because we have no money left to save or invest for ourselves. It would be great if government could pick up that slack, but the government is funded out that very same bare pocket that my RRSPs are.

    So what do we do? I think we need to either do more with less (find efficiencies), and/or cut down to the essentials across the board in all service areas. Those are huge, most likely completely impossible, changes. It is easy to say, much harder to accomplish.

    On the specific issue of retirement, we need to find the most efficient option. We have to minimize the investment and maximize the return. Given as true that maxim that it takes money to make money, having a large percentage of that investment in one pot in theory maximizes the return. Ie the CPP. The CPP, the Ontario Teacher's pension and I believe OMERS are examples of the success of this approach. But the Quebec Caisse de depot is an example of it going horribly wrong.

  6. To maybe clarify what it is I'm getting at. The CPP vs. RRSP debate is a symptom of the greater problem (ie consumer debt).

    It isn't one or the other, because in reality we can't fund either of them.