Mr Martin!
|
Dateline: 09/30/97
Last week Finance Minister Paul Martin introduced legislation to beef up the so-called Canada Pension Plan. So-called? Well, yes. The CPP is no more a pension plan than my big toe.
A pension plan involves investing money contributed during a working person's lifetime to provide him or her with a steady income stream during retirement. The Canada Pension Plan, according to the government's own propaganda, is "financed essentially on a pay-as-you-go basis. In a pay-as-you-go system, contributions by today's workers finance the benefits of today's recipients. Other than a small fund intended to equal about two years of benefits, total contributions equal total pay-outs. The security of plan benefits, therefore, relies on the continuing ability of each working generation to pay for the pensions of preceding generations."
You might say the plan is characterized by "reliance on funds from new investors to pay returns, commissions or bonuses to old investors; need for an inexhaustible supply of new investors; and absences of a profitable product or efforts to make profits through productive work." That description is given by the United States Securities and Exchange Commission as the characteristics of a Ponzi Scheme in their brochure, How To Avoid Ponzi And Pyramid Schemes. Charles Ponzi was the legendary con artist who bilked hundreds of unwary Bostonians in the 1920's with the fraud that now bears his name.
So call it what you like, but do not call the CPP a pension plan!
According to government projections, the CPP will go flat broke, eating up all its reserves, by 2015 if action is not taken to remedy it. The action proposed, however, is worse than no plan at all. The plan calls for premiums to rise from 5.85% of insurable earnings ($35,800 maximum) to 9.9% by the year 2003. That's $3544 a year.
Employers supposedly pay half of that,
which is actually a calculated fraud and everyone knows it. What
employers must cough up in CPP premiums to the government, leaves
that much less to pay employees. The portion the employer pays
is as much a wage cost as if it was going directly to the employee. In fact, in the business software we use for the accounting of my wife's business, CPP contributions are designated as a wage cost.
Without that cost, in fact, the employer would be able to pay
the employee that much more. In reality, the entire $3544 comes
from the employee's pocket and don't let anyone tell you different.
As premiums rise, employers will decrease any wage increases they
might have given employees to compensate.
And what is the payoff? How much does a person contributing the maximum amount to the scheme stand to benefit at retirement? Currently, about $735 a month. That is adjusted upwards for inflation every year.
Why is the cure worse than the plan? True, the revised plan calls for the government to establish a surplus account, a fund that pension plan advisor Keith Ambachtsheer says will quickly grow to $126 billion within 10 years, rivaling the huge "Ontario Teachers Pension Plan Board in assets and clout in the Canadian marketplace". But payouts will be limited in growth to the rate of inflation. The payouts will still depend on continuing streams of revenue, not on profits from investments. And the government invests primarily in low yield government bonds. (It had been lending to the provinces at below-market rates up to now!) We would agree with the opinion of Reform MP Diane Ablonczy who called the government's plan "the largest tax increase in history."
Many people could secure a far better retirement investing the money themselves through an RRSP. Let's, for simplicity's sake, say the benefits at retirement will be $2000 a month instead of the actual $735 adjusted for inflation. And let's assume that the contribution rate stays constant at $3500 a year. To generate $2000 a month from an investment yielding 10% a year would take a fund of $240,000. An investment yielding a paltry 5% a year would require a fund of double that, or $480,000.
Putting $3500 every year into quality equity mutual funds with a performance of 10% a year compounded annually (in the most recent survey, only 5 of 142 Canadian equity mutual funds with 5 year track records failed to do better than 10%) would accumulate to over $240,000 in 21 years. It would take 28 years to accumulate over $480,000. This is not counting the tax savings from contributing to an RRSP, which would grow the result even faster. Thus a person age 39 or younger with maximum insurable earnings would be better off contributing the $3500 per year to an RRSP invested in Canadian equity mutual funds than contributing to the CPP.
At the very least the government should consider letting people younger than 39 opt out and contribute the money that would have gone into the CPP into a locked in RRSP instead. If the government allows the money so invested to be tax deductible as well (the CPP contributions are deductible now so the government would not lose any tax revenue), then even a 48 year old codger like myself would prefer to opt out, even if it means forfeiting the CPP pension benefits already accumulated! The tax savings on the middle income bracket of $3500 invested in an RRSP is 40% or $1400 a year. With the tax savings reinvested, it would take only 18 years to accumulate over $240,000. And I believe I can do better than 10% return on my investments.
If the government were to let everyone aged 50 or younger opt out of the CPP, forfeiting all benefits, and contribute to an RRSP instead, the claims against the CPP would also decrease over time as many, if not most, people would opt out. Only those within 20 years of retirement would be likely to remain in the plan. It would be a partial privatization of the CPP, leading eventually to its outright abolition. It would let the government regain some honesty in its fiscal management instead of continuing to perpetrate the Ponzi fraud of the last 31 years! So privatize the plan, Mr. Martin! Privatize!