Wednesday, 5 May 2010

Retirement System Redesign Ideas

Some readers may have noticed that Canadian Finance ministers are speechifying these days about possible changes to the retirement system. Blogger / web commentator Peter Benedek's succinct statement of proposed fixes took the words right out of my mouth in this posting at his website Retirement Action.

A few of my own riffs on Peter's, er, principles:
1) Participation could be mandatory but it would be just as effective to have the more politically correct solution of automatic enrollment as the default (i.e. people would have to deliberately opt out) since most people go with the flow, as books like Nudge point out.

2) Longevity risk - the possibility that you will live unexpectedly too long and run out of retirement money - cannot be solved by an individual, only by a collective scheme. Annuities cannot cut it because of higher fees and too many confusing useless options (justified under the guise of choice), more limited risk pools, inferior investing and probably a shorter investing time horizon. There is too much temptation for the insurance industry to concoct high hidden cost complex products few customers can possibly understand.

3) The investment arm - and it must be at a national level to get the global economies of scale - is the only way for an individual to get access to the huge and profitable domain of private equity. The governance of the investment arm is critical - the CPPIB seems so far to have been very successful, as opposed to Quebec's Caisse de Dépôt, which for a time became captive to self-aggrandizing, savings-destroying idiots.

4) The target income replacement level should not exceed 50%. That is enough to ensure a decent standard of living. If people want more luxury, they should save privately with RRSPs, TFSAs or taxable accounts. Or to leave an inheritance, it could also be the family house.

1 comment:

Richard said...

The problem with the profitable domain of private equity is that, like any exceptional investment, it will cease to become profitable long before we get anywhere close to having every single person in the country invest in it. Just like any technical trading strategy it works best when it's practiced by a small number of people and derided by everyone else.

Beyond that, unless private equity managers similar to the best out there today somehow retain a strong degree of control this is effectively pushing to have the most profitable businesses owned and run by the government. I'm sure the prospect would instantly reduce the value of said businesses to the current owners and investors.

Having a standardized replacement rate across the country might also lead to disparities; in some areas it might work well but in others (such as Vancouver, where you have to be a wealthy foreigner to own any property) it could leave people well below what's intended.

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