Telling half the story truthfully is a sly way to debate an issue. Clemens and Emes appear to have crunched the numbers properly. Here's what they forgot or neglected to say.
2.1% compared to what? - For CPP to be judged as poor, it needs to be compared against a realistic alternative that covers both the savings phase and the retirement phase of life, such as an RRSP and a life annuity. I calculated and posted such a review in 2015 and found that the relative attractiveness of the CPP varied enormously according to whether the person is a man or woman, single or married, and self-employed or an employee. Married women employees benefit most from the CPP, enjoying the equivalent of a prospective lifetime guaranteed real return of 5.1%, while single self-employed men would get only about 1.1% return. The biggest difference arises from the fact that employers pay half the contribution on behalf of employees while self-employed pay the full shot.
Managing investments yourself vs Total auto-pilot of CPP - It's easy to say you can beat 1.1% or even 2.1% real return investing money in an RRSP yourself without breaking a sweat but consider:
- Will you with absolute regularity for 39 years without fail save out of your income to accumulate investment funds like the CPP imposes automatically, or will you like most people find a more pressing use for your pay, especially early on in life, and only start to save seriously when the reality of retirement stares you in the face? Starting to invest late means needing to achieve much higher returns since you miss out on the power of long term compounding.
- Will you then invest wisely, maintaining a sensible strategy of diversified low cost funds, or instead like most individual investors, buy return-sapping high-cost funds that are offered by salespeople disguised as advisors, or chase returns and hot ideas that only occasionally pay off? Will you properly compare the riskiness of your portfolio, probably containing a lot of riskier equities, to the lowest risk triple A guarantee of the Government of Canada? To be comparable risk, you would need to invest in Government of Canada bonds, which currently yield a nominal max of 2% (on long term bonds), or about 0.3% after the latest 1.7% inflation. And how much is your time and effort worth to do all this in comparison the fully automatic zero effort required by you for the CPP?
True inflation protection - Only the CPP offers true inflation protection, i.e. CPI-linked increases. The best fudge available in the annuity market are annuities that ratchet up by a pre-set amount you choose, like 1.0, 1.5 or 2.0%. You have to guess at what future inflation will be. Guess too high and you over-pay un-necessarily, or guess too low and you still lose to inflation. Either way the uncertainty about inflation is not removed and your retirement annuity income does not keep in step with inflation, drifting further and further apart as years roll on and the differences compound.
Hilarious irrelevant comparisons - The Clemens/Emes report also details some laughable calculations about how people who started receiving CPP back in the 60s and 70s have been getting phenomenally high returns, mainly because they did not contribute long but get full benefits. As if that should make present-day contributors jealous and angry to not want to pay any more - i.e. not support an expanded CPP because they would be handing even more money to retired rich so and so's. Well, we should first note that anyone retiring at 65 in 1969 on CPP launch would now be 112. They're all dead. The ranks are pretty thin at the older higher return end. There's only one living 111 year old Canadian and one of 110. Besides, what happened is done, We must look forward. And, individuals can do much worse or better than the average - die soon after after retirement and get a tiny of your money back, live long beyond the average life expectancy and your rate of return rises to very high amounts. If the report authors are inferring inter-generational inequity needs to be fixed, then the payouts to past retirees needs to be reduced. It is not by stopping CPP expansion.
Most proposals for CPP expansion are that higher benefits come only when they have been earned through higher contributions. That would be fair. You get back for what you put in and you are not paying extra for someone else already a recipient to receive more.
When the full context is given and the whole story told, the CPP sure looks a lot more reasonable than a single low return number seems to imply.
Stumble It!
5 comments:
If anything is hilarious, it's how you are trying to spin the numbers you don't like. For example doubling the rate of "return" because employers contribute to the fund is an interesting method of calculating investment returns. Perhaps going forward we should make employers cover 100 percent of CPP contributions. Ergo - CPP will be the best investment ever by providing a guaranteed 100 percent "return".
Actually it will be infinite... So as you don't count employers contributions as contributions.
BHCh, thanks for the comments. What I am trying to point out is that return is a matter of perspective. From the individual's point of view, treating the CPP as a black box, the only thing that matters is money the individual puts in. The employer contribution money is invisible, unless you are self-employed, whereby the CPP "deal" is much less enticing. From the employer viewpoint, its contribution looks like a tax and not an investment at all - zero return for its money. The Fraser Institute along with business groups who oppose CPP expansion in fact like to describe CPP contributions as a tax because that's their perspective.
OAS is an example of infinite return for the individual - no contribution, only a requirement to have lived in Canada a certain number of years. Note also that Clemens/Emes adopt the very same selective perspective when they calculate the sky-high returns of 1969 CPP recipients - they neglect to include the contributions of other taxpayers that would be required to pay that high "return". Clemens/Emes seem to be trying to stroke the inter-generational inequity anger against a CPP that no longer works that way.
All that is quite different from a government / public policy perspective. The CPP is no longer a black box and both employer and employee contributions MUST be considered to see if CPP is the best way to promote retirement income adequacy. The question becomes whether some other form of program - e.g. private sector managed, voluntary vs compulsory, shared/pooled vs individual longevity risk, would provide better return bang for total contribution bucks, amongst many other questions.
The problem with Clemens/Eves is that they confound individual (what I pay) and public policy (selectively, what is paid in total) perspectives to slag the CPP. The CPP isn't perfect - e.g. it's internal admin costs aren't best in class - but it's pretty darn good from my perspective and if I had a chance to invest more - even as a self-employed man getting the measely 1.9% return I calculated last year, I would take it in a jiffy because it's still a lot better than any available investments with comparable risk.
From employers perspective CPP contributions are simply the cost of employing people, no different from salary.
The risk of giving money to the government is very hard to estimate. Someone retiring in 40 years and contributing to CPP is betting that the rules aren't going to change, the age, the amount of contributions, etc. Well, he is wrong. There will be lots of governments and there will be changes. And the whole scheme could go bankrupt. We are seeing this in other jurisdictions and assuming it will never happen here is naive.
I would make any extension voluntary. If people like you believe it's a giid value, let them use the scheme.
BHCh, True there is risk to handing over money to the CPP, which is a government controlled entity. But the same kind of government risk applies to any private savings or investments, change the rules (TFSA contribution reduction, ahem!), capital gains tax rates, etc. In the case of catastrophic failure of CPP, going bankrupt as you put it, I would guess such an event to arise when the whole economy is in shambles, and private investments would be hard hit too. Short of that we have measured risks like those in the Chief Actuary's reports, which point out how much contribution rates could rise.
My assessment of the CPP is that the governance structure is pretty good and mostly immune from short-term meddling by governments such as Trudeau has just done to the TFSA. Look at the current attempt to expand the CPP. Debate has been going for many years now but nothing has happened. Despite Trudeau's desire to expand it, he cannot willy nilly do so. CPP is pretty hard to touch either way.
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