Monday, 9 August 2010

Pension Reform: a Comparison of CPP(IB) vs RRSP / RRIF / LIRA / LRIF / LIF

There's been a lot of talk lately in Canada about pension reform, a very necessary and worthwhile subject, but unfortunately most of the analysis is from the viewpoint or from the self-interested position of government, regulators and the financial industry. Herewith I present a modest contribution to the debate by comparing two of the existing major options from the viewpoint of the retiree or pensioner, in whose interest all this reform supposedly is ultimately most important.

The two options:
  • Canada Pension Plan (CPP) and its investment arm, the CPP Investment Board - thus my new acronym CPP(IB)
  • RRSP / RRIF / LIRA / LRIF / LIF - the family of registered retirement plans available to individuals, first to save for retirement, and then to draw income from during retirement
The objective is to determine which best meets the first and highest priority of retirement income, the essential spending needs to maintain a lifestyle. I defined my criteria for this objective in my post of June 15 Pension Reform and What Retirees Need, so now I turn to the comparison evaluation as promised then.

First order analysis: What the alternatives deliver today, as promised and as possible. The CPP is very straightforward - once you are eligible and fill in the form to start payments, you receive a monthly cheque, indexed (increased but never decreased e.g. during deflation) for inflation, for the rest of your life. The registered plans are more complicated and the income must somehow be created from investments. I've assumed that the pensioner will follow what I consider to be the best available method to invest within the plans - a portfolio of passive index ETFs, possibly with annuities purchased at some point.

Below is a table with my comparisons and ratings. I haven't bothered with an overall score because the CPP is clearly and massively superior based on doing what it does now.

Second order analysis: drilling down beneath the surface, how sustainable and sure, and what are the risks of each alternative. Below is the table for those results. Again, the CPP is Victoria to St. John's distance ahead of registered plans.

Third order analysis: what investing challenges must be met, what effort and skills does each require to be successful. Big surprise huh? A pattern seems to have emerged as the CPP is again far superior to registered plans.

One could say that the CPP is the best thing since, and for, sliced bread.


larry macdonald said...

I would first ask: do we really have a problem to fix in the pension system when, as Keith Ambachtsheer says, “A global pension quality index currently ranks Canada’s combined public and private pension system fourth in the world.”? Perhaps regulate company pension plans like insurance companies are regulated to prevent more Nortels. But further increases in income transfers from other areas of the economy to the pension system do not seem all that needed, to me.

CanadianInvestor said...

Larry, To the extent that the CPP does meet every worker's basic spending needs, I'd say that no matter how well Canada rates compared to the rest of world, there's room for improvement. Not sure how the pension quality index rates it but if the system is ok up to today, that's one thing, while if the future evolution of the system presents big foreseeable problems, which I think there is evidence of, that's another. As Wayne Gretzky is supposed to have said, it's not where the puck is but where it's going that is important.

CanadianInvestor said...

oops, meant to say the extent to which the CPP does NOT meet basic spending needs.

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Anonymous said...

The new CIBC widget provides some interesting perspectives on the advantages of an RRSP.

Mthirty has a shared a widget on behalf of CIBC.

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