The following presentation was given by pension expert and author Monica Townson
to seniors who came to this Wednesday, January 30/02 forum at the Barbara Frum Library Auditorium in Toronto.
program was sponsored by the Ontario Society (Coalition) of Senior Citizens' Organizations and Canadian
Pensioners Concerned, Ontario Division.
It’s a real pleasure to be here this morning with OCSCO again — and with Canadian Pensioners Concerned.
I remember some years ago when your organization first invited me to make a presentation on pensions. We had a very
lively and animated discussion. In fact, that’s been my experience over the years when you’ve been kind enough
to invite me back again. We always manage to get to the heart of the matter and to air strong and informed opinions about the
situation of seniors. So I’ve been looking forward to being with you today and to hearing what you have to say about where Canada
is going with its public pension system.
I have to say that when I started to think about the presentation I wanted to make today, I was struck by how familiar the themes are.
We’ve talked before about the threat to public pensions. And we’ve discussed how a backlash against seniors seems to have developed
as older Canadians account for an increasing percentage of the population. Those issues haven’t gone away. If anything, they’ve
become more "front and centre" as the baby boom generation gets closer to retirement.
Members of OCSCO or CPC may not be counted among the baby boom generation. But many of us are the parents of boomers.
What’s more, scare tactics now being used by some people who are opposed to public pensions could well place the pensions of
current seniors in danger.
There are some handouts on the table, so I hope everyone was able to get copies. They deal with the facts and figures of seniors’
incomes as well as their assets. And there’s also one fact sheet about OAS and the clawback.
I thought it might be useful to have some of the numbers down on paper, so we can see just how well off seniors are — or are not.
You’ll see one handout headed Sources of income of seniors 1998. This was the most recent information
I could get up to now. But you’ll notice that today’s seniors still get a big chunk of their income from public programs.
Women who are currently 65 or older, for example, on average get 60% of their income from public pensions and other government transfers.
Private pensions and RRSPs are much less important than government programs as a source of income for today’s seniors.
Take a look at the Fact Sheet on the Financial Situation of Seniors if you want to see how seniors are doing,
both in terms of income and assets. In spite of what you may have heard about seniors being much better off than younger people, you’ll notice
that elderly families averaged less than $26,000 in income in 1999, compared with $62,000 for non-elderly families. Even when government
transfers and taxes were taken into account, senior families were still well below other families in their average income after tax.
And what about their assets? We hear a lot about how wealthy today’s seniors are. Statistics Canada now has some new information about
the net worth of Canadian families. True enough, it shows that the typical senior family has a net worth of about $302,900, compared with
about $138,600 for the typical non-elderly family. But the reason is that the biggest asset most families have is their family home.
And seniors generally have paid off their mortgages by the time they get to retirement. Younger families are still working on mortgage
payments, which is mainly why their net worth comes out lower. Clearly, if seniors had millions of dollars in investments, investment
income would be a much higher percentage of their total income. And we have already seen that it accounts for only 12% to 14% of the
income of current seniors.
And how are all those "rich" seniors managing to cope with the OAS clawback, which takes back Old Age Security payments from
seniors whose incomes (in 2002) are more than about $57,000? You’ll see from the Old Age Security
Fact Sheet that only 2% of seniors, or about 76,000 people out of more than 3.8 million have their entire OAS benefit clawed
back because their incomes are too high to qualify.
It’s important that we have this information to counter some of the myths and misinformation about seniors that are being used as
weapons in the debate about public pensions in Canada. Scaremongers have been warning of a demographic time bomb waiting to explode when
the baby boom generation starts to retire in about ten years from now. They say Canada can't afford its aging population. And, in a
backlash against seniors, they claim older Canadians have never had it so good. Are seniors "greedy geezers" who should be asked to give
up some of their government benefits? Will your pension be there when you need it?
And what about the Canada Pension Plan? Is it now out of danger? Was it ever in danger? We had a round of public consultations
and discussions on the CPP a few years ago. That led to changes that came into effect at the beginning of 1998. Contribution rates were increased,
some benefits were reduced, and an investment fund was established. That fund is now being invested in the stock market for the first time.
The objective of the exercise was to put the plan on a sounder financial footing — as well as to boost public confidence in the CPP.
But some people are claiming the government didn't go far enough. They would like to see Canadians allowed to opt out of the CPP so they
could invest their contributions in their own personal savings plans instead. They say younger Canadians would be much better off doing this
than staying in the CPP to get a pension when they’re 60 or 65.
Of course, opting out would shift the cost and the responsibility of providing for retirement on to individual Canadians. It’s a move that
would do away with collective responsibility for and to our older citizens, which has been the fundamental basis for Canada’s social programs.
Instead, individuals would be expected to sink or swim in the stormy seas of "free markets." And financial institutions would be able to
charge them for managing their retirement funds.
Some people might do well under this kind of a system. But many more would probably not be able to provide an adequate retirement income for
themselves. Britain tried it with disastrous results when Margaret Thatcher was in power. Unscrupulous insurance companies persuaded people to
opt out of the state pension plan, even though they will be worse off as a result.
These companies which were selling personal pensions — something like our RRSPs — used high-pressure sales tactics to get the business.
And the British government has fined them huge amounts of money and made them pay compensation for defrauding the public. In Canada,
we already have high-pressure sales tactics when the RRSP season rolls around. You can imagine what might happen if people were allowed to opt
out of the CPP and put their contributions into RRSPs instead.
Some people would even like to see the CPP abolished in favour of a system of mandatory individual savings accounts — the old Reform
Party had the idea of replacing the CPP with "Super-RRSPs." And some people in the United States are questioning the long-term
viability of Social Security. There’s a strong lobby in the U.S. that would like to see Social Security privatized so that individuals
can "make their own decisions" about how to provide for their retirement.
The demographic time bomb
What’s behind this push to get rid of public pension programs in favour of private savings schemes? Why are right wing commentators and
think-tanks warning of a "demographic time bomb" and a "war between the generations"? Who is whipping up the panic and why?
Who stands to gain if governments renege on their commitment to social security and public pensions, leaving the coming generation of seniors
to fend for themselves? Is there a hidden agenda at work here?
I believe there is. And I’d like to explain why I think so. First we should look at the myth of the demographic time bomb. Finance Minister
Paul Martin first raised the alarm in his 1995 budget, when he kicked off a round of proposed cuts to public pension programs. In that budget
speech, he told Canadians that if nothing were done, spending on Old Age Security and the Guaranteed Income Supplement, along with the
Canada/Quebec Pension Plan would jump from 5.3% of Gross Domestic Product in 1993 to more than 8% in 2030. That sounds like a big increase,
until you realize that OECD countries were already spending an average 9.2% of GDP in 1991 — nearly 40 years before Canada was expected
to reach just 8% of GDP.
But the opponents of public pensions have done a good job of striking fear into the hearts of responsible citizens by their warlike language.
In fact, the image of the ticking time bomb has now become so much part of the conventional wisdom about population aging that not many people
even challenge it. It’s simply accepted as gospel truth — not just in Canada, but in other countries too.
Even as long ago as 1984, Margaret Thatcher, who was then Prime Minister of Britain, was using the "demographic time bomb" scare to
attack Britain’s public pension programs. She also used it to undermine the National Health Service and to justify cuts she proposed to
make in public spending on these programs. In the U.S., the time bomb image is being used to support claims that Social Security can’t
be sustained: that it’s a "bad idea" for younger people. Exactly the same arguments are being made in Canada against the Canada
Pension Plan. (And, incidentally, there’s a familiar echo in the current debate about how our health care system is supposedly
"unsustainable.")
We need to challenge the credibility of these arguments. One eminent American economics professor, who is an expert in aging policy, describes
them as "voodoo demography." He says they’re based on "simplistic and erroneous demographic analyses" and they often
don’t even take economics into account
A couple of years ago, two American economists, Dean Baker and Mark Weisbrot, came out with a book that took apart what they called "The
Phony Crisis" in U.S. Social Security. They said the opponents of social security and public pensions have used the demographic
time bomb scare to threaten these programs. They also pointed out another very dangerous trend. They said that many of the people who would like
to preserve Social Security have given up trying to defend the system on the basis of the facts.
That’s because the general public is now so conditioned to believe that Social Security is headed for a crisis when the baby boomers retire,
that anyone who dares to challenge the idea is marginalized in the debate. In a political climate driven by focus groups and polling data, said
these authors, is doesn’t take long for the truth to be turned upside down and a consensus to be formed around a whole new reality.
Again, we also see this happening in the current debate over health care in Canada. The reality — as a columnist in yesterday’s Toronto
Star pointed out — is that health care costs as a percentage of Canada’s national output or Gross Domestic Product, "are now
marginally lower than they were a decade ago and remain comfortably below what the U.S. pays for a system that penalizes the poor."
But the idea that health care costs are spiraling out of control has now become embedded in the public psyche. So has the idea that the
retirement of the baby boomers will bankrupt the public pension system. And anyone who says otherwise, risks being dismissed as ignorant
and irrelevant.
Obviously we will have to spend more on public pensions as we have more and more older Canadians who are entitled to benefits.
But our economy will continue to grow, and the cost of these programs will not be out of line. In a 1998 report, the OECD said Canada
faces one of the highest projected expenditure growths among OECD countries as a result of population aging. But it also said that if
public spending on the old in Canada is to maintain its share of GDP as the population ages, economic growth over the next 40 years would
need to average just 1.05% a year. We should keep that in mind next time we hear about demographic time bombs.
The war between generations
Another favorite argument among the opponents of public pensions is the notion of a coming war between the generations.
Canada’s public pension plans are based on pay-as-you-go financing. Current taxpayers fund the cost of these programs through
their taxes or social security contributions. In effect, this is a transfer of resources from younger to older generations.
It’s an implicit contract between generations. Each generation contributes to the plan in the expectation that when they retire,
the succeeding generation will maintain contributions to pay for the pensions of its predecessors.
But when the population is aging, the size of the transfer must increase, because there are more older people in relation to the number
of younger people. The scaremongers predict this will lead to a war between the generations, unless public pensions are immediately
reduced or even eliminated. For instance, the Association of Canadian Pension Management (or ACPM) issued a report a couple of years ago
that claimed Canada’s pension system is threatened by the demographic time bomb.
This group represents managers of corporate and public sector pension plans. These are the people who act as consultants to the financial
community and who run the pension plans of large companies and big employers. They’re not exactly unbiased observers. But they claim
that Canada has been far too generous to seniors. In future they said, the availability of benefits such as OAS and GIS should be restrained
"as much as possible." They even recommended that eligibility for these programs should be based on a "broader means test"
that would take assets into account. Presumably, seniors who were living in mortgage-free houses could be denied income support.
But measures like this would encourage people to be more "self-reliant," the ACPM said. And much higher tax subsidies should
be directed to younger people so they can save for their own retirement. The business press dutifully sounded the alarm under the
headline "Study Warns of Age War Over Pensions." There’s nothing like scare tactics to grab headlines.
The threat of intergenerational warfare is a familiar one. It’s used by the advocates of privatization of public pensions around the world.
The basis of the argument is that older people are already taking "more than their fair share" of the national income.
Right-wing commentators in Canada and the United States have described seniors as "greedy geezers." They also complain that as the
percentage of older people increases, the share of national income going to the old will increase even further. Younger people increasingly
resent this — so the argument goes. They will not want to pay taxes to support a larger old population, so an "intergenerational
war" will break out.
People who think the CPP is not fair because it involves a transfer from the younger generation to the older, ought to be reminded that
intergenerational transfers occur throughout our society and not just in the pension system. Transfers are made from old to young as well
as from young to old. And they take place in the private as well as in the public sphere
We shouldn’t forget that seniors continue to pay taxes as they grow old. They pay income taxes, sales and excise taxes, GST, property
taxes and user fees. These taxes are used to fund programs such as OAS and GIS. In fact, some economists believe increased tax revenues
from a much bigger generation of seniors will cover most of the increased cost of seniors’ benefits like OAS and GIS. In other words,
there will be a transfer within the older generation instead of from younger to older people.
Younger Canadians might be asked to contribute more to the CPP to pay the pensions of the old, but we also need to recognize that older
Canadians paid - and continue to pay - taxes to finance the building of infrastructure, such as schools, hospitals, transportation, and so on.
They also pay taxes to fund the education of young people. They supported and actively participated in the war effort during the
Second World War. And they also bore the private costs of raising the baby boom generation.
The hidden agenda
But the specter of demographic time bombs and intergenerational warfare has sparked a push to make some radical changes in public
pensions around the world. The World Bank set out the issues it a landmark report on the so-called "aging crisis" published
in 1994. And it held up Chile as the perfect example of what needed to be done. Governments should replace their earnings-related public
pensions with mandatory savings schemes, said the Bank. Chile did it in 1981 under the Pinochet dictatorship when it wiped out public
pensions overnight without any public consultation. In a dictatorship you can do that, of course. Now everyone in Chile is forced to
contribute 10% of their earnings to mandatory, privately-run savings schemes - most of them run by American corporations.
There’s a hidden agenda at work here. It’s based on the view that governments should not do what markets can also do,
because markets do this better. That’s only what you might expect from the World Bank. But we also need to recognize that the
heavy emphasis on the role of mandatory private pensions rather than on public pensions is based on political rather than economic arguments.
The other part of the agenda, of course, is that if contributions now going into public pension schemes can be channeled to private
investment accounts instead, banks, financial institutions, brokers and other financial advisers can earn fees and commissions on the funds.
In the United States, for example, Wall Street firms are heavy contributors to the campaign to privatize Social Security that’s being
waged by several prominent right-wing think tanks.
Privatization as a solution
We have to ask this: If there really is a demographic time bomb waiting to explode, and if the countries of the western world face a crisis
of population aging, how would it help to get rid of public pension plans? How would replacing social insurance pension programs with mandatory
savings schemes help societies deal with the needs of an aging population?
The answer — at least in the minds of the privatization advocates — seems to be that by getting rid of public pensions, society would
no longer have to face the problem. That challenge would be placed squarely on the shoulders of individuals, who would then be expected to sink or swim.
Society would only pick up the pieces for the very poorest, through a minimal anti-poverty or social assistance program.
Switching to private individual accounts would relieve working age people of the "burden" of paying for the pensions of retirees.
Instead, their mandatory contributions would be directed to saving for their own pensions. And this - according to the advocates of
privatization - would eliminate the intergenerational inequity of a pay-as-you-go pension plan.
The mantle of economic respectability for privatization
The people who want to see privatization of public pensions have tried to prove it would make good economic sense.
They say it would increase national savings and bring a whole range of other economic benefits with it. Of course, this begs the question of
whether the objective of public pension programs is to promote economic growth or to provide for the well-being of future seniors.
And in any case, even the World Bank itself has admitted that there’s no real evidence that individual accounts increase savings —
they just think it ought to be so.
The privatizers also claim that young people would get a much better return if they invested their own contributions in an individual savings
account for themselves instead of contributing to a public pension program. Many young people have been attracted by this argument — especially
when stock markets were booming.
The privatizers don’t spend much time talking about whether people would be able to generate an adequate retirement income from individual
savings accounts. Of course, in a market-driven, individualized system, whether or not you got enough to live on in retirement would be entirely
up to you. The privatizers characterize this as "putting pension provision under individual control."
In keeping with their right wing approach, the advocates of privatization apparently see no virtue in the pooling of risks and acceptance of
collective responsibility which is the hallmark of public pension programs like the Canada Pension Plan and the U.S. Social Security.
Privatizing through individual savings accounts
In this dream world of a privatized retirement income system, there are a few problems we generally don’t hear much about.
- The high cost of individual accounts
For instance, we don’t hear about the enormous costs of individual savings accounts. When stock markets are booming, you might very
well get spectacular returns by directing your pension contributions to individual accounts instead of to the public pension plan.
But booming markets don’t go on for ever — as many people now know to their cost.
Even more important - the privatizers never mention how charges and commissions eat into those stock market returns. Investors in private
retirement savings schemes — including RRSPs - have to pay fees and commissions to financial institutions to manage their money.
They must pay commissions to brokers who trade the securities in their accounts, and commissions to the insurance companies that sell
them a pension at retirement, or the banks that handle their Registered Retirement Investment Funds. Then there are advertising and marketing costs
of the financial institutions selling the plans, which are also passed on to investors.
Even if privatization is limited to allowing people to opt out of a public pay-as-you-go plan rather than converting the plan to a system of
individual accounts, there would be significant cost increases. One study of the British system of opting out found that between 40% and 45% of
the value of individual accounts in the U.K. is consumed by various fees and costs. In contrast, the cost of running the CPP is about 1.3% of
contribution revenue.
- High transition costs of privatized schemes.
We don’t hear much about the cost of switching from our current system to a privatized savings scheme either — whether that’s
replacing the CPP with a system of individual savings accounts, or just allowing people to opt out if they want to. Either way, privatization
would involve high transition costs. That’s why studies show the British system is so costly — it’s because transition costs
have been included in the estimates.
Some way would have to be found to pay for the benefits promised to people who have contributed to the public pension plan in the expectation of
receiving pensions (and other benefits) at retirement. The generation of workers caught in the transition might have to go on contributing to the
public plan to pay the promised benefits to retirees, while at the same time allocating contributions to their own private savings plans.
The Reform Party, a few years ago, suggested people might be asked to give up their accumulated CPP benefits if they want to opt out.
For those who chose to stay in the CPP, Reform said the age of eligibility could be increased; disability coverage could be handled separately - possibly
by the provinces; future benefits could be income-tested; and people who chose to stay in the plan could be asked to pay more for their benefits.
- No pension guaranteed.
Of course, we also don’t hear much about the fact that under a system of individual accounts, there would be no promise of any particular
pension at retirement. An RRSP or personal savings scheme is not a pension. Unlike the CPP - which provides a pension that’s related
to your earnings and years of contributions - an RRSP can’t guarantee any particular amount at retirement. It’s simply a way of saving money,
with tax assistance from the government. Whatever amount you build up in an individual account or RRSP may eventually be used to purchase
a pension - assuming, of course, that you haven’t cashed in the RRSP and used the money for something else before you reach retirement age.
- No element of social insurance
An individual account or RRSP can’t provide the kind of security provided by the CPP, either - it is just a fund of money. The CPP, on
the other hand is a social insurance program, not just a retirement plan. It has disability benefits, survivor benefits, benefits for dependent
children, protection for mothers who drop out of the work force to raise children, and special measures to protect workers who are temporarily
unable to contribute because of illness, unemployment, enrolment in training and education, or other reasons. None of these are provided in an
RRSP or an individual pension account.
- Pensions depend on personal characteristics and investment expertise
In contrast, the kind of retirement pension you’d get under a privatized system would depend on your own personal characteristics and your
investment expertise — with a healthy dose of luck. People would end up with lower pensions if they had periods out of the work force because
they were ill or unemployed; if they had extended periods of further education and training; or if they took time out of the paid work force to raise
children. And if an individual were downsized or laid off at the age of 50, they might end up with no pension at all because they would have had to
use their retirement savings up long before they got to retirement age. Most of these situations are accommodated in the CPP without penalizing the
individual.
Under a system of individual accounts or opting out, people who made poor investment decisions would get lower pensions. They’d also get lower
pensions if the stock market dropped so that the rate of return on their investments was much lower than they had anticipated; or if interest rates
were low when they retired and used their funds to buy an annuity. In reality, there is no private sector equivalent to the CPP, because of the security
it provides.
Is the CPP in danger?
Is the CPP in danger? That’s hard to say. In the last round of changes, the federal and provincial finance ministers rejected calls
to abolish the CPP and replace it with a mandatory system of individual savings accounts. The federal government said that a key theme
that emerged from the 1996 consultations that led up to the changes, was "a strong desire to see the CPP remain a public pension plan
rather than privatized." And the government said "this desire cuts across all age groups and all income levels."
Alberta threatens to withdraw from the CPP
But there was a vocal minority involved in the public consultations, led by two of three participating taxpayer associations, which argued
in favour of privatization. And in the federal-provincial negotiations that followed, the Alberta government, led by its then Treasurer
Stockwell Day, tried unsuccessfully to convince the other finance ministers that some form of privatization of the CPP should be introduced.
Changes to the CPP require the consent of two-thirds of the provinces having two-thirds of the population, so Alberta would have had to
convince at least five other provinces, including Ontario, to have any hope of its proposals being adopted.
One of the key items Alberta wanted the finance ministers to consider during this review was an assessment of "the merits of turning the
retirement component of the CPP into mandatory, individual RRSP style accounts." Alberta didn’t give up. But in the next round of
discussions that ended in December 1999, Day failed again in his efforts to get the other finance ministers fired up about his privatization
proposals. He then issued a press release, claiming that while progress had been made on CPP reform "an Alberta solution is still possible.
" And once more, he raised the idea of directing some part of CPP contributions to individual retirement accounts.
Federal finance minister Paul Martin said Alberta’s proposals would be studied, but he didn’t make any commitment to take action - at
least not publicly. Day then threatened to take Alberta out of the CPP unless its proposals were adopted. He said Alberta had been looking at
the possibility of setting up its own pension plan if the reforms it had proposed for the CPP were not achieved.
Whether or not Alberta could actually withdraw from the CPP and set up its own plan, perhaps based on individual accounts, is another question.
For one thing, it would appear that the other provinces would have to agree to let Alberta go. And even if federal and provincial finance ministers could
get over that hurdle, there would still be the question of what portion of CPP costs Alberta would have to assume to make sure CPP participants were paid
the accumulated benefits they’d been promised.
The finance ministers hold their discussions about the CPP behind closed doors, so it’s not easy to find out what’s going on.
At this point, it’s not clear if Alberta is still pursuing its threat to take the province out of the CPP, now that Stockwell Day is no longer
leading the charge. But given the way Ralph Klein is now going about privatizing health care, there’s no telling what that province might do with
public pensions if it gets going.
The people who’d like to get rid of the CPP — or undermine it by letting people opt out and have their contributions directed to their own RRSPs
instead - are clearly following their own political and ideological agenda. It’s clear that by presenting the situation in terms of crisis and conflict,
they’re hoping to soften up the public to accept radical changes to the system. Exactly the same kind of thing is now going on with health care.
We should recognize these threats for what they are. They represent an attempt to justify reducing the role of government and eliminating collective
responsibility for our aging population under the guise of preventing intergenerational conflict. What’s more, many of those who would like to see the
CPP replaced with individual accounts have a thinly-disguised self-interest in the outcome of this debate. They would like to see the mandatory contributions
of workers and their employers directed to private financial markets where fees, commissions and other charges can be levied on them. The result would be to
reduce the portion of workers’ contributions that could be used to generate a pension.
Canada has already taken action to address the concerns raised by a pay-as-you-go pension plan in the face of population aging. The government has preserved
the CPP as a social insurance program — at least for the foreseeable future. If anyone feels the need for further action in the future, there are all
sorts of other options that could be used without resorting to privatization and individual accounts.
Canada’s retirement income system already has a reasonable balance of public and private arrangements and it has done a good job of reducing poverty
and inequality among seniors. If we are really concerned about protecting the financial security of future seniors and ensuring them an adequate income
in retirement, we must resist the attack on public pensions. Our retirement income system is worth fighting for.
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