It’s an axiom of politics that the short term often wins out over the long-term interests of citizens.
Much as a politician might be far-sighted and want to enact decent policy that takes generational issues and fairness into account, it’s tough to ignore immediate pressure to please the current crop of voters or the cohort most likely to show up in the voting booth. That this has had critical and negative consequences is not always appreciated.
For example, consider retirement savings of the government-sponsored and collected variety. The earliest contributors to the Canada Pension Plan (CPP) made out quite nicely in terms of the ratio of their contribution vis-a-vis pension payouts. Those born in 1930 saw a real return on their cash of 9.4% annually. In other words, had they invested such money, they would have needed a 9.4% return each year to reap what they eventually did from their CPP contributions. Similarly, those born in 1940 will net a real return of 6.3% on their money.
But the return on the CPP turns south the later one is born. The payback for those born in:
- 1950 and soon to retire: 4.2%;
- 1960: 3%;
- 1970: 2.4%;
- 1980, 1990 and 2000: 2.3%.
(All figures are derived from the 18th and 25th actuarial reports on the CPP.)
The early, high rates of return are not because CPP contributions were somehow invested in a manner to make Warren Buffett look like a rank amateur. And this doesn’t support the case made by some that the CPP payroll tax should double because it’s a great investment vehicle. The low contribution rates for the pre-baby boom generation had everything to do with demographics. The federal and provincial governments kept CPP contributions artificially low for decades because there was a plethora of young workers to finance the pensions of relatively few seniors then in retirement or soon heading into retirement, say in the 1960s, 1970s or 1980s. Think of the CPP as a partial Ponzi scheme: those in first did great; those who came later, not so much.
The demographics explain why combined employer-employee payments to the CPP were only 3.6% until 1986. After that, premiums began to rise slowly, with a sharper increase after 1997 reforms, where they were increased every year to hit 9.9% of a paycheque in 2003 (employer and employee combined), where they currently sit.
At some point, reality had to be accounted for, and it was.
The 1997 reforms were supposed to address both the unfunded liability in the CPP and partially address the generational imbalance. In that sense, the reforms succeeded, as the later contributors at one point could look forward to a negative real rate of return. But other possibilities, such as perhaps how the Ponzi-like start to the CPP might be modified by a raise in the retirement age, were never seriously considered.
But that option was dead upon proposal. (I know, because I made it in 1997 and in 2003 in two separate submissions to the federal government.) The seniors’ lobby was simply too strong, even though the unfairness of the funding scheme over the decades was plain to see.
Later contributors to the CPP were thus forced to pay not only for their future pensions, but also for the generation that didn’t pay enough into the plan to warrant the outsized early returns.
One usual response to the call for a higher retirement age is the I-paid-for-your-education-so-you-owe-me-a-richer-pension retort. But the problem with that assertion should be obvious: every generation must pay for the education of the young – it’s not as if a six-year-old can pay for his or her schooling. But not every generation built up pension liabilities, federal and provincial debts and health-care liabilities. Today’s crop of taxpayers must pay for all that, and the lack of higher and earlier forced savings via the CPP.
The federal and provincial governments’ pre-Christmas agreement to require employers to participate in a new Pooled Retirement Pension Plan (PRPP) is recognition that each generation should, as much as possible, fund its own retirement. (An obvious exception is the cohort of low-income Canadians; they have limited means and thus have their pensions topped up through other government retirement benefits.) Such a proposal is far-sighted and superior to hiking CPP premiums in a program that was never generationally fair to later contributors.