Planning on the Canada Pension Plan

[Flame Of Liberty]

Ottawa Citizen wrote:

CPP critics say it's unfair that younger plan members will pay the higher contribution rate for longer than baby boomers who are now nearing retirement. Some have suggested younger Canadians would be better off if they were allowed to opt out of the plan and redirect contributions to individual retirement accounts.


The more young people opt out of the plan, the less contributors will remain in the system. The less contributors, the higher contribution rates will be necessary. The higher contributions, the more young people will opt out of the plan. Rinse and repeat.

I wouldnt get too excited CPP will be alive and well by the time young generation will be ready to collect their payments.

[Cowperson]

Originally posted by Flame Of Liberty@Sep 28 2004, 08:28 AM
Ottawa Citizen wrote:

CPP critics say it's unfair that younger plan members will pay the higher contribution rate for longer than baby boomers who are now nearing retirement. Some have suggested younger Canadians would be better off if they were allowed to opt out of the plan and redirect contributions to individual retirement accounts.


The more young people opt out of the plan, the less contributors will remain in the system. The less contributors, the higher contribution rates will be necessary. The higher contributions, the more young people will opt out of the plan. Rinse and repeat.

I wouldnt get too excited CPP will be alive and well by the time young generation will be ready to collect their payments.

CPP is compulsory if you're working. The only way to opt out is to not work.

I agree with the criticism that it is unfair the younger crowd will be subsidizing the older crowd. The Boomer generation used their political clout to give themselves a lot of benefits in the 70's and 80's and when they couldn't pay the bill that's coming, the people behind them have had to pick up the tab.

Cowperson

[Flame Of Liberty]

Originally posted by Cowperson@Sep 28 2004, 03:00 PM
CPP is compulsory if you're working. The only way to opt out is to not work.

I agree with the criticism that it is unfair the younger crowd will be subsidizing the older crowd. The Boomer generation used their political clout to give themselves a lot of benefits in the 70's and 80's and when they couldn't pay the bill that's coming, the people behind them have had to pick up the tab.

Cowperson

The fact that CCP contributions are compulsory is the only reason why CPP is not dead and burried yet. Therefore, it is not because of some dubious `reforms`or `bold changes` the article boasts. This scheme would not survive without being enforced and therefore it is not preferred option how to take care of one`s retirement money. The minute people will be allowed to opt out, the system will fail.

There is not one pay-as-you-go pension scheme in the world that is not in big trouble. Post-socialist country as Slovakia changed its system towards 3 pillar system (one transitional to fund current pensioners only, one capital pillar for currently employed where everyone has its own account in a private retiremend fund to accumulate money and from this account he/she will get paid when retired; and one extra voluntary where you can save more if you want). Sooner or later Canada will be forced to do at least as much. Then you`d have at least some reason to say woohoo.

[Cowperson]

This scheme would not survive without being enforced and therefore it is not preferred option how to take care of one`s retirement money. The minute people will be allowed to opt out, the system will fail.

I agree. Human nature being what it is, that's entirely predictable.

I also am pretty confident that, from a practical point of view, about one-third of the population would not save much at all for retirement and would be largely penniless or working well into their seventies to try and make ends meet.

Also human nature. Also predictable.

Philosophically, this is an enforced way to ensure the average working person has at least some modest way to make ends meet, even if its borderline poverty. That way they're not a much larger burden on society later on.

As a Libertarian, of course, you would say that's their problem and not society's.

Cowperson

[Flame Of Liberty]

Originally posted by Cowperson@Sep 28 2004, 03:45 PM
I agree. Human nature being what it is, that's entirely predictable.

I also am pretty confident that, from a practical point of view, about one-third of the population would not save much at all for retirement and would be largely penniless or working well into their seventies to try and make ends meet.

Also human nature. Also predictable.

Philosophically, this is an enforced way to ensure the average working person has at least some modest way to make ends meet, even if its borderline poverty. That way they're not a much larger burden on society later on.

As a Libertarian, of course, you would say that's their problem and not society's.

Cowperson

That is far too simplistic point of view. People do not save much for their retirement because they know (or they think they know) that when they retire, they will get their pensions from governemnt. The incentive to save is not there for them, their time preferences are concerned with present, not with the future. The thinking is - if the state will take care of me, why would I bother to take care of me myself?

However, if they knew their pension will not be guaranteed, they would change their time preferences and will start saving. That is perfectly normal. If you know no one is going to pay for your summer holiday, and you want to have one, you will start saving.

If someone ignores all this and purposely will not save any money for their retirement, then thats too bad but it is not a reason I should be forced to pay their pension.

But then again, it is the role of charities to take care of people who aren`t able (this is debatable, but for the sake of argument) to save enough money themselves. This way, there will be more funds to take care of people who really need it, and these funds wont be wasted on people who were able to take care of themselves, but couldnt be bothered to do so.

[Cowperson]

However, if they knew their pension will not be guaranteed, they would change their time preferences and will start saving. That is perfectly normal.

No its not normal.

Saving for a summer vacation is about saving within a time horizon you can see.

Saving for your retirement is a 40 year time horizon and, as I said, about a third of the population would do little of that because its simply not in their nature to do so. They avoid. They procrastinate. They're human. You see it all the time.

People living on CPP and Old Age Security and little else is a fairly common scenario in Canada.

If someone ignores all this and purposely will not save any money for their retirement, then thats too bad but it is not a reason I should be forced to pay their pension

I think you misunderstand CPP.

By and large, the purpose of CPP is that people fund their own pension. If you haven't paid into the system, there is nothing there for you.

Old Age Security, a much smaller benefit, is funded by everyone.

Cowperson

[albertGQ]

Old Age Security, a much smaller benefit, is funded by everyone.

Question for anyone that knows the answer:

Is the amount one gets for OAS determined by need? Does everyone get it? Or do rich pensioners not qualify for it?

[Cowperson]

Originally posted by albertGQ@Sep 28 2004, 03:43 PM

Question for anyone that knows the answer:

Is the amount one gets for OAS determined by need? Does everyone get it? Or do rich pensioners not qualify for it?

The lower your income, the more likely you get a bigger chunk of OAS.

The clawback level, the point where you get zero OAS, is something like $55,000 in income I believe.

Cowperson

[albertGQ]

Originally posted by Cowperson+Sep 28 2004, 09:47 AM--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td>QUOTE (Cowperson @ Sep 28 2004, 09:47 AM)</td></tr><tr><td id='QUOTE'> <!--QuoteBegin-albertGQ@Sep 28 2004, 03:43 PM

Question for anyone that knows the answer:

Is the amount one gets for OAS determined by need? Does everyone get it? Or do rich pensioners not qualify for it?

The lower your income, the more likely you get a bigger chunk of OAS.

The clawback level, the point where you get zero OAS, is something like $55,000 in income I believe.

Cowperson [/b][/quote]
Thanks alot!!!

[Flame Of Liberty]

Originally posted by Cowperson@Sep 28 2004, 04:12 PM
However, if they knew their pension will not be guaranteed, they would change their time preferences and will start saving. That is perfectly normal.

No its not normal.

Saving for a summer vacation is about saving within a time horizon you can see.

Saving for your retirement is a 40 year time horizon and, as I said, about a third of the population would do little of that because its simply not in their nature to do so. They avoid. They procrastinate. They're human. You see it all the time.

People living on CPP and Old Age Security and little else is a fairly common scenario in Canada.

Okay, I did some digging through my papers and found one that answers your questions both a priori and empirically.

All quotes below from James Rolph Edwards: ECONOMICS, POLITICS, AND THE COMING COLLAPSE OF THE ELDERLY WELFARE STATE, Journal of Libertarian Studies Volume 17, no. 1 (Winter 2003), pp. 1–16

First off, some notes on the origins of welfare state and the human nature issue. Somehow survival is indeed part of human nature

Studies in the 1920s demonstrated that there was very little meaningful problem of elderly poverty and privation to be solved by a compulsory retirement program. With very few exceptions, the elderly simply kept working, retired on private savings or pensions (which were rapidly increasing in number and value), or were taken care of by family. Private charity was available for the two or three percent of the aged who fell through the cracks. Things were improving steadily, and the public at that time strongly opposed governmental creation of a compulsory social security system.

Then came the Great Depression, with massive unemployment and distress that lasted over a decade. In these desperate circumstances, the public accepted legal institutionalization of compulsory social security as a result of two brilliant, fraudulent appeals by its advocates, both in and out of the Roosevelt Administration. The first was that employers would be forced to pay half of the tax for workers. Since it was as true then as now that employees vastly outnumbered employers among voters, this promise of compulsory redistribution between employers and employees enormously increased public support for such a system. However, it was not true. Employee compensation is not economically arbitrary. Upper limits are set by the market value of worker’s marginal contributions to the output of the firm. The employer tax simply reduced labor demand over time until wage rates were enough lower than they otherwise would have been to offset the compulsory employer contributions. But appearances are deceiving, and employees still do not realize they are bearing the entire cost.

Notice, by the way, that it does not greatly matter for the ethical character of this brilliant and successful political strategy, whether the proponents of social security themselves understood the economics of tax incidence enough to realize that virtually the entire employer burden would be shifted to employees over time. The appeal Roosevelt and his supporters made was to base human motives: to the desire to obtain something for nothing, and to class envy and resentment of employers by workers, resentment that the progressive left had long cultivated. If, however, the initial proponents of compulsory social security really did understand the economic incidence of this type of tax (in contrast to it’s legal incidence), workers not only were appealed to on their baser instincts for support of the program, but were successfully lied to in the process.

[Flame Of Liberty]

Originally posted by Cowperson@Sep 28 2004, 04:12 PM
I think you misunderstand CPP.

By and large, the purpose of CPP is that people fund their own pension. If you haven't paid into the system, there is nothing there for you.

Old Age Security, a much smaller benefit, is funded by everyone.

It is not that easy, the key word is that the contributions are compulsory. What you put in has nothing to do with what you will get out of it when you retire. And even if some things I said dont necessarily apply to the CPP, they apply to Old Age Security, or as it is in the case of these quotes, to the US system too.


Social security is a compulsory, intergenerational income transfer in which successive generations participate on both ends of the income redistribution in sequence. It is not a retirement fund or insurance contract in which a contributor has a property right to promised benefits. Like all compulsory income transfers, it makes some people better off in the present only by making others worse off in the present, and is a negative sum game that makes us worse off in the aggregate, over our whole lifetimes, than we would otherwise be.

It may be that the worst effect of this compulsory intergenerational income transfer is the least known. People’s primary motive for saving is to provide for their retirement. Because Social Security provides “defined” benefits (independent of contributions), social security taxes and benefits have reduced the national saving rate, thereby lowering the national rates of capital formation, productivity, and real income growth over time, ceteris paribus. In stark contrast to the effect of private pensions, this tends to reduce the nation’s capacity to provide
for the retirement payments and consumption of the elderly. Simultaneously, the burden of retirement payments keeps rising. As birth rates keep falling and life spans rise, both the average age and the retired fraction of the population naturally increase while the working fraction tends to fall. Add to this the increasing temptation for politicians in successive elections to buy the votes of the elderly and near elderly by raising real benefit payments, and an eventual default
of the system—partial or total—becomes essentially inevitable.

[Flame Of Liberty]

Once again, reasoning why the system is bound to collapse and why it was invented in the first place.

In 1950, there were 17 workers per retiree. It is now three to one, and the boomers begin retiring around 2008. By 2030, if not before, there will only be two workers per retiree, and they will not be willing to be taxed for social security at the enormous rates necessary to provide the boomers with real benefit levels anything like those being enjoyed by the current generation of retirees. As early as 2015, the system will begin paying out more than it takes in, forcing it to sell bonds from the trust fund for money to cover the difference, and in a decade or two after that, the trust fund itself will be empty.

When Otto von Bismarck enacted the first compulsory social security system in the 1880s in Germany, he could have simply required people to save, and let private investment firms manage the money. But that would not have done his government any good. It was far better, as Bismarck himself made clear, to have them receiving checks from, and being dependent on, the government, to cement their loyalty to the state. The same ideologically statist reasoning, conscious or subconscious, motivated the administration of Franklin Roosevelt half a century later, and continues to motivate the defenders of government social security to this day.


And to sum it all up with a free market solution that has been tried and proved it is working, elderly people are not dying on the streets despite to what the left is telling you.

More than 40 different nations, including Great Britain, Chile, Italy, and Singapore have already privatized their social security systems to varying degrees. Chile began the trend, privatizing almost totally, and, consequently, has had the most spectacular success. Chile’s system was very similar to ours, but it reached its crisis sooner, as demographic changes caused the system’s outlays to exceed its revenues. In 1981, the Chilean government began allowing private companies to compete to manage the retirement savings of dependent workers, and allowing those workers to decide within wide limits how much to contribute. Also, a minimum pension guarantee was included to reduce risk from bad investments.21 Chilean workers had the option of staying in the old system, but 90 percent chose not to do so.

The Chileans scrapped trade barriers, privatized government-owned enterprises, and reduced the entire government sector by more than 50 percent. In combination with private management and investment of retirement funds, this increased their saving rate to 25 percent, and raised real economic growth to seven percent per year. As a result, pensions under the new system have been enormously higher in real terms—between 51 and 57 percent higher—than they were under the old system. This was accomplished with lower retirement tax rates.


In free market system, everyone, including pensioners is better off. Who woulda thought?

[Daradon]

Flame is right, because CPP is based on a pyramid scheme, it is doomed to collapse. At some point the top is going to get too heavy, too much of a burden, for the workers. The fact that the average age is growing by leaps and bounds is only going to compond this failure. I mean, a lot of these 65 year olds will live to be a century now with the medical technology we have. Unless they increase the age of when you can receive, making you work and therefore pay in longer, there's going to be big problems.

Making the younger crowd pay in more, is HARDLY a fix in my eyes. Sure it may have relieved the strain and helped save the system, but we're still not getting what we pay into it this way, we are just subsidizing others costs.

And 9.9 is a GROSS amount to pay. Besides, investing that 9.9 yourself would yield you far larger returns. I'm sure if you could invest even 6.0 of that you could make more for your retirement than the gov could and still have a cool 3.9 for spending.

It's a tax is all it is really. Though at least we can take solace in the fact that we are helping the older generation. I guess the fact that we agree with a certain level of 'social responsibilty' is one of the reasons why many of us live in Canada, though there are lots of debates recently about changing this. (Health care, etc.)

[Flame Of Liberty]

Too bad our resident democratic libertarian conspiracy theorist Lanny has got nothing to say on this topic...

[Cowperson]

Originally posted by Daradon@Sep 29 2004, 08:29 AM
Flame is right, because CPP is based on a pyramid scheme, it is doomed to collapse. At some point the top is going to get too heavy, too much of a burden, for the workers. The fact that the average age is growing by leaps and bounds is only going to compond this failure. I mean, a lot of these 65 year olds will live to be a century now with the medical technology we have. Unless they increase the age of when you can receive, making you work and therefore pay in longer, there's going to be big problems.

Making the younger crowd pay in more, is HARDLY a fix in my eyes. Sure it may have relieved the strain and helped save the system, but we're still not getting what we pay into it this way, we are just subsidizing others costs.

And 9.9 is a GROSS amount to pay. Besides, investing that 9.9 yourself would yield you far larger returns. I'm sure if you could invest even 6.0 of that you could make more for your retirement than the gov could and still have a cool 3.9 for spending.

It's a tax is all it is really. Though at least we can take solace in the fact that we are helping the older generation. I guess the fact that we agree with a certain level of 'social responsibilty' is one of the reasons why many of us live in Canada, though there are lots of debates recently about changing this. (Health care, etc.)

Actually, its logical to assume the boomers will die and the bubble of their demand on the system will eventually pass.

It's an issue of whether or not sufficient adjustments to CPP have been made to accomodate the bubble. Thirty to fifty years from now, the issue of CPP sustainability might be well in the rear-view mirror.

If I recall, there is some consideration being given to raising retirement age to 70 as one example.

The bigger challenge of the boomer bubble will be on the healthcare system.

Demographically, the USA and Canada are probably in a better position to meet the challenges of the welfare state than say, Europe. Canada's population will continue to increase through the next 50 years via our immigration policies. European populations are set to flatten and decline just as demands on their welfare systems will begin to accelerate.

I found this just surfing the issue. The reference to emerging third world economies looking at establishing welfare nets as their economies begin to generate surpluses is interesting and again, goes to philosophy and whether you agree with one argument or the other.

http://www.cwru.edu/pubaff/univcomm/authors/welfare.htm

It is not that easy, the key word is that the contributions are compulsory. What you put in has nothing to do with what you will get out of it when you retire.

I actually said that earlier, the highest contributors probably subsidize, to some extent, the lowest. In OAS, the wealthy definitely subsidize the poorest.

If you took a survey of Canadians, you would find most support that concept to some extent. What they don't like is waste in the system or people receiving benefits who don't need them.

Regarding the rest of your posts, it seems to me this is more of a philosophical argument versus one that can be demonstrated factually one way or the other.

Like a lot of Canadians, I'm kind of indifferent on the topic of CPP, neither planning for it nor really factoring it into the picture of retirement. So I'm not here to defend the principle behind it.

Cowperson