Wednesday, July 22, 2015

Pension Reform – Individualized Accounts Please

Pension reform, why? It seems to me we should be finding ways to encourage people to do. One of the biggest challenges facing our economy is that people are dependent on their savings to keep them, so they are very conservative in the way they invest; please see my blog entry Canada the Economic Stagnation Nation which points out that policy matters, good policy works and there is an absence of good policy in the creative deployment of capital.

The government is always on about pension reform, one should always be wary of an organization that has as their sole focus the collective interest, it is clear the government is wanting people to work longer – policy is moving that way, “retirement” age seems to be going up. Do you want to work longer? Now some are suggesting people save more of their earnings in the government system. The rationale, people are failing to save enough on their own – is seems a little odd that an organization that extorts as much of 65% of your earnings to sustain itself and spends the extorted funds with little or no real accountability, would be asking people to trust them with more of people’s money.

There are a number of challenges with pooling funds and government pensions systems. When you put money in the system, it is in the system, whether you die a day after you retire or 50 years after you retire, what you’ve put in the system stays in the system – so your kids never see a dime for your efforts related to your CPP contributions. There is merit in helping people save, the question is, “is mandatory participation in a pooled fund okay”, or even constitutional for that matter.

It makes a lot  more sense to individualize the system, that is to say, to provide everyone with an account and then set out the terms by which you can contribute to that account; in so doing, the government is permitted to offer incentives to save, but, in no way in pinches on personal choice or judgement. There is a wise saving level for an individual to save to over the course of a working life; the government can be generous in several ways to incent people to save to that level – rather than engaging draconian measures to force savings. Beyond that prescribed level, further savings should be discretionary: really, once a person is independent of government or has provided for sufficient income to sustain themselves; government has no role to play.  Presently, government policy is subsidizing saving exceeding necessity and complicating the tax system.

In the early 1980s the Swedish government instituted pension reform, they assigned accounts to individuals. A portion of the contribution was from employers, similar to CPP, and a portion from citizens. Each citizen was given an account in which to accumulate savings. The government provided a half dozen “portfolios” the people could choose from, one of which was the governments “standard basket” of investments used before transition; people were given the option to “self-direct” investments a well. The key in the Swedish model was choice, people treat their account in a similar way we do RRSPs, they had complete flexibility to save and there was a minimum prescribed contribution.

We all work to provide for ourselves, we also work to make a future for our families. By issuing accounts the government can track contributions and provision for intergenerational wealth transfer. Personal accounts also provide for direct incentives to generate saving to a minimum level. Personal accounts provide for a consolidation point of government related saving programs – RRSPs, tax free savings etc.. There is both better resolution for the individual and for government as well; resolution in terms of an individual’s utilization levels of all programs and perhaps most importantly, the saving level relative the citizen’s meeting minimum saving levels. 
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