Pension Reform in Canada

[Riverwind]

Riverwind, please don't get on this "small cartel is controlling world capital markets" hobby horse again.

How is it any different from your "any investment fund in the hands of a government is communist" hobby horse?

World capital markets are extremely competitive and it defies belief that any cartel could function for more than a few instants in the mind of even the most conspiracy-suspicious person. Markets are designed for the little guy and that explains in part why the market system is so successful.

Then why are you worried about pools of capital in the hands of bureaucrats?

[August1991]

Riverwind, the capitalist system has been more successful than any socialist system. Why? Ultimately it's because economic decisions are diversified under capitalism. In socialism, these decisions are concentrated in the hands of so-called "professional" experts answerable to a "democratic parliament". Such socialist schemes work for awhile but they don't work in the long run.

Wall Street and Lombard Street have worked longer and more successfully than Gosplan ever did. This didn't happen by chance.

[M.Dancer]

If bureaucrats aren't making the investment decisions, who, please tell me, is?

I'll wager that you don't know. But I'll also wager that you know where your other savings are and who is managing them.

If you mean personally, know I don't know them....but they are professional financial analysts and money managers.... the same as you would find in any investment firm. As far as my other investments go....I don't know them either. I had a broker for awhile but after a string of calls offering me opportunities on the TSX-V (I didn't take) that didn't pan out....I let him go and closed my account.

As for where my other savings are, I know what they are invested in and specifically what companies for the most part. Most of that info is available in either the prospectus or the AR.

Trust me, when dealing with assets of billions, they are going to let a swivel servant throw darts...

[August1991]

If you mean personally, know I don't know them....but they are professional financial analysts and money managers.... the same as you would find in any investment firm.

But the managers of a public plan have far more power, and you have no control over what they do.

Here's what happens when you concentrate such power in the hands of a few bureaucrats:

The head of the massive Caisse de dépôt et placement du Québec has been called to appear before the National Assembly's public finance committee - the date is tentatively set for next week - to explain the depth of the $237-billion provincial pension fund manager's entanglement in the non-bank asset-backed commercial paper crisis.

The Caisse has repeatedly refused to comment on reports - by now so common that almost no one doubts their veracity - that it stands to lose more than any other Canadian institution in the $33-billion non-bank ABCP meltdown. Its holdings of the now-illiquid paper stand at between $13.6-billion and $17.5-billion, according to Quebec reports.

National Bank of Canada has just written down the value of its non-bank ABCP holdings by a quarter.

Financially and politically, the non-bank ABCP "affair" is shaping up to be the most damaging in a long history of Caisse affairs - from Provigo to Vidéotron. Certainly, it could be the most costly.

G & M

It is also unremarkable that the Caisse - as any good bureaucracy would do - has yet to state its exposure.

[no queenslave]

The CPP accomplishes two worthy goals:

1) It gives Canadians a chance to participate in a defined benefit plan (something most would never be able to do).

2) It forces Canadians to save some money for retirement (something many would not do if CPP was optional).

2) is important because the political realities mean the government will have to spend money on a 'senior welfare program' to support people who fail to save on their own. A compulsory savings program like the CPP reduces the need for this 'senior welfare program'.

You don't trust bureaucrats managing large pools of capital. I don't trust large pools of capital in the hands of a relatively small number of super rich people. I don't see that as an argument for ending either of them.

It does not give them a chance ; it is not optional . If it was a chance then it would be optional..

[msj]

It does not give them a chance ; it is not optional . If it was a chance then it would be optional..

If a person really didn't want to pay into CPP then he/she can arrange his/her affairs not to.

Try self-employment within a corporation and take dividends instead of wages - no CPP.

Set up a proper profit sharing plan within a corporation - no CPP.

Set up a company in BC or NS with certain share structures and with the use of a trust and realize capital gains (this one is very aggressive) - no CPP.

There are ways to not pay if someone is smart enough or dumb enough to not want to.

[August1991]

Try self-employment within a corporation and take dividends instead of wages - no CPP.

Set up a proper profit sharing plan within a corporation - no CPP.

Set up a company in BC or NS with certain share structures and with the use of a trust and realize capital gains (this one is very aggressive) - no CPP.

There are ways to not pay if someone is smart enough or dumb enough to not want to.

If you tried any of these routes, your salaried income would be limited (about $3500/annually) and hence your RRSP contributions would be severely limited too.

The desire to limit your CPP contributions only occurs if you've maxed out your potential benefits from previous contributions. Keep in mind that, from an individual's standpoint, both the employer and employee contribute and all contributions are income tax deductible. I'm not certain that with these advantages, you would do better outside of the CPP.

While the CPP imposes costs on Canadian society overall, as an individual, it would be difficult to capture any of those costs. They're a deadweight.

[msj]

If you tried any of these routes, your salaried income would be limited (about $3500/annually) and hence your RRSP contributions would be severely limited too.

The desire to limit your CPP contributions only occurs if you've maxed out your potential benefits from previous contributions. Keep in mind that, from an individual's standpoint, both the employer and employee contribute and all contributions are income tax deductible. I'm not certain that with these advantages, you would do better outside of the CPP.

While the CPP imposes costs on Canadian society overall, as an individual, it would be difficult to capture any of those costs. They're a deadweight.

RRSP's defer taxes. So do small business corporations.

One can defer taxes within a small business corporation and then sell the shares at retirement - and get $750,000 of the capital gain tax free with any excess gain taxed at a low rate (i.e. as capital gains).

A couple could take $60,000+ out of a company and pay no personal taxes while the company pays 16% tax.

Is that worth saving CPP? Depends on the circumstances - I have done analyzes for some clients and the answer is yes and for other people the answer is no - even when there is no chance of any sale of shares (which is rare).

Few people are smart enough and even when they are most aren't lucky enough.

One more thing - CPP contributions are not entirely income tax deductible. The employer's portion is deductible while the employee's portion is a tax credit. Whether you are an employee of your own corporation, a regular employee, or a proprietor this is the way it works.

[msj]

But the managers of a public plan have far more power, and you have no control over what they do.

Here's what happens when you concentrate such power in the hands of a few bureaucrats:G & M

It is also unremarkable that the Caisse - as any good bureaucracy would do - has yet to state its exposure.

It seems to me that Bear Stearns wasn't exactly forthcoming with the fact that they had hedge funds that went broke recently.

Then there is LTC (Long Term Capital) and how about HSBC Holdings PLC pumping $35 billion into two troubled funds just yesterday.

Of course, we could cherry pick examples of any bureaucratic organization (whether public or private) to demonstrate any point we want to prove.

The one thing I do know, however, is that privately owned investment banks have been fighting the new accounting rule SFAS 157 in the US for a while now (at least a year - given that the rule was originally going to be adopted last year but they succeeded in pushing it off to this year) so as to not disclose what is known as "level 3 assets."

Those level 3 assets are related to valuing CDO's, ABCP's , etc that the Caisse was so reluctant to discuss. No surprise that US banks/investment funds are as reluctant to talk this than Canadian or European ones.

So, are you going to complain about the "concentration of power" in the hands of a few big, private, investment banks in the US?

[August1991]

It seems to me that Bear Stearns wasn't exactly forthcoming with the fact that they had hedge funds that went broke recently.

Then there is LTC (Long Term Capital) and how about HSBC Holdings PLC pumping $35 billion into two troubled funds just yesterday.

Of course, we could cherry pick examples of any bureaucratic organization (whether public or private) to demonstrate any point we want to prove.

Bear Stearns was one organization of many. People chose voluntarily to give their money to Bear Stearns. If you don't want to, you can save it somewhere else (probably at a lower rate of return). When people a car or a house, they devote a lot of effort to deciding what product is appropriate. Why should savings be any different?

In the case of the CPPIB or the Caisse, I have no choice because the government forces me to make a pension contribution. (And let's be honest, CPP/RRQ contributions are a tax in all but name.)

The Canada Pension Plan Investment Board says it's disappointed that New Zealand has blocked its $1.4 billion bid to buy a 40 per cent stake in Auckland International Airport.

Mark Wiseman, senior vice-president of private investments for the CPP unit, which invests some of the assets for future Canada Pension payments, said the rejection was disappointing and surprising but won't be appealed.

Toronto Star

This is good news. Government bureaucrats (ie. people working for the CPPIB) cannot pick winners and shouldn't try. Politicians should keep them on a tight rein. (The Caisse is now facing an embarrassing situation in the ABCP market and it's only the tip of the iceberg. In the wisdom of Caisse bureaucrats, it invested heavily in real estate. Real estate is the elephant graveyard of too many naive investors who start to see big.)

Anyway, stoping this purchase will be an easy political sell for the Tories. Most Canadians will be curious to know why their pension savings are being invested in New Zealand airports.

RRSP's defer taxes. So do small business corporations.

One can defer taxes within a small business corporation and then sell the shares at retirement - and get $750,000 of the capital gain tax free with any excess gain taxed at a low rate (i.e. as capital gains).

A couple could take $60,000+ out of a company and pay no personal taxes while the company pays 16% tax.

A small business is extremely risky. Anybody who makes a profit running a small business deserves to be taxed at a (capital gains rate) lower. Not many people will take all their life savings and put it into a business.

RRSPs are different. First of all, they avoid double taxation. (Unsheltered savings are taxed when you save and then taxed when you take them out.) Second, unlike a small business, RRSPs need not be risky.

Edited April 11, 2008 by August1991