Pensions Under Attack: Summary

Pensions Under Attack What’s behind the push to privatize public pensions Mo n ic aTow n so n Summary Why are public pensions be much better off in retirement than today’s generation of seniors. They will also pay an under attack? increasing share of the amounts collected by various levels of government in different Canada’s aging population has raised cries of kinds of taxes and user fees that will help pay alarm and panic from some quarters. Critics for services to the elderly such as pensions, warn of a “demographic time bomb” waiting health care and long-term care. In other words, to explode and an age war over pensions as higher total amounts paid in taxes by seniors the baby boom generation starts to retire in themselves will be able to finance a signifi- the next decade. Because the population is cant part of the cost of the programs that the aging, we are told, there will be fewer people older generation will require. of working age to support those who have retired and become “dependent.” Younger Recent Canadian studies have also demon- people will resent paying the cost of support- strated that, with relatively modest economic ing the growing older generation, so the ar- growth over the next few decades, Canada can gument goes. The answer, according to some “afford” its aging population – even taking people, is to get rid of public pension pro- into account increased public spending on grams like the Canada Pension Plan and force health care and pensions as the population people to contribute to their own personal ages. And the OECD says that if public spend- savings plans instead. ing on the old in Canada is to maintain its share of GDP as the population ages, the av- The fact is that public spending on income erage annual growth rate required between security for seniors in Canada is modest by 1980 and 2040 is only 1.05%. international standards and is expected to peak at levels well below those anticipated by So why the panic? What’s behind the attack other western counties in this century. Public on pensions? Who stands to gain if govern- pensions have reduced poverty and inequal- ments renege on their commitment to social ity among seniors in Canada. And while the security and public pensions, leaving the com- percentage of older people in the population ing generation of seniors to fend for them- is increasing, the percentage of young people selves? Is there a hidden agenda here? has been dropping. By 2031, when the so- called demographic time bomb is supposed The push for privatization as the to explode, Canada’s “total dependency ratio” - the ratio of the young and old “depend- answer to an aging population ants” to the population of working age - will still be lower than it was in 1951. If there really is a demographic time bomb waiting to explode, and if the countries of the In addition, as seniors form an increasing per- western world face a crisis of population ag- centage of the population, they will account ing, how would it help to get rid of public for an increasing percentage of all taxpayers. pension plans? How would replacing social The baby boomers have been described as insurance pension programs like the CPP with “the trillion dollar generation” and they will mandatory or even voluntary savings schemes help societies deal with the needs of of providing for the loss of income that indi- an aging population? There’s no clear answer viduals face when they retire or become disa- to this. bled. An investment portfolio or mutual fund can’t provide the additional benefits available The advocates of privatization of public pen- through the CPP such as inflation indexed sions do not say what would happen to the pensions, disability coverage, survivor ben- incomes of future seniors under a system of efits and benefits for the dependent children mandatory savings plans. of disabled or deceased contributors. They have argued that the public costs of an It is inevitable that as the elderly form a much aging population just cannot be sustained. higher percentage of the population, more of When the population is aging, they say, pay- the economy’s total resources will have to be as-you-go public pension plans such as the directed to them. Whether that’s done through CPP require unacceptable transfers from public pension plans or private savings makes younger generations to the old. Of course, little difference to the total amount of re- they don’t talk about other inter-generational sources that must be allocated to older peo- transfers – for example, the cost of education ple. Claims on national income by the elderly or the financial support families give their can only be reduced if their numbers are re- children - which represent transfers from older duced – perhaps through later retirement – or people to younger. their relative incomes can be reduced. No matter how pensions are financed – whether They claim public pensions plans like the CPP through pay-as-you-go public pension plans, are unfair to young people, who would get a general tax revenues, or fully funded private much better return if they contributed to an savings arrangements - they must be paid out individual savings account for themselves of current incomes. rather than to the public pension program. But this ignores the fact that individual savings But if the economy is growing and produc- accounts, which depend on individual invest- tivity is improving - as they almost certainly ment expertise and the vagaries of the stock will over the long term - increased claims on market don’t guarantee any pension at retire- the national income by retirees should not ment. Fees and commissions also reduce the result in a reduction of the claims of younger proportion of the individual’s contribution Canadians. that will actually generate a pension, as other countries that have tried this system have dis- Pinochet and the Chicago boys covered. privatize Chile’s pension system Under a system of individual savings accounts, people would end up with lower pen- Privatization of public pensions in Chile was sions if they had periods out of the work force implemented under the Pinochet dictatorship because they were ill or unemployed; if they in 1981, with the help of economists from the had extended periods of further education University of Chicago - known colloquially as and training; or if they took time out of the “the Chicago boys” - who pushed the Chil- paid work force to raise children. Most of these ean economy down the free enterprise road situations are accommodated in the CPP with- with deregulation, privatization of public in- out penalizing the individual. stitutions, and pro-market social and economic policies. Virtually overnight and with- The CPP is not a personal savings plan like a out any public consultation, Chile replaced its mutual fund or an investment portfolio. It is public pension plan with a forced savings a social insurance program that pools the risks scheme. It became the darling of right-wing governments and think tanks around the Margaret Thatcher in the mid-1980s. However, world and was held up by the World Bank as rather than replacing the public pension pro- a model for other governments to copy. In gram with a mandatory private savings Canada, for example, the former Reform Party scheme along the lines of the Chilean system, advocated the abolition of the CPP and its re- the Thatcher government, decided to allow placement with a mandatory savings scheme individuals to opt out of the public earnings- of “Super-RRSPs” based on the Chilean related system and from workplace pension model. plans, provided they could demonstrate they had an approved personal pension. But Chile’s system of mandatory private savings accounts can hardly be called a pension Personal pensions were individual savings scheme, since there is no pooling of risk, which plans, sold mainly by insurance companies is the fundamental characteristic of a true pen- and very similar to Canada’s RRSPs. Aggres- sion plan. The entire risk of providing for re- sive marketing by the insurance companies tirement is borne by individuals. Workers persuaded two million people to opt out of must contribute 10% of their monthly earn- the public earnings-related pension plan in ings into an account with a private investment favour of individual savings accounts, even fund to cover old age pensions, and an addi- though the pensions many of them will re- tional 3% of earnings to cover disability and ceive at retirement will be less than they survivor pension benefits. There is also a man- would have received under the public pen- datory health insurance premium of 7% of sion plan. People were also persuaded to opt earnings. In other words, total mandatory con- out of good defined benefit workplace pen- tributions to these private funds - most of sion plans in favour of inferior personal sav- which are run by foreign financial institutions ings accounts where no pension was guaran- - amount to 20% of earnings and there are no teed. The scandal that followed, euphemisti- matching employer contributions. cally known as “the mis-selling of personal pensions,” resulted in insurance companies Experts who have looked at Chile’s manda- being fined an estimated £11 billion or about tory private savings scheme have raised seri- $23.3 billion at current exchange rates. ous concerns about it, including the high cost of the scheme; the low coverage and the large Analysts note that the personal pensions that number of vulnerable workers who are ex- many individuals have chosen in place of the cluded; the inadequate benefits provided by public earnings-related plan, are based on the scheme; and the systemic bias against uncertain investment returns and are subject women.

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