Pensions Under Attack What’s behind the push to privatize public 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 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 ra- tio” - 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 covered. privatize ’s pension system Under a system of individual savings ac- counts, 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 eco- nomic 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 sav- ings 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. Low-income workers can’t afford the to very high set-up and administration high contributions and many are in default. charges, often inappropriate sales tactics, and It has been estimated that for the average very low paid-up values if contributions into worker, fees, commissions and other charges the plans lapse prematurely. As well, the evi- consume well over one third of contributions. dence suggests that very few personal pen- By way of comparison, the cost of running the sions scheme members are likely to maintain CPP (before the recent reforms) is 1.8% of the their membership of the scheme for long contribution revenue. enough to build up an adequate pension. Margaret Thatcher brings opting It has been estimated that between 40 and 45% of the value of individual accounts in the UK out to Britain’s pension system is consumed by various fees and costs. Yet advocates of privatization of public pensions Privatization of public pensions in Britain was in Canada – including the Reform/Alliance implemented under the government of Party, and the province of Alberta - are now suggesting people be allowed to opt out of the 35 years, by which time the baby boom gen- CPP and have their mandatory contributions eration will have retired. The surplus, which directed to their RRSPs or some other type of currently stands at about US$124 billion, has personal savings scheme instead. been accumulating since 1983, when the So- cial Security payroll tax was increased. And it Does Social Security have a will help finance the baby boomers’ retire- ment, which is why the program will not have future in the U.S.? any trouble meeting its obligations when the boomers are retiring. In the United States, almost everyone ac- knowledges that Social Security has been an Nevertheless, there is now strong pressure to enormous success in providing the elderly, the privatize this public pension system. For ex- disabled, and survivors with a modest basic ample, George W. Bush, in his campaign for income. Two-thirds of retirees receive more the presidency, proposed allowing workers to than half their total income from Social Secu- divert part of their Social Security payroll tax rity. Without this program, the incomes of – possibly two percentage points - into their approximately 16 million people - about half own individual savings accounts. of all retirees – would fall below the official poverty thresholds. Until recently, no politi- It would appear that Bush’s plan – like all cian would dare say anything against Social similar privatization proposals – was based Security, so popular was the program. on the assumption high stock market returns will continue indefinitely. It appears no esti- But just lately, Social Security has been losing mates have been made about what percent- some of its lustre – thanks to a concerted ef- age of contributions to individual accounts fort by right-wing think tanks such as the would be consumed by fees and commissions. Heritage Foundation and the Cato Institute, Nor has the Bush plan taken into account tran- ably assisted by a compliant media that has sition costs involved in moving to the new swallowed their privatization message hook, system. According one estimate, Bush’s pri- line and sinker. The campaign has received vatization plan would cost something like generous funding from Wall Street firms US$900 billion over the first ten years. Transi- which stand to benefit if Social Security con- tion costs this high would result because the tributions are directed to private financial in- Social Security system would have to simul- stitutions. taneously pay out current benefits, while pri- vatization drained over 16% of the money The idea that Social Security is broke - or will coming into the system – assuming that two be bankrupt any day now - has become so percentage points of the current 12.4% contri- much a part of the conventional wisdom that bution rate would be diverted to the indi- almost no one even questions it. So effective vidual accounts. has the right-wing message been that one ex- pert says apocalyptic predictions about Social Not only would average Social Security ben- Security now represent the accepted opinion efits have to be cut relative to current law, but of the bulk of the American population. There workers would have to shoulder substantially are clear parallels with the attack on the CPP increased risk under individual accounts – a in Canada and with the widespread – but er- typical outcome when public pension pro- roneous – belief that the CPP is broke. grams are replaced with individual savings accounts, even when such privatization con- The reality, as it turns out, is that the Social sists of the kind of limited opting out that the Security Trust Fund is in surplus and is ex- Bush proposal envisages. pected to remain that way for at least the next Replacing the Canada Pension • Vulnerable workers may be pressured to opt out – as they were in Britain - even Plan with individual accounts though it would not be in their interests to do so. In Canada, advocates of privatization have • The high cost of individual accounts used tactics that are strikingly similar to the would reduce the proportion of contribu- kind of strategies being used by advocates of tions available to generate a pension, prob- privatization south of the border. The key to ably leaving individual without adequate getting radical changes adopted, of course, is pensions at retirement and therefore in- creating the crisis mentality. If people can be creasing the number of people who would convinced our public pension program is in have to rely on a minimum government crisis, they will be much more amendable to guarantee through OAS or GIS. making major changes. • Opting out could seriously undermine the viability of the public plan itself. Based on Corporate funded think tanks and right-wing the British experience, those most likely commentators have put forward a number of to opt out would be higher-income work- different schemes to privatize of the CPP by ers with secure jobs. If contributions from converting it to a system of mandatory indi- these workers were diverted to their pri- vidual savings accounts, or by allowing peo- vate individual savings accounts, contri- ple to opt out of the plan and have their man- bution revenues from those left in the plan datory contributions directed to their indi- might be inadequate to pay the promised vidual savings accounts. While initially most benefits. proposals seemed to favour the Chilean • Privatization through individual accounts model, in recent years, the British system of or opting out would introduce inequali- opting out seems to be the preferred option. ties. For example, Alberta’s proposal to withdraw “surplus” funds from the plan The Reform Party, in a 1998 booklet on pen- and allow individuals to invest them pri- sion reform, claimed that privatization based vately for their own benefit would also on individual accounts was working success- contravene the principle of pooling risks fully in other countries, including Chile, the through social insurance. UK and Australia. A closer look at those coun- • It would weaken public policy levers that tries reveals that is not the case. The Alberta can be used to redistribute income and government, under its then Treasurer reduce inequality. Recent Canadian stud- Stockwell Day, threatened to take Alberta out ies indicate the important contribution of the CPP unless federal and provincial fi- made by the public pension programs – nance ministers agreed to adopt several Al- and particularly the CPP – to reducing berta proposals, one of which was to allow poverty and inequality among seniors. individual to opt out of the plan and have Reducing the role of government to one some part of their contributions directed to of simply providing social assistance for their individual accounts. those most in need, while encouraging market place solutions for income security But opting out raises the same kinds of con- and maintenance, would likely lead to an cerns as complete abolition of the CPP increase in rates of poverty and income inequality among future generations of • There would be huge transition costs be- Canadian seniors. cause some way would have to be found • It would weaken support for the public to pay for the accumulated benefits of peo- pension plan. The more people who opt ple who chose to opt out of the plan. out of the public pension plan, the more collective responsibility and social solidar- Those who want to replace the CPP with a ity would be weakened. It might then be- system of individual savings accounts – come a simple matter to abandon the pub- whether that takes the form of mandatory lic earnings-related plan completely, forc- private savings plans or simply allowing peo- ing low-income workers to rely on means- ple to opt out of the CPP if they wish to – are tested benefits from the first tier of the clearly following their own political and ideo- pension system - always assuming they logical agenda. It’s clear that by presenting the can qualify. situation in terms of crisis and conflict, radi- cal solutions may be more likely to find pub- The bottom line on privatization lic acceptance. of public pensions in Canada We should recognize these threats for what they are. They represent an attempt to justify So far, policy makers in Canada have rejected reducing the role of government and elimi- calls to abolish the CPP and replace it with a nating collective responsibility for our aging mandatory system of individual savings ac- population under the guise of preventing counts. And Stockwell Day, as Treasurer of intergenerational conflict. Many of those who Alberta, was unable to convince the other fi- advocate privatization through individual nance ministers to agree to a limited form of accounts have a thinly-disguised self interest opting out of the public plan. Polls show in the outcome of this debate. They would like strong support for the continuance of the CPP to see the mandatory contributions of work- as a public pension plan. But there is no doubt ers and their employers directed to private fi- that pressure for privatization will continue. nancial markets where fees, commissions and other charges can be levied on them – reduc- Significantly, none of the advocates of priva- ing the portion of workers’ contributions that tization claims that it would ensure adequate can be used to generate a pension. incomes for the seniors of the future. In fact, even the World Bank admits that “mandatory Canada has already taken action to address savings schemes can still leave considerable the concerns raised by a pay-as-you-go pen- old age poverty.” Pensions generated from sion plan in the face of population aging. A such schemes may fall below subsistence lev- wide range of further acceptable options is els because of inflation or unexpectedly low available to policy makers, if necessary, with- returns. And low-income workers may never out resorting to privatization and individual accumulate enough in their pension accounts accounts. Canada’s retirement income system to support themselves in old age, the Bank already has a reasonable balance of public and notes. private arrangements and it has done a good job of reducing poverty and inequality among Advocates of individual accounts have tried seniors. If we are really concerned about pro- to coat their views with a veneer of economic tecting the financial security of future seniors respectability, but empirical studies suggest and ensuring them an adequate income in re- that choice of a pension regime in itself has tirement, we must resist the attack on public little impact on savings, investment or growth. pensions. Our retirement income system is However, it can change markedly the distri- worth fighting for. bution of income and wealth. Privatization of public pensions would jeopardize the ability of the state to reshape income inequalities in later life. Canadian Centre for Policy Alternatives Suite 410-75 Albert Street, Ottawa, ON K1P 5E7 www.policyalternatives.ca

CAW 567 OTTAWA