A debate over CPP? If only

Good news, Canadians! We’ve been spared a “debate” over pensions. What a relief! God forbid we should ever consider two sides of any question, least of all pensions, a narrow, divisive issue that only matters to everyone. These glad tidings come to us from the Globe and Mail’s John Ibbitson. Where the Americans are now embarked on a vigorous national debate over how to reform Social Security, the equivalent of our Canada Pension Plan, in this country the whole thing was sewn up in a weekend. Thanks to “far-sighted actions by Canada’s finance ministers,” CPP taxes were quickly and discreetly jacked up by 70 per cent, a multi-billion dollar raid on the pocketbook that, according to John, “Canadian business and Canadian workers accepted.” Well of course they did. After all, we wouldn’t want to have a debate, would we? Or maybe we would. If we had, we might have avoided committing ourselves to what is shaping up to be a major policy disaster. By contrast, the debate George Bush has launched holds the promise of transforming, not only America’s pensions, but its society. In some ways, the most contentious part of Mr. Bush’s plan, allowing workers to divert a portion of the payroll taxes they now pay into Social Security into their own retirement savings accounts, is the least important. In some ways, it is the most important. It won’t do much, that is, to address the program’s most pressing challenge, its enormous unfunded liability -- the difference between projected revenues and promised benefits. But unfunded liabilities are not the worst problem that can afflict a public pension plan. So let’s leave Mr. Bush’s proposal aside for the moment. The issue confronting Social Security is broadly the same as that with which our own far-sighted finance ministers had to contend: demographic changes that threaten to overwhelm a system designed for another era. That system is known as “pay-as-you-go” -- today’s workers pay for today’s pensioners. That’s fine when there are 16 workers for every pensioner, as there was at Social Security’s founding. It doesn’t work so well when, as now, the ratio has dropped to three-to-one, on the way to two. No, that doesn’t mean Social Security is about to “go bankrupt,” as Mr. Bush claims. But the President is only taking the Democrats at their word: the party breezily assures the public that, even though Social Security benefits will start to exceed revenues in 2018, the plan can carry on for another 30 or 40 years by drawing down its “trust fund,” i.e. the plan’s accumulated annual surpluses. Logically, when the fund is depleted, that should mean the plan is bankrupt. It doesn’t, but only because the fund is largely a fiction. The surpluses are long gone: the US government took them and spent them. In return, it gave the plan little IOUs called government bonds. The “trust fund” is composed of promises the government has made to pay itself -- with interest! To repay those IOUs, the government will have to scrounge for funds, eventually to the tune of hundreds of billions of dollars a year. There are only four ways it can raise the money: increase taxes, reduce benefits, cut spending elsewhere in the budget, or borrow more. Well, there is one other way: by investing today’s surpluses in real assets, equities for example, and letting the magic of compound interest do its work. But that still means generating the surplus funds to invest, which means some combination of those first four unpleasant options. So some sort of forced savings plan would be in order, quite apart from Mr. Bush's proposal to let individuals invest these savings on their own account. But the Bush plan has its advantages, which younger workers have been quick to grasp: not only would would they not have to depend on the willingness of future generations to support them in their old age, but neither could some future government confiscate their savings for its own use. Indeed, pensioners could pass these nest eggs on to their children. The advantage to society is even greater. At a stroke, Mr. Bush would create a nation of shareholders. No longer would there be a divide between labour and capital: every worker would also be a capitalist. Marx could only dream -- worker control of the means of production, at last! The downside: What if workers make lousy capitalists? What if they blow it? Mr. Bush has an answer: not only could workers stick with the old plan, if they chose, but even the “private” accounts would be restricted to a handful of tightly regulated investment plans. As workers aged, the mix of safe and risky investments in their portfolio would adjust, so as not to leave anyone too exposed late in life. And backstopping the individual accounts would be a guaranteed, albeit modest supplement. But the real answer is: What if the government blows it? Compare the Canadian version of reform. The whole Canada Pension Plan is invested in a single government-owned fund -- and almost entirely in one country. To that systemic risk, add the much larger political risk. How long can it be before some enterprising politician, staring hungrily at the CPP’s billions, starts to wonder out loud: Why don’t we put those savings to greater use? Why aren’t they invested in small businesses, or in depressed regions? Why isn’t a greater proportion going to green technologies, or firms owned by women, or minorities? Experience teaches that wherever and whenever such large pots of money are left in government hands, they are abused. It needn’t have been this way. Once upon a time, the Reform party put forward a plan for reform of the CPP on lines broadly similar to Mr. Bush’s. But that was when conservatives were still interested in ideas. That was when Canadians were still permitted a debate.