Wednesday, November 20, 2013

Leave the playing to the playas

Canada and the US (I assume much of the developed world is the same but I don't know for sure) have a problem with pensions.  We currently operate under a system where there is a patchwork of different systems in place to support elderly people who can no longer reasonably work and those systems are starting to burst at the seams.  The news is full of articles on Detroit and Chicago which are having massive problems with paying for pensions for their workers but all kinds of cities, states, and provinces are feeling the same crunch as the obligation to pay people for thirty years after they have retired adds up.

There are many ways to tackle this.  One obvious one is to move to defined contribution instead of defined benefit as a model.  Each year the employee works the employer puts a fixed amount of money away instead of guaranteeing money for life.  This avoids employers sinking themselves by kicking payments down the road to make things work now.  If employers actually have to have the money on hand they can't make promises that won't be kept and this is good for both sides since a default is a disaster for everyone and that doesn't happen under defined contribution.

The trouble with that change though is it continues to assume that the standard model for taking care of the elderly revolves around playing the stock market.  I think this is a fundamentally flawed assumption because I see little to no benefit in having average citizens *with no applicable knowledge or expertise* trying their hand at investing.  All this accomplishes is the creation of a gigantic industry including banks and investment firms that is devoted to taking a percentage of those investments for no return.  Of course people who want to invest can and should be able to do so but the the government plan for taking care of the elderly should not rest on the assumption that nearly everyone will do so.  Investing is a fine thing for investors and is just a parasite on normal people.

A standard model that I am much more comfortable with would be one where the government supplies a much larger base amount to those over retirement age.  This of course has to be paid for some way and I would pay for it by increasing income tax on those from lower middle class on up with of course the largest increases coming from the top.  The idea is simple - instead of assuming that average people will invest large sums into the stock market we tax those sums and distribute it to the elderly instead.  Cut out the waste in the middle and get rid of the randomness of the market in determining how people live in their later years.  Leave worrying about a market crash to the economists and the big investors rather than people who just want to know if they will be able to eat when they get old.

Simply put I think that the market as a standard vehicle for preparing for one's later years is a mess.  It should be available to those who wish to use it but it shouldn't be considered a necessity for anyone.  Get the market out of the equation and increase base government stipends and huge gold plated pensions won't be necessary much less a crippling load on those cities that planned poorly.


  1. This is the most left-leaning I've heard you in awhile.

  2. So, the reason for moving to defined contributions (DC) instead of defined benefit (DB) plans is because people no longer stay at the same company their entire lives, and DB plans base your payout increases non-linearly with the number of years you've been working there. DC plans are more linear and more amenable to being moved around from one company to another. For both types of plans money gets put aside by the company - pension actuaries calculate exactly how much needs to get put aside and invested so that the plan will be able to pay people out once they retire. Problems arise because the amount set aside is invested rather than just being stuffed in a mattress somewhere. Also, I think the company owns the pension fund, so it is on their books as an asset, so if the company goes under the pension fund may wind up paying off investors rather than pensioners. Although I may be wrong about that. I just remember there being huge issues when Polaroid went under and their pension fund went away...or maybe it was that the former employees were still covered under Polaroid's health insurance which went away.

    I'm not sure how government pensions work, but I think OAS and CPP are paid out of taxes rather than out of some stash of money sitting around somewhere. This means that the current workers are paying the current retirees pensions and assuming that once they're old there will be other workers who will pay taxes that will pay their pensions. This system originally came into place following one of the wars when there was a budget surplus, and obviously fails if you've got a demographic bubble where suddenly there are more people being paid out and for longer periods of time. I have no idea how pensions work for government employees, but I'd assume they are more along the lines of how private companies pensions work.

    I like the idea of getting rid of private pensions entirely and having the government run pensions - DC plans where your company could offer a benefit of matching your contributions. Of course then the government is going to have a new pot of money to play with which may or may not be a good idea...and it would give the pension actuaries headaches...

  3. @Mom

    Government interference is often a mess but in this case we have two options for government interference: RRSPs / investments / pensions and a universal stipend. One of these funnels money through parasitic investment companies and supports those who least need supporting as well as being very complicated and confusing to normal folks. The other makes sure that everyone has a livable income when they can't provide for themselves and is very simple. The choice, to me, seems clear and has has little to do with right or left wing.