Ontario’s proposed pension plan is just a notion with major holes

Theglobeandmail.com
Jan. 19, 2016
By William Robson

The provincial government has released some specs. The contribution rate: Employers and employees together will put in 3.8 per cent of covered earnings. The retirement benefit: about 15 per cent of covered earnings. The Conference Board of Canada has released a cost-benefit report paid for by the Ontario Ministry of Finance. And the government has committed, again, to launching on Jan. 1, 2017.

Notwithstanding these announcements - and much advocacy pro and con - the government has published no numbers about the operation itself. How much savings would go in. What investment return it would earn. How much the ORPP would cost to run. The dollar value of benefits out. The basic business plan (there isn’t one).

That lack makes the commitment to launch the plan in less than a year - even scaled back to initially cover only large employers - look rash. It also feeds more fundamental doubts about the wisdom of the project. A financial model - contributions, investment returns, costs, payouts - is critical to judging whether a saving scheme can deliver what it promises.

That is not nit-picking. History is rife with financial swindles, insolvent employer-sponsored pensions and unsustainable social-security schemes. Too many savers dream of paying a little and getting a lot. And too many con artists, plan managers and politicians promise to fulfill that dream. Time and again, schemes have promised larger benefits, and paid their managers more, than contributions and investment returns could cover. They were Ponzi games - intergenerational scams - with early participants and managers making out like bandits, and later participants getting stuck with the bill.

Why might the ORPP’s numbers, if we could see them, reveal an unsustainable design? Returns on safe investments are currently very low: After inflation, long-term Government of Canada bonds, like most comparable-quality assets, yield less than 1 per cent. So backing a promise to pay a decent pension with suitably secure investments means making big contributions and waiting a long time. A government wanting votes in the next election doesn’t think that way.

The way to reel in impatient savers, as Charles Ponzi and his successors knew, is to promise net investment returns higher than safe assets can produce. We do not know - without numbers, we can’t be sure - that the ORPP will do that. But the Canada Pension Plan does publish such numbers, and since the ORPP is supposed to resemble it, we can work off those.

The CPP’s contribution rate is 9.9 per cent, and its retirement benefit is about 25 per cent, of the earnings it covers. The federal chief actuary’s projections show that working with real returns, after expenses, of 4.0 per cent annually. The ORPP’s 3.8 per cent contribution would be less than two-fifths its CPP counterpart, yet its 15-per-cent payout would be three-fifths its CPP counterpart - which implies net returns much higher than the CPP.

That comparison is too simple. The CPP’s contributions and investment returns cover more than just retirement benefits. But the CPP also spreads its $1.5-billion in annual operating and investment costs over almost 21 million contributors and beneficiaries - about $75 per person. The ORPP’s costs - which, especially during setup will be in the hundreds of millions - will loom much larger, per person, and compared to money collected. On balance, the conclusion stands: The ORPP will need returns higher than the CPP, and higher than assumed by such other major Ontario plans as Teachers and the Ontario Municipal Employees’ Retirement System.

Some cite the CPP Investment Board’s gains up to last year as evidence that higher returns will reliably happen. But as private-sector investment advisers must warn their clients, past performance does not guarantee future returns. Take risks to earn returns higher than safe assets pay and you might win - or, as lately, you might lose. Promises not backed by safe investments are hallmarks of Ponzi games, insolvent pensions and unsustainable social-security schemes. Because of government deficits and massive health-care commitments, younger Ontarians are already on the wrong end of huge intergenerational transfers. They do not need an ORPP that adds to the damage.

Even as a notion, the ORPP has holes. Not everyone sees a big retirement savings gap in Ontario. Some do, but think the ORPP will cover the wrong people. Others, including the Conference Board authors themselves, warn that the ORPP will reduce other retirement saving, offsetting much of what its designers are trying to do.

Alongside those objections is the starkest flaw of all. Less than a year before its scheduled launch, Ontarians do not know how the ORPP is supposed to work. How much in, costs, how much out - and, critically, whether returns on safe investments can support it, or whether it will be one more unsustainable scheme that ends up ripping off the young.

It should be no surprise if the ORPP’s new CEO announces shortly that it will not launch on time. But unless the government releases numbers showing how the ORPP will run, and fund its promises with low-risk investments, a better announcement would be that the ORPP will not launch at all. Without those numbers, the Ontario Retirement Pension Plan is, in fact, no plan at all.