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Government Pension Plans May Be More Reliable Than You Think

January 21, 2013 Leave a comment Go to comments

It’s become common to talk about how plans like Social Security in the US and OAS in Canada will not be available to people who are young now, because of the wave of baby boomers who are about to shift the balance. However like a good contrarian I have to point out a major oversight in this analysis.

The common criticism is right: these are a transfer from people who are working to people who are not, recalculated each year. In all their wisdom our politicians didn’t anticipate a change in the numbers on each side ahead of time (funnily enough they will threaten to jail corporate executives who fail to prepare like that). Or maybe they expected a lot of deportations. Who knows.

We can correctly assume that in 20 years there will be a larger number of people not working, supported by a smaller number of people who are working. That much is already written. But let’s go a bit further. Take someone who is 25 now. The standard retirement age will probably rise over time, so let’s say they start to collect government pensions at 75.

That means their government benefits will be supported by people who are 20 – 75 at the time, or in other words people who are up to 55 years younger than them. Given that they are 25 years old today, how many people will be 0 – 55 years younger than them? Er… good question! We’re not even half-way to being able to count that.

Changes in societal behavior or government policies could have a large impact in that time. All those people who want to ban birth control don’t hate women, they’re really just trying to improve the balance of retirement benefits! Another baby boom may be too much to hope for (plus it would be unsustainable for them) but it’s possible that those who are young now will retire as part of a more balanced demographic with sustainable government plans to support them.

This doesn’t apply to pension plans at specific employers since those are typically funded by a pool of investments and aren’t allowed to operate out of the current year’s revenues alone. That means a large group of retirees that get overpaid can drain the pension plan, possibly leading to bankruptcy of the employer.

Of course this is all assuming that governments are smart enough to cut benefits or raise taxes to maintain benefits and not take out debt that they can never repay. I’m not taking my chances. Once I’ve made my fortune I’m buying a private island and getting out while the doors are open!

  1. Joe
    January 21, 2013 at 5:43 pm

    I can totally understand their raising of the retirement age for entitlement programs, e.g. OAS. But if CPP goes up, it becomes a total scam. My employer and I each pay 4.95% and the self-employed pay 9.9% already!? It’s just nuts for a program that, as you analyzed on TF, doesn’t generate an impressive amount of post-retirement cash. I’m confident the program will be there, it’s just increasingly becoming absolute garbage.

    Now my defined benefit pension, on the other hand, makes me a lot more nervous.

    • January 21, 2013 at 6:22 pm

      The CPP is one of the few exceptions to this since it is well-managed apart from the legacy costs built into the structure. I think it’s more likely to see the CPP benefits raised to unsustainable levels than to see them reduced in any way over the next few decades. Now that I don’t contribute to it I’m free to vote for any changes to the CPP since someone else pays the cost 🙂

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