The federal government is set to announce today a new method for Canadians to save and invest for their retirement. I am unsure about the details of this plan and I imagine that I could easily find something objectionable about it once I learn the details, but it is already clear that it is better than the alternative. There has been pressure on the government to increase CPP payments, and that would have certainly been a bad idea.
First of all the claim that the CPP is cheaper to manage than a private firm is at the very least exaggerated but could also be simply false. The claim is based on the administration costs of the CPPIB (Canadian Pension Plan Investment Board) versus the usual costs of a private investment firm. The problem is that the operational budget of the CPPIB does not cover all the costs that private firms face. These costs are carried by other government agencies (such as Revenue Canada), so the straight one on one comparison is false.
Secondly and more importantly, the proposed plan is another voluntary method rather than government mandated. Putting aside the morality of forcing people to invest in something that they don’t want to invest in, it disadvantages some individuals. In general it is a good thing for people to invest in retirement, but there can be pretty compelling reasons why that money is needed more immediately (or perhaps needed for another long term project such as a new business). By allowing the individual to choice we are allowing them to set their own priorities and not disadvantaging those that wish or need to do something else with that money.
Thirdly CPP is not the safe investment that its proponents claim. It has the same disadvantage of any defined benefits plan. It is possible if not likely that the liabilities will outstrip the contributions. At which point it becomes unlikely that younger investors will get their full return. Also it is subject to the whims of governments that might change the contribution levels or benefits at will.
Fourth and finally, the CPPIB is about at the end of its effectiveness as an investment manager. Neil Mohindra of the Fraser Institute released a study a few months back that looked at the literature on the diseconomies of scale for investment managers. The study demonstrated that there are several disadvantages to having a too large money pool. These disadvantages can be offset in limited ways by various practices but the CPPIB has already put these methods into place. The return of an enlarged investment into the CPP is very likely to be minuscule because the diseconomies of scale would be too great.
The government’s new plan would have to be pretty awful to be worse than the disadvantages I have just mentioned. So even if it is not perfect, and I am sure that it will not be, I am confident that it will be the better of the two policy options.