I recently heard an interview by a CBC reporter with a worker who had recently gone back to work after a lengthy strike. The strike was largely about pensions and whether or not new hires would be entitled to pension benefits. The settlement approved by existing workers did not extend pension benefits to new workers.
In theory, a pension should be a zero sum contract. The company contributes, the worker contributes, benefits are insured with annuity contracts and the pensioner knows what he or she will get during retirement. The fund is usually augmented by workers who leave before pensionable age and forfeit the company’s contribution. However, this only works in theory. The employer rarely has the cash to make its portion of the contributions. They pay as they go and, largely, governments have allowed them to do this. With disastrous effect. When the company runs out of money pensioners are left high and dry. Nortel is a good example of how not to run pension programs.
Add to this the problem of longevity. 40 years back, the usual pensionable age was 65 and the average death age was about 72 to 75. Therefore, the pension account was burdened to pay the pensioner for, at best, 10 years. As people lived longer the pension accounts ran out and employers were put to augmenting the fund to pay pensioners who, in some cases, were retired longer than they had worked for the employer. The only agency that can get away with that is the government who funds retirement benefit out of current taxation. The charge on automobiles made by the “big three” that represented pension benefits was about $3,500 per auto. This made US and Canadian made autos largely either non-competitive or money losers. This problem got “solved” when GM went bankrupt (thereby cancelling all of its future pension obligations) or negotiated with the unions (Ford and Chrysler) to call off pension programs for new hires. What took its place in many contracts was a savings plan—that is the company would make payments to a savings plan and the employee would make payments to a savings plan but there was no guarantee or fixed benefit to the employee. This is what was being offered by Japanese and Korean automakers in the US and Canada and this has become the industry standard. In some other companies there is no pension benefit of whatever kind offered. Workers will have to rely on RRSPs in Canada and IRAs in the US as their main source of retirement income.
This will have profound effect on the next generation of workers. The savings rate in North America is very low. Workers have not gotten a significant wage increase—beyond inflation—for many years. Workers are falling behind and there is good evidence that even modest savings can survive the financial impact of the expenses of a growing family. That means that, other than government workers, the future looks very bleak. Take that together with people living longer and the future looks even bleaker. Giving workers the opportunity to save larger sums of money in a tax-sheltered account makes the mistaken assumption that those workers have money to save. Paying workers more for the same work makes domestic goods less affordable and exported goods less competitive.
There are political forces both in Canada and the United States that call for governments to be less involved in the affairs of the nation. Both of these are conservative movements that have the blessing of the 2% of the population that don’t have to worry about retirement. The Scandinavian countries have solved this problem—to a large extent—through high taxation in return for significant benefits over the taxpayer’s life. These include healthcare, education and, yes, retirement. A Dane or Swede can retire comfortably because he paid into the system over his or her lifetime and is now reaping the benefit. Because 100% of the electorate is funding the pension obligation those who die early, leave the country or otherwise don’t make a claim on the fund provide a cushion for those who do. It works.
There are two camps of political and social theorists. One holds that the market is pure and impartial when it judges human economic behavior thereby optimizing the most efficient course of action. While, in theory, that may be true, the other camp holds that in practice the market is severely imperfect and government intervention is needed to hedge these imperfections. At the present time the free market theorists seem to be at the helm—at least in Canada—and knocking at the door in the US. What has resulted in the US is a serious disconnect between those who have sufficient funds for retirement and those who have no way to obtain them. Add to this the fact that, in the US, the home was the major store of value. Homes in the US have fallen in value and this will contribute to a lack of capital for retirement. So, the poor will get poorer at the expense of those who don’t pay their share. Social security in the United States is in serious trouble because no one wants to increase contributions and no one wants to die young. In Canada CPP and other assistance programs provide only subsistence support. There is a need, in both countries, to look at a long term solution to these problems and there appears to be few is any politicians who will lead the way.
Bernie.
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