An unsustainable pension plan

The Ontario Retirement Pension Plan (ORPP) looks like a bad, outdated idea. But it’s a lot worse than that. It’s a reactionary and economically illiterate attempt to solve the modern pension crisis, in which some people have been promised more than there is, by promising everyone more than there is.

Superficially the ORPP is a provincial knockoff of the Canada Pension Plan (CPP), built on the exploded notion that the government can give you something for nothing, in this case by managing your retirement savings better than you could.

It can’t. If the state forces people to save more for retirement, it leaves them less to pay down high-cost credit card or mortgage debt, start a business or put a kid through college, all of which offer better returns than mutual funds. And if it simply forces them to shift savings from private to public plans, they’re still worse off because governments are lousy money managers.

For years the CPP apparently defied these laws of economic gravity by running a pyramid scheme that redistributed from future generations. But that trick ended years ago, when it was “reformed” into an indifferent retirement vehicle and there is no chance of doing it again provincially.

In any case, when you peer closely at its design, the ORPP has a very different goal.

Unlike the CPP, it is not compulsory for all employees. It only applies to those without generous workplace pensions, starting with big companies (500-plus employees) in 2017, medium ones in 2018 and small in 2019, grabbing 1.9 per cent of employees’ earnings up to $90,000 and a matching amount from the company.

Even this “matching amount” concept is economic illiteracy or worse. To companies, the total cost of an employee is what matters. In the very short run the “matching” 1.9 per cent on existing wages and salaries will bite into profits. But firms will quickly adjust starting salaries, raises and bonuses to compensate; the “wedge” between what your employer pays and what you get all comes from your pocket.

Sensible people now realize the “defined benefit” pensions of the Fred Flintstone era were unsupportable and played a major role in hollowing out North American manufacturing, as compulsory unionization pushed managers to buy labour peace for today with unsustainably generous retirement packages for tomorrow. That’s why these lavish plans are now largely confined to the public sector; in Canada over 80 per cent of public servants have “defined benefit” plans, versus under 15 per cent in the private sector. But tomorrow comes even to government eventually.

The C.D. Howe Institute has warned that the federal government’s unfunded pension liability is about $90 billion higher than the shocking $150 billion it admits to. And such fiscal landmines are scattered throughout the federation including Ontario teachers’ pension funds. Yet Premier Kathleen Wynne and her colleagues have bought into the public sector union fantasy that unsustainability is a neo-liberal plot to enrich the “one per cent” on the backs of the toiling masses.

Instead of working responsibly and courageously toward a situation where everyone’s pensions are sustainable, they want to go back to a situation where no one’s is. But you cannot, in the long run, pay people more than they are worth, and the bigger the “wedge” gets, the worse unemployment becomes.

To increase the cost of all employees by 3.8 per cent would be insane. To increase only the cost of those employees who do not already have unaffordable pension plans is not only insane, but reactionary.