The success it is today

By Steven Martinovich
web posted December 6, 1999

Recent news that Alberta Treasurer Stockwell Day was considering withdrawing the province from the Canada Pension Plan in favour of a provincially run system -- an idea put on the backburner since -- brings to mind an image of a newly rebellious teen who feels he can make his way in the world without his parents because he got his first job at the local pizzeria. While it's laudable that Day finally realized that the CPP is poorly administered to the point the federal government a few years back had to increase premiums a total of 73 per cent -- from 5.85 per cent of pensionable earnings to 9.9 per cent -- by 2003 in order for the program to merely survive, his solution isn't much better.

Day's problem with the present federal system is that it is patently unfair to people who haven't been in the work force very long. The hike only serves to insure -- hopefully -- that the baby boom generation receives their benefits when they begin to retire in less than two decades time on the backs of youth who aren't even assured that the program will survive to meet their retirement needs.

By considering a provincially run system, however, Day promises to merely recreate the problem on a smaller scale -- Alberta. That province faces the same demographic time bomb that the rest of western society faces, a large group of people will all begin to retire at roughly the same time and someone will have to foot the bill: people who still have decades of work ahead of them.

Sooner or later the numbers bare out that fewer workers will be supporting far more retirees. Since raising the retirement age or premiums has an upper limit, and even in Canada there is an upper limit, the system must sooner or later reduce its promised benefits, the first sign of a bankrupt system. No matter how those reductions are carried out, it creates insecurity in a program designed to promote the exact opposite.

A radical but proven solution that Alberta and its peers have not considered is the lead established by Chile and soon to be followed by Hungary, Poland and Sweden. It's the end of government administered social security systems, replaced instead by privatized systems.

Chile was the first nation in the Western hemisphere to establish a government run social security system in 1929 and in 1981 it was the first to completely privatize its system. The results speak for themselves. The Chilean savings rate increased to 27 per cent of GNP by the middle of this decade while the funds administered by the private pension funds grew to equal to 40 per cent of GNP.

Experts also point out that under a private system it is virtually impossible to lose money in the markets over a period of several decades. Even if returns are low over a period of twenty years, a person would do no worse than the poor returns that government administered programs will provide over the coming decades.

Chile's switch to a private program also served to depoliticize a huge sector of the economy and give the individual worker more control over their own lives. With one move Chile avoided the demographic flaw which will pain Canada and the United States and the future of the pension system began to depend on the markets and personal behavior.

If simple economics isn't enough to sway Day from choosing a government run program, an appeal based on human rights should. The problem with government intervention in pension programs is that they manage to divorce work from reward and infringe upon individual initiative. Without understanding how much money it really takes to survive in those last years, people have no incentive to properly plan, leaving most to survive on the meager benefits handed out by the CPP. Benefits which won't get any better in the years to come.

As columnist P.J. O'Rourke wrote earlier this year, "[h]aving a government that owned economic assets is what made the U.S.S.R. the success that it is today." Unforunately that success is being repeated in the CPP and quite possibly in a future Alberta system, all for the fear of simply giving back control of the future to the group it matters the most to, the people themselves.

Steven Martinovich is the editor in chief of Enter Stage Right.




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