By Franco Terrazzano
The last thing Alberta taxpayers need is another pension Ponzi scheme, but that’s exactly what taxpayers can expect if the provincial government recreates the Canada Pension Plan in Alberta without fundamentally over-hauling it.
The government is currently considering whether the province should withdraw from the CPP and create its own plan. As Premier Jason Kenney has acknowledged, “a compelling case can be made for such a shift (away from the CPP).”
That’s because Alberta taxpayers have contributed more than their fair share to the CPP. Between 2008 and 2017 they paid about $28 billion more into the CPP than they received back in benefits, according to a 2019 Fraser Institute report.
An internal analysis from crown corporation AIMCo, the Alberta Investment Management Corporation, concluded that Albertans could see a 27 per cent tax savings from a provincial plan while still receiving the same benefits as from the CPP. As economist Jack Mintz explained in these pages last November: “The reduction in the payroll tax would encourage employers to hire more workers and provide some tax relief for workers, especially those with lower incomes.”
Although withdrawing from the CPP has some economic merit, Kenney shouldn’t merely recreate the CPP. He should reform and improve it. That’s because the current CPP better resembles a Ponzi scheme more than it does your typical investment fund.
According to Charles Lammam and Hugh MacIntyre of the Fraser Institute, “There’s an assumption that the money (people pay) into the CPP is going to fund their own personal retirement, as is the case with private pension plans. But this is largely not the case because … most of the contributions you make today fund someone else’s retirement.”
Today’s Mr. and Mrs. Taxpayer largely fund today’s retirees while relying on younger generations, the good faith of future politicians and the health of government finances decades from now to fund their pensions. But there is no legal requirement for a future government to provide pension benefits. That will always be the risk when taxpayers are forced to rely on politicians for their retirement benefits instead of their own savings.
The CPP comes with big debt problems. Its unfunded liability as of the end of 2015 was $884 billion. That means it will need to take in hundreds of billions of dollars from new taxpayers to pay the benefits promised to its current members. But isn’t that exactly how a Ponzi scheme operates? New recruits finance existing members? Do Albertans really want to replicate this model?
Albertans — and all Canadians — should be able to pull out of mandatory government pension plans and invest their money how they see fit, instead of handing it over to the taxman. Taxpayers are much better positioned to manage their own money than politicians in Ottawa or Edmonton who couldn’t balance a lemonade stand’s budget.
But if Premier Kenney is dead set on forcing Albertans to fork over their paycheques to a government pension plan, he should take a page from our cousins from down under and implement individual retirement savings accounts.
In Australia, workers must contribute a portion of their salaries to their own retirement savings account, rather than a collective pension plan. This allows workers to: choose an investment strategy that best suits their preferences and circumstances, leave their money to loved ones upon death, and withdraw investment income for health and financial emergencies without being penalized. Under this approach, workers truly own and benefit from their savings.
In Alberta, any government-mandated system should follow what is already established with voluntary RRSPs, TFSAs and other investments. The government can pre-approve investment providers, if it wants to, and set the amount that must be saved, but the bulk of decisions should be made, not by bureaucrats and politicians, but by the workers who are saving for their retirements.
Alberta’s — and all of Canada’s — taxpayers should be afforded the dignity of managing their own money in the way they see fit. But if governments instead insist on mandating pension plans, then workers shouldn’t be forced to save for other people’s golden years. Alberta can do better than recreate another pension Ponzi scheme.
Franco Terrazzano is Alberta director for the Canadian Taxpayers Federation.