Pension Folly

An amazing argument is playing out across the public and private sectors across several nations.

This argument deals with defined benefit pension plans.

The problem is very simple to define and (in theory) just as easy to solve.  Whether we are talking about Social Security, the Canada Pension Plan or various public or private sector pension plans the problem is the same.  Current workers pay premiums that fund the benefits for retirees.  The benefits are paid out without any real connection to what those workers paid into the plan in the first place.

As an example, one pension plan I am aware of pays out (for life) based on the following formula:  2% x the number of years of service x average of your salary in the final 3 years.  If one lives a very long time, the retiree will receive much much more than was paid in.

This problem afflicts all such pension plans.  Social Security (USA) sets payments to begin at the age of 65.  At the time that the program came into inception (1935) the average lifespan of workers was 67.  Today it is around 80 and increasing.

The aging of the population and reduced birth rates has lead to projections that the worker-retiree ratio (which was 10-1) will soon reach 2-1.

In short, the program is fundamentally flawed.  It is simply not built to deal with negative demographic trends. In fact, it was always doomed to fail since the human population simply cannot keep growing forever...certainly not at the rates that it had been.

So why all the hue and cry when corporations or governments try to fix this obvious problem?  It points to a cultural shift in values.  Where such programs were once a sign that society takes care of each other, now it has become a game of hanging onto your spoils and damn the consequences for everyone else.

Personally, I don't want to saddle my children and grandchildren with debt to pay for my retirement.  If we want to avoid the fate of nations like Greece, then we need to eliminate or at least radically reform the way cherished programs like CPP work.  Otherwise we are just sweeping today's problems under the rug for our children to deal with.

If anyone wants my advice, I suggest saving enough for your retirement assuming that you will get bupkus from the Canada Pension Plan.  It's the right thing to do and the safe thing to do....cuz that might be the case anyway.