A solution to income inequality and anxiety about retirement poverty
Canadians are financially challenged. They have been devastated by COVID. They are struggling with outlandish inflation, high prices for real estate, high rents, impossible mortgage rates, and much more. Moreover, the income inequality gap has rapidly widened.
Canadians desperately need some positive financial news. And there is some. However, three powerful industries would suffer if the following news reached Canadians. Under-the-radar, these three greedy industries are making sure this good news never reaches us.
What is the good news? CPP Investments is probably the best pension fund investor in the world. Their investment success has led to a colossal $224 billion surplus in our $536 billion CPP fund. This is 72% above target. And based on CPP Investments’ outstanding track record and investment advantages, the CPP's surplus should continue to mushroom, making the surplus closer to a 400% surplus today.
When a pension fund has a mere 25% surplus, a surplus distribution is appropriate. Please compare 25% to the CPP’s 400% surplus. By reasonably distributing $170 billion of this surplus, millions of Canadians and the Canadian economy would benefit tremendously as shown here.
Will CPP Investments continue investing so successfully? Probably, because they have many advantages over the average investor. Recently, one third of their portfolio, private equity, had an unheard-of 37% return over a 12-month period. For example, they own half of 407-ETR, a toll road in Ontario. According to Google, the Pennsylvania Turnpike is the most expensive toll road in the world. 407-ETR is 2 ½ times that cost. The profits are likely gushing in for CPP Investments from 407-ETR. Many Ontarians are enviously saying “I would like a piece of that investment.”…and they can.
With 2,000 employees searching worldwide, CPP Investments has many lucrative investments like 407-ETR. While nothing is ever a certainty with investing, one can confidently conclude that CPP Investments will continue with returns far higher than the public equity option that almost all individual investors must use. For example, an individual investor’s typical 5% return will turn $100,000 into $163,000 in ten years. CPP Investments’ probable 11% return will turn $100,000 into $284,000 in ten years, thereby giving the investor three times the profit.
With convincing evidence that our Chief Actuary has abandoned 17 million members of the CPP, Canadians need a profitable CPP format that he cannot tamper with. Now, the CPP is a Defined Benefit Pension Plan. The Chief Actuary now decides when a surplus will be declared. And he can conceal the surplus by manipulating the data in his reporting, as he has.
However, if part of the CPP became a Defined Contribution (DC) pension plan, no such denial would be possible. With a DC plan, your contributions are invested, and your personal fund appreciates at the same rate as CPP Investments’ return, which is roughly three times the rate the CPP now gives us.
By 2025, experts estimate all private sector pension plans will be DC. Soon, millions of Canadians will hope that their retirement contributions, usually matched by their employer, will be invested expertly, yielding a considerable nest egg for their retirement. Companies like DC plans because, if the fund is poorly invested, the company is not responsible for replenishing any shortfall. Conversely, if the fund is skilfully invested, the pensioner, not the company, receives the gains.
There is probably no other pension fund or investment vehicle in the world better suited for a DC format than the CPP.
By making the CPP a partially DC pension plan, almost all 25-year-old Canadians could be millionaires by age 65, with no increase in contributions to the CPP.
Roughly 90% of Canadians earn $20,000 or more per year. This means they must contribute, with their employer matching, a total of $2,000 or more per year to the CPP. Currently the CPP only gives us a 4.3% return on our contributions. However, if the CPP invested our first $2,000 in contributions directly with CPP Investments, like a DC plan, contributors would probably see their contributions increase rapidly. For example, based on an 11% return, a 25-year-old would be $1.26 million wealthier at age 65 as the graph below shows.
The green line shows how the annual $2,000 in contributions will likely increase to $1.55 million over 40 years if invested directly with CPP Investments. And, presuming a probable 11% return after age 65, a senior will have an indexed pension that is roughly 11% of $1.55 million, $170,000 per year. (With a 2% inflation rate, a $170,000 pension in 40 years is the same as a $76,500 pension in 2023 dollars.)
The red line on the graph shows how the annual $2,000 in contributions only produces a $288,000 value, based on the stingy CPP’s current 4.3% return. This would result in a $10,000 CPP pension in 40 years, or a $4,500 pension in today’s dollars.
The graph shows that this proposed policy would give almost all 25-year-olds, on their first $2,000 in contributions, a $76,500 CPP pension instead of a $4,500 CPP pension. One is 17 times the other.
A CPP pension alone is currently far from adequate for retirees. Those millions of Canadians without a pension plan, other than the CPP, are told to save and invest 10% of their annual income if they want a comfortable retirement. If they saved and invested, for example, an additional $2,000 per year, the blue line shows a typical 5% return. This investment would provide a $343,000 value by age 65. It would yield a $17,000 pension (5% of $343,000) in 40 years, or $7,650 in 2023 dollars. However, already struggling, low-income Canadians would suffer if they had to sacrifice $2,000 more in income every year.
The following table shows the pros and cons of the two strategies – contribute $2,000 per year to the CPP and invest another $2,000 with the financial industry or contribute $2,000 directly to CPP Investments.
How CPP reform could substantially solve income inequality
Why are politicians not legislating this simple solution? CPP Investments’ success has inconvenienced the financial industry. Their worst fear is voluntary contributions to the CPP. They have stated worry that revised CPP legislation could
“undermine a lot of successful, legitimate, (retirement savings) products in the investment industry”.
Who should be undermined? Should it be the financial industry that now hogs 47% of all corporate profits? Or should it be millions of struggling low to middle-income Canadians?
The industry knows voluntary contributions to CPP Investments are a possibility because Finance Minister Flaherty investigated this option in 2011, when CPP Investments’ returns were much less proven. If voluntary contributions were allowed today, the investor would probably earn three times the profit over ten years when compared to the financial industry. This means billions of investment dollars would quickly transfer from the financial industry to CPP Investments, if allowed. However, with the above proposed policy, there would be no voluntary contributions to CPP Investments allowed.
The above proposal might still slightly harm the financial industry’s profit flow. Knowing a $76,500 CPP pension is likely forthcoming, some investors might reduce their investments with the financial industry. The above proposal, with no voluntary contributions, but a DC format for some contributions, is a reasonable compromise that will leave billions of dollars of profit for the financial industry.
Those 10% of Canadians earning less than $20,000 per year will still benefit, prorated. For example, a 25-year-old worker only earning $10,000 per year would contribute $1,000 to the CPP and receive half the above benefits at age 65 - a $38,750 CPP pension in today’s dollars plus $8,000 in OAS. This means the 33% of seniors now living near the poverty line would decrease to roughly 5% of Canadians in 40 years.
Those who contribute more than $2,000 will likely still see considerable additional income from the CPP at age 65 because CPP Investments will invest most of it, achieving an 11% return, not the 6% return needed to fund their promised pension. Their additional contributions will be treated as the CPP now treats all our contributions.
Wealthier Canadians are now contributing almost $10,000 to the CPP, if we include employer matching. They will logically want all their contributions invested directly with CPP Investments. Here is why this is not fair or appropriate:
This policy means almost all Canadians can share equally in the outstanding investment prowess of CPP Investments.
If a $2,000 contribution by a 25-year-old can likely result in a $76,500 CPP pension, then a $10,000 contribution can likely result in a $382,500 CPP pension in 2023 dollars. This is inappropriate if others are struggling.
This policy means billions of dollars in GIS payments to retirees, now skyrocketing, will eventually plunge.
Because CPP Investments is a pay-as-you-go pension fund, some contributions must be used to pay today’s pensioners. The funds over $2,000 per contributor will be treated as contributions are treated today – some is used to pay pensioners, and some is invested.
Wealthier Canadians own real estate which has spiralled in value, making most homeowners millionaires by age 65, while most low-income renters will have a zero net worth by age 65. Moreover, in retirement, low-income Canadians must pay rent, which is currently increasing faster than inflation. This unjust “Own a home or be poverty-stricken at age 65” environment now in Canada can be substantially offset.
In the 1960’s the top tax rate for the wealthy in Canada was over 80%. Now it is roughly 54%, thanks to aggressive lobbying by the wealthy. The poor have near-zero lobbying power.
Even if CPP Investments only averages, for example, a 4% return, there is little risk for low-income seniors. Because they will receive the Guaranteed Income Supplement (GIS), their CPP income is subject to a 70% clawback rate. For example, after dutifully contributing $100,000 to the CPP, thereby deserving a $10,000 CPP pension, a low-income senior will now only receive a $3,000 increase in cash received because of his CPP pension. If CPP Investments invests poorly, his loss of net income will be trivial.
Most low-income young Canadians are very stressed because they cannot purchase a home, rents are skyrocketing and retirement looms as poverty-stricken. With this policy, their peace-of-mind and mental health will improve substantially. And their prospects for retirement will be enticing, not looming as miserable. Mushrooming mental health problems for young Canadians could be alleviated.
How is the financial industry keeping this good news from Canadians? Canada’s top expert on democracy, in his book, TEARDOWN, states on page 124,
“Our political system has evolved into a sophisticated enabler of mass institutionalized bribery...powerful corporations continue to wield enormous power in our legislatures”.
Democracywatch.ca, Canada’s democracy watchdog, states on their website,
“Corporations spend $25 billion annually on their lobbying and promotion efforts.”
The financial industry earns 47% of all corporate profits in Canada but only contributes 7.5% to our GDP. Their profit in 2020 was a massive $125 billion. Why not spend, for example, 1% of their profits, $1.25 billion, aka $1,250 million, to bribe all three political parties to remain silent regarding the CPP’s surplus? For example, a mere $100 million bribery expense to preserve a multibillion-dollar profit stream is highly justifiable, as long as it is concealed.
The bribe must be succeeding. All MPs have been notified regarding the CPP’s surplus and potential. Almost all continue to remain silent even though a promise of justifiably giving $10,000 to each of 17 million Canadians, and the above policy, could likely win any party a majority.
Two politicians have provided feedback. After a half hour presentation, Jane Philpott, my MP’s final words were “Disgraceful lobbyists.” Pierre Poilievre emailed me a thank you for these “new and innovative ideas to rescue our economy”.
What about the media? The entire Canadian media has never mentioned the CPP’s surplus. If Canadians became aware of the surplus, the pressure on politicians to distribute it would be overwhelming. What would attract more readers than this story?
“The CPP now has a $224 billion surplus. Roughly 17 million Canadians will soon receive a surplus payment of $10,000 each, on average. The are several other benefits including…”
Media experts claim our media industry has sacrificed journalistic integrity for profit. The media’s decision to choose profit over integrity is costing Canadians and Canada the benefits listed above. The evidence is overwhelming that the financial industry has also paid the entire Canadian media millions of dollars to never publish news of the CPP’s surplus.
Who else could afford and engineer such a bribe? No other industry has 10% of the resources and the motivation that the financial industry has. Ms. Freeland, Mr. Carney, and Mr. Poilievre have all claimed our capitalist system is rigged to favour the super-rich.
What about actuaries? CPP Investments’ success has jeopardized their industry. Actuaries know that, if the CPP’s surplus and investment prowess becomes known, the demand for other pension funds, and hence actuaries, will plummet. Ten top actuaries have been consulted and denied the irrefutable $224 billion CPP surplus with vacuous arguments. One, in a moment of conscience and candour, claimed our Chief Actuary has “manipulated the data” and “hidden things at will”. After six years of research on the CPP, I heartily agree.
The evidence is convincing that three powerful industries have greedily and selfishly colluded to keep the news of the CPP’s surplus and potential suppressed, thereby selfishly depriving millions of Canadians and Canada of huge benefits.