Sunday, 15 December 2013

Myths, Delusion and Pensions


Another day, another clarion call from a provincial premier or Canadian media outlet fretting about our "retirement crisis","savings crisis", "pension crisis" or "jobs crisis".  Today Thomas Walkom in the Star observed that Canada's two opposition leaders have made no concrete commitments to repair the country's "frayed social safety net", in line with a recent editorial I recall from his employer calling on the federal government to "shore up pensions".


It is clear that Canada, being a nation of conscientious, compassionate individuals, watches over its citizens with deep concern and a heavy heart as it wonders how they are possibly going to fend for themselves and maintain their standards of living.  To combat this scourge, the nation's enlightened minds have devised the solution of creating expensive, inefficient, hare-brained government schemes to somehow steal money from these same citizens and give it back to them in the form of...what? Promises to pay? IOUs? Tax credits for cable, SUVS, and cross border shopping?


The media and the politicians like to get all somber and stern when they're talking about pensions but you never hear them getting upset about black friday, 0% auto loans for 8 years, iphone 5s, soaring house prices, record-breaking box office hauls, or bidding wars on homes.  Canadians in any province are free to carry credit card balances at 19%, buy furniture, applicances and electronics at 29-32%, and use payday loan facilities at 36%.  They can also try their luck in an excellent array of proven money-making investments such as slot machines, race tracks, lottery tickets and video terminals on offer from their provincial gaming commission  And hey, if ever things don't go so well, you can always relieve the stress with alcohol and/or nicotine also sold by your friendly neighbourhood provincial monopolies with 100%+ markup.


Yet again today the Star was at it again, this time railing against "pinstriped bankers" and "smartypants columnists"  The Canada Pension Plan only is based on a maximum of 51,000 a year earnings, "leaving many middle class workers vulnerable".  It's really nice of them to behalf on all those 51-150k earners who lived beyond their means, never saved a dime, and for whom we are now expected not just to provide a pension income, but to maintain McMansion lifestyles




I have been antagonized by this debate because of the high level of intellectual dishonesty and pathetic victimization it has been characterized by.  The line usually spun by columnists like Cohn and parroted by comments online goes along the lines of "Bankers and speculators destroyed everyone's savings and crashed the economy in 2008 and now the government wants everyone to be a part of that risk to fund their retirement".  This line of thought reveals a fundamental misunderstanding of the systems which govern the mechanisms (the market) that all of our money, assets, and liabilities, public and private, are a part of, whether you want them to be or not.

When someone tells you they "lost everything in 2008", what they mean is that they committed two ultimate amateur investor errors: They 1)Got scared, meaning they got overtaken by the emotion of fear and sold off what they had and 2) Bailed at the bottom of the market, providing a picture perfect example of what average people are experts at doing, buying high and selling low.  If one had merely tuned out the noise since then their investment would have recovered with a nice little extra upside, and if they had had the cojones to "double down" they would have made a nice little profit.  This is true following all of the market crashes that occurred in the 20th century.

But our tireless pundits on the hunt for free money to bail out the average Canadian who borrowed and spent for his whole life think that this whole sequence of events occurred in some sort of bubble which their sacrosanct "pensions" are somehow exempt from.  Missing in their passionate arguments is the behaviour the managers of pensions are forced to engage in to generate the returns required to pay benefits to their members.  Farmland in Saskatchewan, private equity, commercial real estate, mortgage backed securities, junior mining companies, commercial paper.  These are all risky and speculative investments, and they are all owned by our country's largest and most well-known pension managers.  The Canada Pension Plan Investment Board who managed the CPP has been snapping up farmland in Saskatchewan.  The Ontario Teachers Pension Fund, the 2nd biggest in the country, made a killing the last 20 years in private equity deals.  The CPPIB also owns office towers in New York, Chicago,and Australia.  The Caisse de depot et de placement du Quebec, which managed the 186 billion$ QPP fund, lost $40 billion in US commercial paper in 2008 and has a significant ownership stake in the Stornoway Diamond mine project, whose stock has jumped around all over the place between 50 cents and a dollar in 2013 alone.

So it is very clear that even if universal pensions were a panacea to save individual canadians from the repercussions of their own financial irresponsibility, they would continue to be exposed to the same market risks the pension beef up proponents decry as being somehow unfair.  I will explain to them now what nobody has clearly ever taken the time to: risk free returns do not exist.  If they did we'd all be billionaires.

The other argument is that investment on this level (with the CPP and the teachers, for example) is done on a mandatory basis which gives the funds huge asset bases and allows economies of scale which drive management and fee costs down.  Yet the government has made retirement saving and tax sheltered investing abundantly accessible to the average Canadian through RRSPs and TFSAs, but only some Canadians choose to take advantage.  The government has given tools to the average person to provide for themselves what we claim there is a lack of now, and the fact that they didn't is going to be solved by some new, expensive government program?

Pensions are also heavily exposed to a risk the average person isn't: demographic risk.  Even with their crack management teams and world-beating returns, CPPIB and OTTP have not generated anywhere near enough money to cover all of their future obligations: this is a nearly impossible task when people receiving benefits outnumber people contributing, which is already the case for most funds in the western world and the tendency is only going to accelerate.  In this instance, I don't care if you're warren buffett on steroids - demographics transform the world's best pension fund into a huge ponzi and there's nothing you can do to stop it.  

Management fees are another issue, as is the defined benefit versus defined contribution debate.  These subjects stir up passionate and heated debates amongst one segment of the population while making the eyes of the majority glaze over.  That's fine, but as long as people don't understand the forces involved allowing them to "enjoy a comfortable retirement" I sure as hell am not willing to hand tax dolllars over to sustain some utopian myth that money falls out of the sky when you turn 65.  At least the debate has started and the new books out by Fred Vettese and Jim Leech are a start but we need to continue the conversation, and young people especially need to speak up and make it known we are not going to have more of our tax dollars confiscated in some ill-advised government orchestrated scam to absolve the previous generations for their decades of abhorrent financial behaviour.

Merry Christmas everyone