Pension360

A proposed constitutional amendment, which would require New Jersey to make full, quarterly contributions to its pension funds, passed a state Assembly committee on Monday by a 5-2 vote.

State Democrats, who have been championing the amendment for years, are pushing for placement on the November ballot.

More from Nj.com:

An identical resolution was passed by the Legislature last year and must pass again this year in order to qualify for the fall election, which is expected to see high turnout from the presidential race.

The measure (ACR109) was approved by a 5-2 vote along party lines, with Republicans expressing concerns that the mandatory payments could lead to steep tax increases.

[…]

Without the amendment, the size of the state’s payment — or whether the state makes one at all — is at the discretion of the governor and the Legislature. That’s part of the reason the state’s portion of the pension system is only about 48.6 percent funded.

The amendment also would force the state to make the contribution into the retirement fund in installments throughout the year. State Senate President Stephen Sweeney (D-Gloucester) has said waiting until the end of the year costs the state millions of dollars in investment earnings.

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

A former CalPERS chief executive officer, Fred Buenrostro, was sentenced to 4½ years in prison last week for taking bribes, including $200,000 in cash, from a former CalPERS board member, Alfred Villalobos, who collected about $50 million in fees from private equity firms for helping them get investments from the big pension fund.

Villalobos died from a pistol shot to the head at a Reno gun range in January last year, an apparent suicide on the day before a scheduled court appearance. His inside man at CalPERS, Buenrostro, pleaded guilty on the eve of his trial in July 2014 and has been cooperating since then with state and federal prosecutors.

Assistant U.S. Attorney Timothy Lucey told a federal court in San Francisco last week that Buenrostro, after his guilty plea, went on “to assist the government in a number of ongoing investigations the court is aware of through the filings that have been made to the court, both the public filings and the sealed filings.”

Buenrostro’s attorney, William Portanova, told the court that his client “took the investigation to a level far beyond that which his own case involved” and that information in the sentencing memorandum and sealed documents “touches on some of these larger investigations.”

U.S. District Judge Charles Breyer noted that Buenrostro’s cooperation resulted in refiled charges before his guilty plea that reduced the maximum sentence from ten years to five years. He disagreed with Lucey and Portanova that cooperation since then merited an additional one-year reduction, instead cutting six months for a total of 4½ years.

Breyer, quoting Lucey, said Buenrostro committed “a spectacular breach of trust for the most venal of purposes, which is self enrichment.” Buenrostro had years to turn back but chose to “double down,” said the judge, calling it “a dagger in the heart of public trust, and without public trust our government institutions cannot function.”

Buenrostro, 66, balding head slightly bowed, shuffled into court in faded blue pajama-style prison garb, with day-glow orange footwear and his legs apparently shackled together by a short chain not visible from the back of the court room.

“Your honor, I take full responsibility and accept the consequences of the actions I took,” Buenrostro said in a firm and clear voice. “I’m humiliated, embarrassed, and deeply ashamed of my actions.”

Asking mercy, Buenrostro said he “let down” family and friends and apologized to CalPERS, the court, prosecutors, and his fellow Californians. He said he assisted the U.S. Attorney, the Securities and Exchange Commission, and the state Attorney General “in their investigation and litigation and will continue to render assistance.”

So, what’s still being investigated? There were few public clues last week.

A sentencing memorandum filed by Lucey outlined the case against Buenrostro, adding some new detail but no major surprises to an extensive report in 2011 done for CalPERS at a cost of $11 million by Philip Khinda of a Washington, D.C., law firm.

Buenrostro, a former CalPERS board member, served as chief executive officer from December 2002 to May 2008. His earliest connection with a Villalobos deal mentioned in the Lucey and Khinda reports began with meetings in 2004 at the Villalobos home at Lake Tahoe.

Notably, three active CalPERS board members (Robert Carlson, Charles Valdes, and Kurato Shimada) met with Villalobos and Buenrostro (who had served on the board with the other three a decade earlier) and an executive of a firm, Medco, that was seeking a large CalPERS pharmacy contract, said the Khinda report.

Carlson and Valdes, now both deceased, voted in 2005 to give Medco the pharmacy contract. Shimada, though not a committee member, sat in and asked that his questions be reflected in the record. Villalobos reportedly got the final $1 million of a $4 million fee immediately after the vote.

“Early in the conspiracy,” said the Lucey report, “Villalobos used Buenrostro’s mere presence to add luster and gravitas to important meetings with his clients, knowing that Buenrostro would place his interests over his duty to CalPERS.”

Outside CalPERS, Villalobos was beginning to attract attention. In 2006 Los Angeles Times reporters asked the California Public Employees Retirement System for letters, e-mails or memos from Villalobos and former state Sen. Richard Polanco about investment opportunities.

A letter to the Times from a CalPERS attorney rejecting the Public Records Act request said “the release of the (sic) some of the requested information may harm CalPERS’ ability to continue to invest with top-tier private equity funds.”

Inside CalPERS, a staff proposal in 2007 requiring investment managers to disclose the use of “placement agents” such as Villalobos stalled in a committee chaired by Shimada, who had worked for Villalobos during a three-year absence from the CalPERS board beginning in 1999.

The California State Teachers Retirement System was adopting placement agent rules at the time. And crucially, as it turned out, in March 2007 a large private equity firm, Apollo, began requiring a written acknowledgement from investors like CalPERS before paying fees to placement agents like Villalobos.

When CalPERS investment and legal staff refused to give Villalobos an acknowledgement, he had Buenrostro sign a series of acknowledgements on phony CalPERS letterhead that became a key part of the charges against the two men.

Villalobos hosted Buenrostro’s wedding at Tahoe in 2004, promised (and later delivered) lucrative post-CalPERS employment, and betstowed other gifts. The notorious cash payments came as Buenrostro needed money for a divorce and Villalobos pursued the Apollo deal, said the Lucey report.

By December 2007, Villalobos had made cash payments to Buenrostro at the Hyatt hotel near the Capitol in Sacramento on three separate occasions: “The first two payments of $50,000 were each delivered in a paper bag, while the last installment of $100,000 was delivered in a shoebox.”

After receiving the last of the phony disclosure letters in June 2008, said the Lucey report, Apollo began payments to the Villalobos firm, ARVCO, that totaled more than $14 million before they were stopped on their way to as much as $35 million over the life of the contracts.

Buenrostro retired June 30, 2008, after his official duties ended on May 12 of that year amid staff complaints of “unprecedented levels of meddling in investment decisions.” Shimada resigned from the CalPERS board in April 2010.

The Khinda report concluded that the CalPERS investment staff “did withstand” the pressure from Buenrostro and did not make inappropriate investments. A CalPERS new release last week listed the reforms resulting from the scandal, including the disclosure of placement agents.

A mark of the passage of time, and CalPERS hopes the healing of wounds, since its survey of private equity firms in 2009 revealed the huge Villalobos fees: Buenrostro’s successor, the current CalPERS chief executive officer, Anne Stausboll, is retiring at the end of the month.

Buenrostro settled a state lawsuit by agreeing to pay a $250,000 fine, which if not paid will be reapplied by the federal ruling. He also agreed to a judgment in an SEC case and to accept a penalty, if one is imposed after the federal ruling.

His annual CalPERS pension, $201,600 based on a final salary of $238,992 and about three decades of service, was reduced to $141,278 under a “felony forfeiture” provision and a $360,000 overpayment will be deducted, the Sacramento Bee reported.

Nineteen letters in support of leniency for Buenrostro were sent to the judge by several of his Pepperdine classmates, ski instructor colleagues, family, two persons well-known at the Capitol, and the nonprofit Shores of Hope, which praised his post-guilty plea work on transportation management for the elderly and disabled.

One leniency letter dated in March was from a woman who said she had recently lived with Buenrostro for nearly three years. Buenrostro came to court in custody last week after being jailed in late April for misdemeanor battery on a former girlfriend, his second arrest.

Leniency was not urged in a letter to the judge from the CalPERS general counsel, Matthew Jacobs, that said Buenrostro “must be fittingly punished for this tremendous breach of the public trust” that led to an 18-month internal investigation and the Khinda report.

“CalPERS condemns Mr. Buenrostro’s misconduct in the strongest possible terms, and urges the court to hold him accountable for his actions,” Jacobs said. “Those actions eroded the trust that had been built up over 80 years between CalPERS and its members, employers, and stakeholders. It also had a tremendous impact on staff morale, and on CalPERS’s previously-strong reputation in the financial community.”

New Jersey Democrats are making another push – the latest of many over the past year – to create a (state) constitutional amendment that would force the state to make its pension contributions each year, and on a quarterly basis.

[Read the amendment here.]

New Jersey’s pension system is 48 percent funded, largely because numerous governors have elected to skimp on the state’s pension contributions over the last 20 years.

As far as the amendment, lawmakers are aiming for placement on the state’s November ballot.

More from NJ.com:

The state Legislature approved the ballot question last year and must pass it again this year with a simple majority in order to qualify for the fall election. The controversial question would ask voters whether they want to constitutionally protect those pension payments.

The measure goes before the state Assembly Judiciary Committee Monday morning.

[…]

Led by state Senate President Stephen Sweeney (D-Gloucester), proponents say that what is a hefty bill now will grow unmanageable later if payments are put off.

The Democrats who control both houses don’t need Republican support to put the question on the ballot. Christie also has no say in referendums.

“If we don’t do this, by 2026 or 2027, when the pensions go broke, it’s nine or ten billion dollars. And that’s coming out of the budget. Directly out of the budget,” Sweeney has said. “That’s armageddon.”

The amendment also would force the state to make the contribution into the retirement fund in installments throughout the year. Waiting until year’s end costs the state millions of dollars in investment earnings, Sweeney said, and has left it vulnerable to last-minute cuts.

Christie twice vetoed such bills, calling it “an improper and unwarranted intrusion upon the longstanding executive prerogative to determine the appropriate timing of payments in order to properly match the timing of large annual expenditures with the timing of the actual receipt of state revenues.”

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

The Canadian Press reports, Canada Pension Plan reform: Ontario’s new pension plan complicates talks:

Federal sources say Canada’s most populous province has become Ottawa’s main challenge in work to gain the required provincial support to expand the Canada Pension Plan.

Ontario’s position in the ongoing talks is that it wants reforms to the Canada Pension Program to dovetail with the provincial pension program Ontario has vowed to create.

The province’s finance minister says there needs to be “some degree of substantial benefit” from a revamped national pension plan through higher benefits for retirees.

But replacing more of a retiree’s income through the CPP would require increases in premiums paid by employees and employers.

And if the premiums are too high, that reform would likely alienate the provincial governments in British Columbia and Saskatchewan, both of which don’t want to see rates rise over concerns about potentially negative ripple effects on small businesses and low-wage earners — further complicating talks about expanding CPP.

Ontario Finance Minister Charles Sousa said he plans to use the Ontario program as the starting point for negotiations to push for timely amendments to the national program. But he added that the province isn’t intractable in its position.

“I’m not suggesting that we’re going to obstruct CPP enhancement because we’re introducing (the Ontario Retirement Pension Plan). We’re using ORPP now as a means to have something substantive on the table for other provinces to review and we recognize that other provinces won’t go to that extent. So we will work to find a compromise,” Sousa said in an interview.

‘Ontario’s willing to play’

Federal, provincial and territorial finance ministers will meet the third week of June in Vancouver where CPP reform will be a key part of the agenda.

Federal Finance Minister Bill Morneau has said he wants to see a deal for an expanded CPP completed by the end of the calendar year.

Sousa wants to see early action. He said the talks will be for naught if a majority of provinces don’t signal their backing for immediate changes to the pension plan at the June meeting.

“Timing is critical and, frankly, it does put everybody on notice that Ontario will work with the federal government, we are working with the federal government, and other provinces to recognize that we have an opportunity to make a deal here. So Ontario’s willing to play,” he said.

“What we don’t want is to go back and have this: ‘We’ll do CPP enhancement at some time in the future at some amount without real determination.’ I want us to have details, I want us to discuss the parameters of what that enhancement will be. And we are prepared to move forward with CPP enhancement in a form that is close to what ORPP is.”

Ontario has proposed to almost double the income replacement rate by supplementing CPP benefits that would lead to annual payments of about $25,000 — but which would also require a increase in premiums. The province also wants to see coverage to Ontarians higher up on the income scale by raising the year’s maximum pensionable earnings amount, known as the YMPE.

“That’s not going to palatable to all provinces. So Ontario is willing to discuss that and have a meeting of the minds as to what amount should be preferable,” Sousa said.

First overhaul in 20 years

Since December when the federal and provincial finance ministers last met, political and bureaucratic conversations have been intensifying behind the scenes to garner support for an expanded pension plan. But coming to a consensus has proven difficult.

Morneau spokesman Dan Lauzon said Ontario has always “acted in good faith” from the start of talks around CPP reforms.

“The fact that they argue passionately for the people of Ontario only adds to the discussions both behind the scenes and around the ministers’ table,” Lauzon said.

“We look forward to a collegial and lively discussion at the upcoming finance ministers’ meeting in Vancouver, as we work together to advance retirement security of all Canadians. Ontario’s voice is crucial to the success of that meeting.”

The finance ministers are scheduled to meet again this coming December where Morneau expects a deal to be finalized.

Changes to the national pension plan require the support of at least seven provinces holding two-thirds the population of the country — a high bar that makes it mathematically difficult to make changes without buy-in from Ontario.

“Were that to happen, then we would not get a national CPP reform,” said former Bank of Canada governor David Dodge.

It would be the first major CPP overhaul in almost 20 years after the provinces and federal government agreed to increase premiums in 1997.

Most provinces were ready to agree to an expansion of CPP in 2013. But the previous Conservative government balked at the move, which led the Ontario Liberals to head down the path of their own provincial pension plan. Quebec also has its own provincial pension plan.

First, Bernard Dussault, Canada’s former Chief Actuary, notes the following:

Contrary to what David Dodge stated, there could be a CPP expansion if at least seven provinces covering at least 2/3 of the Canadian population would agree with an expansion “similar” to the ORPP, because the CPP Act clearly says that any province may opt out of CPP provided it implements a “similar” plan of its own.

In my opinion, Ontario is way ahead of everyone else when it comes to the issue of enhancing the CPP. As far as the ORPP, far from obstructing the talks, it lays the blueprint for everyone else to understand why it’s crucial to move ahead and enhance the CPP, bolstering the country’s retirement system and economy.

In fact, the Government of Ontario just passed the Ontario Retirement Pension Plan Act:

Ontario is expanding pension coverage to over four million workers without an adequate workplace pension plan.

Today, the province passed the Ontario Retirement Pension Plan Act (Strengthening Retirement Security for Ontarians), 2016. The Ontario Retirement Pension Plan (ORPP) will bring financial security and drive economic growth for generations to come, by providing Ontario workers with a predictable stream of income in retirement, paid for life. The ORPP will also offer a survivor benefit for all plan members.

Along with regulations expected this summer, the legislation gives employers and employees the information they need to prepare for the launch of the ORPP. This is a crucial step forward in fulfilling the government’s commitment that every eligible employee is part of the ORPP or a comparable workplace pension plan by 2020.

Strengthening the retirement income system is critical to the future prosperity of the province. Studies show that many of today’s workers are not saving enough to maintain their standard of living in retirement. Pension coverage is also low for many Ontarians, with only one in four younger workers — aged 25 to 34 — participating in a workplace pension plan.

Building a secure retirement savings plan is part of the government’s economic plan to build Ontario up and deliver on its number-one priority to grow the economy and create jobs. The four-part plan includes investing in talents and skills, including helping more people get and create the jobs of the future by expanding access to high-quality college and university education. The plan is also making the largest investment in public infrastructure in Ontario’s history and investing in a low-carbon economy driven by innovative, high-growth, export-oriented business.

Quick Facts

• The ORPP will offer a predictable, reliable and inflation-indexed stream of income in retirement, paid for life, by providing a pension of up to 15 per cent of an individual’s pre-retirement income. Employees and employers would contribute an equal amount, capped at 1.9 per cent each on an employee’s annual earnings up to $90,000.
• A cost-benefit analysis conducted by the Conference Board of Canada found that over the long-term, the ORPP will add billions to Ontario’s economy.
• Since 2014, the government has consulted extensively on the design of the ORPP with the business community, labour, academia, non-profits and Ontario workers, including holding public consultations in more than 10 communities across the province. Over 1000 responses were also submitted online and by mail.
• Ontario looks forward to participating in the Federal-Provincial-Territorial Finance Ministers Meeting on June 20 in Vancouver. Ontario supports CPP enhancement. Ontario is open to exploring a range of potential CPP enhancements for a national solution to strengthening retirement security as long as it is targeted to those who need it most and provides substantial earnings replacement benefits in retirement

Background Information

Details of Ontario Retirement Pension Plan Act, 2016

Additional Resources

Ontario Retirement Pension Plan

Quotes (click on image)

The passage of the Ontario Retirement Pension Plan Act right before the meeting on enhancing the CPP isn’t meant to be provocative but rather informative. It also represents a hedge for Ontario in case other provinces balk at enhancing the CPP, it is ready to go it alone.

Ontario is basically sending a clear message to other provinces: “Hey, we have a fundamentally divergent view on bolstering the country’s retirement system and economy. We want to build on the success of Ontario’s great defined-benefit plans and provide our citizens with an enhanced retirement they can count on no matter what happens in schizoid public markets. More importantly, we fundamentally believe that enhancing the CPP or introducing the ORPP should the enhanced CPP option fail, will bolster the economy over the long run. And we’re basing this on a cost-benefit analysis conducted by the Conference Board of Canada, not some flimsy report by the grossly biased Fraser Institute.”

I think this is a stroke of genius on Ontario’s part. Why? imagine if all the other provinces balk at enhancing the CPP and Ontario moves ahead with ORPP and 20 years from now comes out way ahead of everyone else not just in terms of retirement security but also in terms of its economy?

What are the other provinces going to say then? “Well, back in 2016 we had a golden opportunity to all embark on enhancing the CPP but we chickened out because we were listening to flimsy arguments from think tanks like the Fraser Institute and special interest groups like the Canadian Federation of Independent Business (CFIB) which doesn’t understand the first thing about why enhancing the CPP is in its members’ best interests.”

How sad and tragic that would be. The naysayers will argue against me and claim that Ontario will be worse off 20 years from now if it goes it alone but I guarantee you it will be far ahead of everyone else if all the provinces don’t get on board and enhance the CPP (and QPP in Quebec) once and for all.

Canadians need to get informed on why enhancing the CPP will be one of the smartest social and economic policies of our time. I highly recommend you read my comment on why Canadians are getting a great bang for their CPP buck and my last comment on why expanding the CPP will help everyone, including our most vulnerable seniors.

Enhancing the CPP isn’t simple but neither was passing a national health care act which is the cornerstone of our health care system and a huge part of the Canadian identity. I’ve said it before and I’ll say it again, a vibrant democracy ensures free healthcare, free education and a solid retirement system where people can retire in dignity and security. These are the three pillars of any vibrant democracy.

Is it going to be perfect? Of course not. Are there going to be snags along the way? You bet there are. But the key here is to think what is in the best interests of our citizens and the economy over the very long run and not to get embroiled in cyclical issues of the price of oil and where the economy is headed in the next couple of years.

Personally, I’m very worried about the Canadian and global economy over the next few years but that in itself doesn’t hinder my views on bolstering our retirement system. In fact, it makes me more resolute and I believe it would be a national crime if the provinces and federal government squandered this golden opportunity to enhance the CPP once and for all.

Two consultants disagreed slightly on how corporate pensions’ aggregate funding status changed in May; but the bottom line is that funding levels remained largely unchanged.

Mercer reports that the aggregate pension funding status of S&P 1500 companies increased 1 percent over the course of the month.
Meanwhile, Wilshire said the funding ratio of the same group decreased slightly.

More from BenefitsPro:

Mercer reported that S&P 1500 companies saw their pension plans’ estimated aggregate funding level increase, by one percent, to 79 percent as of May 31.

However, Wilshire Consulting said that the aggregate funded ratio for U.S. corporate pension plans decreased by 0.7 percentage point by the end of May to 76.8 percent. That, said Wilshire, matched the low point over the past twelve months and brought the year-to-date decline to 4.6 percentage points.

Wilshire said that the monthly change in funding resulted from a 0.8 percent increase in liability values versus relatively flat asset values (-0.1 percent). The year-to-date decrease in funding is the result of an 8.6 percent increase in liability values.

Increasing discount rates and relatively flat equity markets were responsible for the increase, according to Mercer, which said that as of May 31, the estimated aggregate deficit of $498 billion decreased by $6 billion as compared to the end of April.

The aggregate deficit is still up by $94 billion, it added, from the $404 billion deficit measured at the end of 2015.

Chicago’s new pension reform deal – which last week survived a Bruce Rauner veto – isn’t impressing Moody’s.

The deal gives the city a longer timeline to ramp up to making full payments to its Police and Fire pension fund. Chicago finance officials are wiping the sweat from their brows after the legislature overturned Rauner’s veto, because the savings from the bill has already been worked into the city’s 2016 budget.

Moody’s says the deal is a “credit negative” for the city, because it increases unfunded liabilities at the expense of smaller payments now.

From the Chicago Sun-Times:

“While the new law does provide short-term budget relief by reducing these pension plan contributions by $220 million, Chicago pension contributions will now fall far short of amounts needed to curb growth in its unfunded pension liabilities, a credit negative. By paying less now, Chicago risks having to pay much more later,” Moody’s wrote in its new Weekly Credit Outlook for Public Finance.

[…]

According to Moody’s, that means the city’s contributions to the two funds will be “insufficient to cover interest accruing on accumulated unfunded pension liabilities to continue growing.”

Based on current actuarial assumptions, Moody’s estimated that the unfunded liabilities of both plans will “now increase for almost 20 years, growing $3.3 billion over their reported year-end 2014 values.”

“If plan investment returns do not meet return assumptions, the risk of greater cost growth increases,” Moody’s said.

The report noted that 2015 investment returns for all four of the city’s pension funds “ranged from -1.5 percent to +1.8 percent.” That’s “far below assumed returns” of 7.5 to 8 percent.”

For anyone needing a refresher on the terms of the pension deal, here are the details via Reuters:

The measure alters a 2010 state law that boosted Chicago’s payments to its public safety workers’ pensions in order to reach a 90 percent funded level by 2040. Under that law, Chicago’s contribution will jump to nearly $834 million this year from $290.4 million in 2015, according to city figures.

The new law reduces the payment to $619 million and allows for smaller increases through 2020 than under the 2010 law. It also gives the police and fire funds until 2055 to become 90 percent funded. The police system is 26 percent funded and the fire system 23 percent funded.

Chicago’s fiscal 2016 budget assumed the bill’s enactment by lowering the city’s contribution to police and fire pensions by about $220 million.

 

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Ian McGugan of the Globe and Mail reports, Expanding CPP may not help most vulnerable retirees:

You’ve probably seen the television ad by now – the one that shows a man receiving a watch as a retirement gift, then pawning it at night, presumably because he’s strapped for cash.

The ad, sponsored by the Canadian Labour Congress, is part of what is becoming an emotional debate over a possible expansion of the Canada Pension Plan. The Liberals have vowed to enhance the CPP and federal officials will meet with provincial premiers in Vancouver on June 20-21 to see if they can agree on what has to be done.

Here’s one tip for all the deep thinkers who will convene in Vancouver: First, define the problem. Is the goal to help seniors living in poverty? Or is it to build a better retirement for the middle class?

Yes, our national retirement system could use some tinkering. However, it’s fantasy to insinuate, as the television ad does, that large numbers of working Canadians are doomed to poverty once they leave a job.

Canada’s retirement system consistently earns above-average grades from international comparisons such as the one compiled by benefits consultant Mercer. Thanks to building blocks put in place over the past half-century, poverty among seniors in Canada has faded to a small fraction of its level in the 1970s.

Contrary to popular belief, retirees are now less likely to be living in dire straits than working-age people. Only about one in 27 seniors has to subsist on a low income, compared with about one in nine non-seniors, according to a new report from the Fraser Institute.

To be sure, we should not be satisfied with any level of poverty. The elderly, in particular, often have little capacity to improve their economic situation and deserve special attention. However, the Fraser Institute study makes a strong case that simply expanding the CPP won’t help the most vulnerable retirees.

The report, by Charles Lammam, Hugh McIntyre and Milagros Palacios, shows that senior poverty is heavily concentrated among those who live alone. These low-income seniors are disproportionately women.

The group of people who are the most vulnerable of all are those with absolutely no CPP income. In 2013, nearly half of seniors with no CPP income lived in poverty, according to the report (click on image).

Here’s the rub: CPP benefits are typically based on how long a person has drawn a paycheque in Canada and how much money they have made. People with no CPP income in retirement are usually those with no history of paid employment, perhaps because they have been homemakers, perhaps because of health issues, perhaps for other reasons entirely.

Expanding CPP payouts won’t do much to help this group because they don’t qualify for benefits in the first place.

Even for seniors with a trickle of CPP income, an increase in benefits may not result in much increase in total income. That is because a more generous dollop of CPP money is likely to mean less money from other government sources.

Under current rules, an impoverished senior who collects a higher payout from the CPP would be penalized by receiving a lower stipend from the guaranteed income supplement for low-income seniors.

So what should CPP expansion aim for? The Fraser Institute report makes no suggestions. It gives the impression that any enhancement of the current system is probably unwise.

In contrast, many of us would like to see help for Canada’s most vulnerable retirees. The problem is that it’s difficult to see how this can be accomplished within the confines of the CPP system, which is tied to past employment income.

But perhaps that’s not the real problem at all. Much of the agitation for an expanded CPP comes from those who believe many middle-class Canadians will face a sharp drop in living standards once they quit work.

That is a far more tractable challenge. One simple way to address the middle-class gap would be for the CPP system to bump up its earnings ceiling.

At the moment, CPP contributions stop once your income hits $54,900. If the limit were increased to $100,000 or more, CPP payments in future could ratchet up to much higher levels.

Just don’t count on a big bump right away: The increased payouts would not be immediate. Extra contributions would take years to build up to a point where they delivered significantly higher payouts to future workers. And, yes, you would have to contribute more of your paycheque to make this happen.

The knotty realities of any reform suggest the upcoming CPP discussion in Vancouver will offer plenty of entertainment.

Those who attend will first have to address whether they want to help Canada’s most impoverished retirees or address the plight of the middle class. Either way, the potential solutions are likely to prove more difficult than television ads imply.

This is an excellent article which highlights a lot of key concerns on expanding the CPP but it falls short in one big area which I will discuss below.

First, you can read the latest report from the Fraser Institute, Expanding the Canada Pension Plan Will Not Help Canada’s Most Financially Vulnerable Seniors, by clicking here.

Here is the summary of this report:

Concerns about the adequacy of retirement income are mostly driven by a misplaced focus on middle (and sometimes upper) income Canadians not saving enough for retirement. The debate should be refocused on Canadian seniors who, because of their very low income, are financially vulnerable in retirement.

According to Statistics Canada’s low-income cut-off, single seniors living alone are more likely than other seniors to experience financial difficulties. In 2013, 10.5% of single seniors living alone lived in low income, which is considerably higher than the rate for all seniors (3.7%). The group of low-income, single seniors is disproportionately made up of women.

A subset of single seniors is at even higher risk of low income, namely, single seniors with no income from the Canada Pension Plan (CPP). In 2013, nearly half (48.9%) of single seniors with no CPP income lived in low income.

Expanding the CPP is an ineffective way to help Canada’s most financially vulnerable seniors since many of them have a limited work history. Those who have not worked, or worked only a little outside the home, have made limited contributions to the CPP. Those contributions are a key determinant of the CPP retirement benefit, so expanding the CPP would do little or nothing to help Canadian seniors with a limited or no work history.

Even for low-income single seniors with a work history and sufficient CPP contributions to receive retirement benefits, expanding the CPP may provide little or no net increase in their total income. That’s because a higher CPP benefit could simply result in a reduction in government-provided benefits targeted at low income seniors, such as the Guaranteed Income Supplement.

Unlike previous reports from the Fraser Institute which I lambasted on my blog, this one is decent. However, I’m not particularly impressed because there is absolutely nothing new in this report.

In fact, policymakers know all too well that expanding the CPP won’t benefit the poorest seniors which are disproportionately women who never contributed to the Canada Pension Plan.

In November 2013, I attended a conference in Ottawa sponsored by the University of Calgary’s School of Public Policy and CIRANO. I wrote about it in a comment looking at whether Canada is on the right path.

The speakers at the conference included Jean Charest, the former Premier of Quebec who now works at McCarthy Tétrault and David Dodge, the former Governor the Bank of Canada. Also in attendance was also Henri-Paul Rousseau, the former President and CEO of the Caisse who now works at Power Corporation.

I wrote the following back then:

[…] the presentation that got a lot of us thinking was the one by Kevin Milligan, an associate professor of economics at the University of British Columbia. He argued convincingly that lower income Canadians are better off in retirement now and forcing them to pay more into the CPP will leave them worse off. You can read the paper he co-authored with Tammy Schirle of Wilfrid Laurier University by clicking here.

The two main conclusions of their paper are:

1) CPP reform that expands coverage for lower earners can do them harm–it transfers income from a period they are doing poorly (while working) to one in which they were already doing better (retired).

2) An expansion of the CPP that simply expanded the year’s maximum pensionable earnings (YMPE) upwards would have nearly the same impact on combined public pension income as the PEI proposal, but with greater simplicity.

Ok, so we know that expanding the CPP isn’t the way to lift the poorest of poor seniors out of poverty and that it can actually harm them which is why any policy to expand the CPP should make sure it doesn’t leave this vulnerable subset worse off.

Indeed, I would argue that you need to also expand the Guaranteed Income Supplement to cover the poorest seniors living on their own barely scraping by and you need to make sure these people are taken care of first and foremost.

But expanding the CPP was never meant to help the poorest seniors. It’s chief goal is to help hard working Canadians with modest incomes save more for retirement so they can receive a safe, secure pension for the rest of their life precisely so they don’t end up outliving their savings and are not condemned to pension poverty like many of these impoverished single seniors. This is why I continuously argue to ignore the critics and realize that Canadians are getting a great bang for their CPP buck.

The problem with all these discussions on expanding the CPP or introducing the ORPP is that Canadians are not properly informed on the success of our large well-governed public pensions and why expanding the CPP and bolstering defined-benefit plans in general is the right thing to do for our retirement system and the economy over the long run.

This is where I think the article above misses a crucial point. Expanding the CPP at a time when the Governor of the Bank of Canada has openly warned pensions (and retirees) to brace for the new normal of lower neutral interest rates (which effectively means prepare for lower returns ahead) is smart social and economic policy.

I mention this because Bill Gross came out with his monthly comment today, Bon Appetit!, where he basically explains why the next 40 years will look nothing like the past 40 years which he called a “black swan event” (I agree with Gerard MacDonell, please stop mentioning black swan too often, it’s not a black swan, we’re headed into a prolonged period of debt deflation and I would ignore silly economists and strategists who think deflation is dead. Make sure you have enough US nominal government bonds, the ultimate diversifier, to properly protect you in this environment).

All this to say please ignore the Fraser Institute or anyone who thinks that expanding the CPP or introducing the ORPP is a bad idea. They simply have an axe to grind and are not taking a holistic view on why such policies will vastly improve our retirement system and economy.

I leave you with some feedback on the article above from Bernard Dussault, Canada’s former Chief Actuary and in my humble opinion, one of the leading experts on retirement policy in this country (added emphasis is mine):

Here are my comments on Ian McGugan ‘s article “Expanding CPP may not help most vulnerable retirees” published in today’s Globe and Mail.

Even if “Canada’s retirement system consistently earns above-average grades from international comparisons such as the one compiled by benefits consultant Mercer”, about 35% of Canadian seniors (i.e. 65 and over years of age) do receive Guaranteed Income Supplement (GIS) benefits. This means that in total these GIS beneficiaries earn annually between $14,000 and $20,000 approximately. Obviously this is not a decent income and while some of them earn above some defined poverty levels, all of them live in miserable conditions, not in dignity.

Due the implementation of the CPP and QPP in 1966, the GIS utilization rate has gradually decreased from 56% in 1973 to about 35% in 2010. Without an expansion, the GIS utilisation rate is projected to plateau forever at the 35% level.

Unfortunately, most if not all proposals (except mine) currently envision a CPP expansion that would exclude from coverage at least the first $25,000 of annual employment earnings under for the following two reasons, which I counteract as follows.

• Low income earners do not have any savings margins. Nevertheless, I contend that although this would have always been the case, the CPP has been working well for them since 1966. An ultimate modest CPP expansion should accordingly well contribute to further reduce the 35% GIS utilization rate. Of the two main objectives of pension programs, i.e. alleviation of poverty and maintenance of living standards, the former should prevail. It must be kept in mind that individual income varies over one’s career and that accordingly the group of workers earning less than $25,000 in a given year is not the same as the ensuing year’s group. Moreover, irrespective of the CPP program, the Canadian and provincial government should consider as soon as possible gradually increasing the minimum hourly wage (about $10) to $15, not mainly because it would provide most Canadian workers with the savings ability to contribute to a modest CPP expansion but mainly because it would compel businesses to pay a decent minimum salary in consideration of the compelling nature of any job.
• Low income earners would not benefit from the expansion because their additional CPP benefits would be clawed back by the GIS. I contend that this is only partially true because few GIS benefits recipients have earned less than $25,000 a year in every of their working years until age 65. Besides, should the majority of Canadians not adopt more largely a CPP-related Confucius state if mind (i.e. the CPP compels you to fish rather than beg for fish) as opposed to strictly GIS-related Robin Hood one (i.e. there will always be a need for wealth transfers from the richest to the poorest individuals but this should be limited to some extent).

I tell you, the one thing I love about my blog is I get to interact with extremely smart and classy people like Bernard Dussault. The man is a true Canadian treasure and you will never read comments like the one above in the Globe and Mail or National Post. It even opened my eyes to things I didn’t understand completely (thank you Bernard).

Most Canadians don’t get it. Even informed Canadians are skeptical about expanding the CPP and I can’t blame them. They read garbage in national newspapers from clueless journalists or even good journalists which cite flimsy reports from grossly biased think tanks and they think they’re properly informed when clearly they’re not. They are being misinformed or partially informed on critical public policy issues.

I hope this comment helps many of you, including experts in the field, understand why it’s critical to expand the CPP once and for all.

What else? Many Canadians aren’t aware of this but every two years, the CPPIB holds public meetings across the country, in accordance with legislative requirements. The next one is on June 6, 2016 and you can find out more details as to where to attend here.