(EM018)

When People Control Their State Pension

Canadians who resent the huge increase in their pension plan contributions can now look with envy to Mexico. The Mexicans have just scrapped most of their bankrupt public pension scheme.

Mexico finds itself in a dilemma similar to Canada's. Its state pension plan's unfunded liability equals 80 per cent of the country's Gross Domestic Product. The Canada Pension Plan is just as shaky. Unfortunately, our leaders are dealing with the CPP's own $600 billion unfunded liability in an uncreative way. They are doubling payroll taxes while keeping control of the money firmly within the hands of a small, anonymous group of Ottawa civil servants who will invest the money on behalf of millions of Canadians.

Meanwhile, effective July 1, the Mexican government chose to remove itself substantially from its bankrupt public pension system. It was basically privatized.

In most respects, the Mexican government has followed the Chilean solution of mandated Pension Saving Accounts, an enormously successful policy now imitated widely elsewhere. The model disperse control back to the grassroots, entrusting ordinary people with control of their pensions.

Mexicans now deposit pension funds into individuals accounts, which are managed by competing private pension fund companies called afores. The Mexicans will keep the current state pension framework but only for current or imminent retirees. The government will pay them from general revenue instead of payroll contributions. Meanwhile, it will supervise the afores while operating one itself in competition with the private funds.

Problems remain with Mexico's set-up. For now, Mexico will allow afores to invest in a limited range of securities. Canadians saw governments fritter away their nest eggs, i.e. pension contributions, in low cost loans to spendthrift provincial governments during past decades. They would not endorse that policy.

But even if Mexico's changes add up to a paler imitation of Chile's groundbreaking pension reforms, it's changes should improve the lot of retirees. The reason governments everywhere will eventually adopt the competitive state pension model, including Canada, is simple. It works better.

• Consider the record in Chile, which privatized its own struggling state pension edifice in 1981:
• Pension Savings Accounts have already accumulated $25 billion, in a developing country with only 14 million people and a GDP of only $60 billion.
• The old system's unfunded liabilities have been covered by proceeds from the privatization of large state-owned companies that became immensely more efficient and productive in the marketplace. Pension fund managers captured much of the new wealth by investing PSAs in them.
• The real return on PSA investment has averaged 13 per cent a year since 1981. Chile enjoys large government budget surpluses.
• Pensions under the new system are much higher, and the typical Chilean worker's largest asset is the capital in his PSA.
• More than 90 per cent of Chileans have dropped out of the old state pension system despite lobbying from trade union leaders and old-style politicians to keep the government in control of people's pensions.

José Piñera, the Minister of Labor and Social Security most responsible for Chile's conversion sums it up: "The new pension scheme gives Chileans a personal stake in the economy. [They know] that a bad minister of finance can reduce the value of pension rights . . .. When workers feel that they own a part of the country, not through party bosses or a Politburo, they are much more attached to the free market and a free society."

Canada's leaders missed a vast opportunity to directly connect millions of citizens to investment markets within a competitive pension framework. For now, our country will continue to run with the old, low performing system. A small group of people will invest your money in a patched up system that extends and perpetuates the CPP's economic illusion with a heavy dose of new job killing state-mandated pension contributions.

As stock markets boom, it's a shame. Tamales, anyone?

---

The Frontier Centre for Public Policy

is an independent public policy think tank whose mission is "to broaden the debate on our future through public policy research and education and to explore positive changes within our public institutions that support economic growth and opportunity."