Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Thursday, February 17, 2005

U.S. Social Security vs. Canada Pension Plan

The Canadian Pension Plan [CPP] has a reserve fund that is invested in the market, not in special gubmnt securities, as is the U.S. Social Security fund. Last year, this reserve fund earned a return of more than 5%.

The Canada Pension Plan earned 5.2 per cent on its investments in the third quarter, or about $3.9 billion, the CPP Investment Board said Friday. At the close of the quarter, the $77.2-billion CPP reserve fund consisted of $43.8 billion in publicly traded equities, private equities, real estate and infrastructure, and $33.4 billion in nominal fixed-income securities.

BrianF, who sent this link to me, writes,

Here's part of the difference between social security here and in the US. In the US the social security trust fund is invested exclusively in special government bonds, so all future pensions will have to be paid out of future tax revenue.
I am not entirely optimistic about the CPP investments. If/when the markets have some serious downturns, the reserve fund will dwindle, members of the CPP investment board will come under attack, and politicians will clamour for the use of general revenues to guarantee that pensioners receive payments they had come to expect. Brian's response to this concern is, in part:
The CPP's now invested in a mix of securities, which has a couple of
advantages. One is that there's a greater likelihood those funds which are being earmarked to support retirement incomes will actually be used to increase the capital stock, and therefore income. The other is that it gives low income retirees some share of capital income - the payroll tax funding mechanism, since the tax is probably entirely shifted back to labour, seems just to redistribute labour income. The US Social Security trust fund is, as I understand it, entirely in non-marketable federal government bonds. Of course, another reason the CPP's in better shape than Social Secturity, at least according to a couple of recent articles in the National Post, is because CPP benefits are much lower than Social Security ones.
To learn more about the CPP, click here.

My own preference is for a minimal gubmnt pension that by itself would allow a very spartan life. I think it is unconscionable not to provide people with the wherewithall to maintain a very basic lifestyle. Beyond that, we have plenty of inducements, encouraging us to plan and save more. In this sense, the Canadian Pension Plan (coupled with our Old-Age Security plan) is preferrable to the U.S. Social Security System.
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