Yesterday, Guest Bogger Simon Archer of the law firm Koskie Minsky provided us with an excellent summary of the complexities of the law that governs pensions when a company files for bankruptcy. In todays second installment, Simon adds some perspective to the law and considers more directly some of the policy debates about the potential benefit of a Federal defined pension plan model. There’s a nice little anecdote about General Motors in this piece, look for it. Thanks Simon:
[Yesterday’s entry looked at] some of the considerations and tensions at the intersection of pension and insolvency law. They are important, in fact, very important for members of those plans. The under-funding and failure of these big company pension plans can have a profound effect on the living standards of employees and retirees and their communities.
It is also important to put these plans in context, especially for a policy debate. Only one-third of the paid labour force participate in an occupational pension plan, and 20% of those plans are DC plans. The vast majority of the workforce does not have a plan. For those who have them, they provide between 35%-50% of total retirement income — so we know they are a very important source of income in retirement. Even then, they are, on the whole, not “rich” plans: the average benefit paid from a defined benefit plan might be somewhere around 15-18k per year — significant, but not a high amount. (Note that this is just income from pension plans — other sources of income will increase total retirement income).
It is also relevant to note that occupational pension plans are already a very large — perhaps the largest — “tax expenditure” that governments provide — that is, a form of government spending through forgone tax revenue that would have otherwise been collected. This is one of the perceived inequities of the private occupational pension system: it assits fewer and fewer employees, and it is a fairly large public policy commitment.
For these reasons and others, there is very significant interest in a renewed and expanded national defined benefit pension plan, otherwise known as C/QPP. There is a certain symmetry to this policy debate: in 1950, it was GM that took the lead in fighting for the right to provide pensions at the company level, rather than the government level, as the UAW under Walther Reuther proposed. GM argued that public pensions were a form of creeping socialism or nanny state.
Much the same issue is being contested today at the federal level, with companies advocating in favour or more tax breaks for the current system or more Defined Contribution-type savings arrangements, and unions, largely, advocating for an enhanced C/QPP. At the same time, the federal and provincial governments are being asked to pay a portion of — you guessed it — GM’s pension liabilities. Those burdened with a sense of irony find it heavy lifting these days.
In fact, there are reasons of principle, precedent and practicality to consider an expanded public program such as CPP.
Pensions are an “after-market” phenomenon, that is, they are a post-employment benefit that are not easily tied to continuing employers. We could also call failure to adequately save for pensions a “market failure”. As such, they require policy intervention, either through tax assisted savings, which in the U.S. is now being called the “nudge” option (See this paper by Orly Lobel and On Amir on the American ”nudge’ debates), or through more direct public policy interventions. We know from reams of research that the nudge school is limited in its ability to effect desirable outco mes. Pensions are most efficient and most reliable when delivered by a very large plan, and the biggest and best of those plans, and therefore cheapest and most reliable, is the C/QPP.
There is a second dimension to “after-market” phenomena like these: they can actually be turned into competitve advantages when provided on a national, government-backed platform. Health care is another example. In health care, a universal payer system (or some version of that) is not a burden on individual firms or employers because it is paid through the state. Health care insurance costs for U.S. firms are far higher than Canadian firms, in part because of he presence of public health care. It is a competitive advantage available to all businesses with employees here. Similarly, a public pension system could have the same efficiencies for employers: it could reduce volatility on the balance sheet and take the administration of these plans out of the duties of overworked CFOs.
Third, C/QPP or a national public plan would be available to everyone, which avoids a singificant limit of the employer-centric plan, which only becomes available to those employees whose employer is willing tosponsor one.
We also have precedent for large sector-wide or national-in-scope plans in other OECD countries, such as the Netherlands and Australia, or old favourites like the Scandinavian economies. Even within Canada, thereare examples of very well-run large pension plans. Although the best would likely be a large, government-supported plan, the precedents are already present in the Canadian system.
Finally, there is a practicality to an expanded C/QPP over other options: it already exists, we already know how to run it, and it has worked very well at what it does.