Sunday, April 29, 2012

Pension debate; do Canadians care?

One of the positions put forward by the government is that Canadians don't care enough about their retirement to plan for it.  This interesting perspective is about laying blame rather than dealing with the issues surrounding retirement. A number of supporters of the idea of changing the way we pay out Old Age Security offer similar arguments. These arguments can be classified as follows: First, that if you did not plan properly for your retirement that is your own problem. Supporters of the government will say something like  If your retirement plan is compromised by a missing $13,000 that you knew years in advance you wouldn’t be getting, it wasn’t a serious plan in the first place.

Or supporters will say that many Canadians now collecting OAS also are still in the labour force, by choice  so it’s not as if 65 is the pivotal age it once was.

The second argument is that with all of the opportunities given to us by the government there is no excuse for not putting money aside for retirement. Of course, I agree that there are opportunities such as the Tax Free Savings, Pension Splitting, Changes to the Canada Pension to reward those who take it later, the ability to sell your personal residence with no taxes and the low rate of Capital Gains tax, and finally the abundance of private sector plans and the ability to maximize contribution's to your RRSP.

The problem is these are only available to those with extra money and this is not most of us. Its not that we cannot be bothered it is because we have other more pressing expenses such as raising children, or paying the mortgage, or buying food or paying rent, or buying gas to run our car, or or or.  The crux of  this argument is that  people do not want to be held responsible for lifestyle choices.Those who hold this argument believe that most of us Boomers included, are spenders and into self-gratification and they want the government to bail them out for bad choices they are making today so they can continue to live the good life when they retire.

There are other explanations as to why we don't take advantage of all of our opportunities to plan for retirement and for these we can look to the field of Behaviour Financial modelling. This area of Economic offers models that hold there are a number of reasons why people don't put money into retirement plans, including:

People are easily influenced by decision framing, which means decisions are often made based on how the options are presented.  Madrian and Shea (2001) have shown that when workers are required to opt-into a pension plan as the default decision (or the non-decision) people will not opt in and the effect is that people save nothing; by dramatic contrast, if the default decision is an automatic enrollment plan started when they are hired or is put into play by a union contract, the default decision is that people will save whatever is the contracted agreement. What this means is that by merely changing the question the decision can be changed from not saving to saving.

People lack willpower. People try to save for retirement, but they too often prove to be limited in their capacity or desire to execute intentions. In a sense, saving for retirement requires behavior similar to those undertaken in other behavior modification programs such as exercising, dieting, quitting smoking, or following through on New Year’s resolutions. It would seem that while people intellectually “understand” the benefits of a specific behavior, and they even have some idea of how to get started, they have difficulty implementing their intentions. Too often, they struggle to take action, and when they do act, their behaviors are often half-hearted or ineffective.

Risk vs Rewards have different meanings. Weber suggests that retirement risks rate low along both dimensions: few people have a palpable fear of impending disaster or of great uncertainty in their retirement planning, as compared to other risks in their lives. In Weber’s framework, the self-control problem of retirement saving must join both cerebral and emotional decision-making simultaneously, if people are to be prompted to take effective action. For example, if one were to experience the risks of retirement in the present so as to stimulate the brain’s affective system, people might attempt a real-world experiment such as attempting to live on, say, two-thirds of their income for the next month.
Too many decisions results in confusion One tenet of contemporary economics is that more choice is good news, but choice, can produce "choice overload" so  the opposite may be true.  If we become overwhelmed with the complexity of the decision many will withdraw and  pension plan participation is reduced. Faced with complex investment choices, and given a myriad of choices, many of us take the default choice and do not choose anything.

Another position taken by supporters of the government is that we really cannot afford to continue to pay because there will not be enough workers to support the program.  The argument goes something like this,  there are now seven workers paying for every one person collecting Old Age Security, in 20 years there will be only 2 workers for everyone worker collecting Old Age Security.

What are the facts about this last statement. In 2031 there will be about 9,935,,000 Canadians over the age of 65 according to Stats Canada. (using the highest growth rate for Canada) while there will be about 24,355,000 Canadians between the ages of 20 and 65, many of whom will be working. Today there are about 21,714,000 million Canadians between the ages of 20 and 65, while there are about 4.981, 000 over 65.

Yes. the number of Canadians over 65 will increase, but so will the number of younger Canadians who are or could be working. Canadians who are working age will increase by about 3 million while the number of Canadians over 65 will increase by about 4 million. But there are many who, while over the age of 65 will continue to work, because they need to work. The argument that those collecting Old Age Security will outnumber the workers 2 to 1 does not make sense to me.

There are many reasons that Canadians do not prepare for retirement and need the Old Age Security, this is a complex issue, which begins with understanding human nature and financial decision making as well as looking at the facts.

The arguments being put forth by the government and its supporters are simplistic and are not based on facts. The government decision will be sold to the public as rational. However, The decision to cut the pension is an ideological decision not an Economic decision. I believe that the conservatives have never been a government that relies on facts and the truth to drive their decisions.

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