Blogs & Comment

Is the retirement system sustainable?

The Dept. of Finances consultations on the retirement system are in progress until April 30 and the proposals to fix the system are flying fast and furious. They highlight at least for me why Canadians would better off with the simplicity of a flat-tax system.
I earlier noted that the proposalswere uniformly focused on how benefits can be expanded as opposed to how costs can be contained. It seems the war on the family is only poised to escalate, with working generations and families being set up to transfer even more of the fruits of their labor.
A recent post by blogger Michael Jamesdealt with one of the proposals to fix the retirement system specifically, a recommendation to change the way RRIF withdrawals are taxed to give seniors more after-tax income. He presented a convincing argument why the logic behind the proposal was flawed.
The commentary at the end of the post was also interesting. Im starting to get tired of the number of proposed tax changes that clearly favour old rich people, went one of the remarks. Oink Oink, quoted another.
Another theme dealt with what could be called regulatory risk, or the fact that programs like RRSPs and the Canada Pension Plan (CPP) are subject to amendment by politicians and bureaucrats. As the history of these programs shows, not only do these changes occur quite frequently but they can: i) penalize some groups and ii) are hard to anticipate.
This makes it difficult for persons to optimize their consumption, saving and personal-finance decisions in the here and now. As one of the commentators to the post said, Significant changes to the [RRIF] rules amount to a retroactive punishment for those who optimized their finances based on the original rules.
This brings me to one of the leading proposals in the Dept. of Finance consultations, which is to increase contributions to the CPP. Many people might think its OK to pay higher CPP premiums because they expect to get them back with interest in their old age.
But that assumes the politicians and bureaucrats dont change the rules yet again down the road. For example, what if the government encounters a fiscal crisis 5-7 years from now and austerity measures include a substantial cut to CPP benefits?
In short, I wonder if the collectivist approach to retirement now in vogue will only come to grief at some point. Canadians are putting their retirement years in the hands of politicians and bureaucrats; there is bound to be some disappointment on this count.
Not only are thereconcerns over the efficient allocation of resources by government agencies but also over political interference. For example,the retirement apparatus could be used to buy votes from interest groups (as now seems to be the case).
A flat-tax system would eliminate, I believe, much of the regulatory risk, inefficiency and political interference. It would dispense with the bewildering array of exemptions/deductions, lower the general tax rate and let people have more control over how they save for their own retirement.