Alberta Premier Danielle Smith has offered a proposal for a separate provincial pension plan, in which her province would drop out of the Canada Pension Plan and take 53 per cent of the plan’s assets with it.PHOTO ILLUSTRATION BY THE GLOBE AND MAIL. SOURCE PHOTOS: JEFF McINTOSH/THE CANADIAN PRESS
Sovereignty, as we used to say about the Parti Québécois, is what you can get away with. In the run-up to the 1995 referendum the Péquistes issued all sorts of lunatic explanations of how the province would go about seceding, in which a stupefied rest of Canada would respond to Quebec’s formal and final raising of the middle finger by … agreeing to every one of its demands.
A free-trade deal, a common currency, a highly advantageous (to Quebec) division of the national debt, and of course the whole extraconstitutional, unilateral-declaration-of-independence thing: You had only to believe to make it so. Or as the Yes campaign slogan had it, Oui et ça devient possible.
Danielle Smith and her advisers have made no secret of their admiration for Quebec nationalists – the same unworkable policies, the same impossible demands, above all the same brazen cheek – so it is not surprising to see the latest expression of it: a proposal for Alberta to pull out of the Canada Pension Plan, which it is legally entitled to do, and take 53 per cent of the plan’s assets with it, which it most certainly isn’t.
Others have already patiently explained why this is not going to happen. The rationale for allowing Alberta, with 12 per cent of the national population and 17 per cent of national GDP, to make off with more than half the national trust fund – $334-billion in today’s dollars – is based on an elaborate game of what-if: What if Alberta had never been part of the CPP? In that parallel universe, how much of a nest egg might a hypothetical Alberta Pension Plan have accumulated by now? Right: Give us that. Oui et ça devient possible.
Backed by such an enormous portfolio of assets, Albertans would need to pay just 5.9 per cent of pensionable earnings to maintain benefits at current levels, versus 9.9 per cent currently under the CPP. Or they could pay themselves higher benefits. Of course, workers in the rest of Canada would face the reverse set of options: higher levies or lower benefits. Ha! Too bad for you, other provinces! That’s what you get for keeping so many old people around!
It’s about as realistic as the PQ’s postseparation fantasies, only in this case the extraction of the country’s innards would be carried out by a province of Canada. There’s no way the rest of Canada is going to agree to this; neither are the courts about to endorse it. A more realistic scenario, based on the province’s share of total contributions, would assign it just 20 per cent to 25 per cent of the CPP’s assets. In which case the promised Valhalla looks a lot less impressive: a contribution rate of 8.2 per cent, not far off the status quo. Are Albertans going to take a flyer on this, entrusting their pensions to the care of Dr. Ivermectin Cures Covid and her crew, for such meagre and uncertain gains?
The proposal, then, is of interest less as a practical possibility than for the thinking that underlies it. It’s hard to justify such a nakedly self-serving move, especially in what remains by far the richest province per capita. So instead the whole thing is premised on the idea that – stop me if you’ve heard this one – Alberta has been systematically shortchanged by the CPP, to the tune of $60-billion.
There is a vast industry of this sort of calculation in Alberta. Teams of analysts work round the clock churning out statistics on how much more the province’s citizens pay into the federation than they get out: Famously, this has been estimated at $600-billion since 1967. It’s not the figure itself that’s objectionable. It’s the wildly tendentious interpretation attached to it.
The suggestion, explicit or implicit, is that the whole of the observed gap can be explained as a matter of discrimination. In fact, it is overwhelmingly a function of one simple variable: Albertans are richer than other Canadians. So they pay more in federal taxes, on average, than people in other provinces, on average – not because they’re Albertans, but because they’re rich. That’s not discrimination: Rich Albertans are taxed at exactly the same rate as rich Ontarians or rich Nova Scotians. There’s just more of them, proportionately.
Alberta also tends to have lower unemployment rates, so they receive less in federal employment insurance benefits. And Albertans are younger, on average, than people in other provinces: There are fewer retirees, more people of working age. So they pay more in pension contributions, on average, and receive less in pension benefits: again, not because the rules are any different, but because of differences in demographics – differences that are largely to Alberta’s benefit, financially.
The same applies to equalization. As a federal program it is funded out of federal taxes, which, again, Albertans pay at the same rates as citizens of other provinces. The only reason it contributes to Alberta’s “deficit” with the rest of Canada is because the province has never been eligible to receive equalization payments. Of course it hasn’t: It’s the country’s wealthiest province, with its lowest tax rates. There’s nothing to equalize!
That’s not to say Alberta has no legitimate grievances. Indeed, it may be the only province in this whiny, crabby, godforsaken country that does. The national energy program, which suppressed oil prices for the benefit of central Canadian consumers and diverted oil revenues from Alberta’s treasury to Ottawa’s, was a monstrosity, of a kind that would never have even been contemplated had the oil been in Ontario or Quebec. That’s “domineering federalism.”
The current federal government, while justified in levying a broad-based carbon tax as Canada’s contribution to the global fight against climate change, has needlessly piled a raft of more interventionist, and expensive, policies on top, notably Bill C-69 (the No More Pipelines Act, as it is called in Alberta) and the hard cap on emissions for the oil and gas industry, which seem calculated to annoy Alberta. But the NEP has been dead for 40 years, and these newer irritants are a tiny fraction of that much-advertised $600-billion.
And yet people who should know better, including some economists, continue to bandy it about as if it held any meaning. It might politely be described as a false correlation – it’s not Albertans, as a group, who pay more than they draw out, but rich people. Less politely, it’s a lie. But it’s a useful lie, as we can see in its latest deployment.
It seems clear how Ms. Smith intends to use the pension windfall, if she can: to set up a kind of sovereign wealth fund, à la Norway’s Oil Fund, a vast pool of money for governments to invest in shaping the province’s economy to their designs. “If we can reduce premiums for workers, increase benefits for seniors and also have a say in how the money is invested,” she told the Calgary Sun’s Rick Bell, “that checks off a lot of boxes for me.”
This is a perennial dream of politicians, oddly, in what is supposedly the country’s most conservative province. Only until now the idea has been that the fund would be endowed by oil revenues – not by other provinces’ pensioners.
The former has at least something resembling a sensible rationale. Oil is a depleting asset. Rather than simply consume the revenues from it until it is gone, it makes sense to convert these into more durable assets, the kind that can pay dividends far into the future. The mistake is in assuming the assets must be held in public hands: the One Big Fund approach. The objective is just as much achieved if those assets are held privately. Arguably, it is better achieved.
Anyone who looks honestly at the history of public investment funds in this country, with their record of politicized misdirection and industrial-policy follies, must blanch at the thought of adding another one. I am not just talking about the obvious disasters – the Quebec Pension Plan, or Alberta’s own Heritage Savings Trust Fund. I’m talking about the Canada Pension Plan.
I have written about this once or twice before. Since it switched from passive to active management in 2006 – no longer simply “buying the index,” as it was obliged to do when it was first allowed to invest in public markets, but resorting to ever more abstruse strategies and exotic assets in an attempt to “beat the market” – the CPP’s costs have skyrocketed from $178-million, or 0.15 per cent of assets, in fiscal 2007, to $7.5-billion, or 1.32 per cent of assets, in 2023.
Not only have its staff numbers ballooned (from just 261 full-time employees to 2,136), but so has average compensation: The five top-paid executives made about $800,000 each in 2006; in recent years it has topped $4-million. You’d think the CPP’s board of directors would have something to say about this – only the directors have been enriching themselves at just as frantic a pace. The whole thing is a textbook example of a failure of oversight.
All this, for a net gain over the fund’s own preferred benchmark of roughly half a per cent, annually. Admittedly, that’s better than most actively managed funds. Every year between two-thirds and three-quarters of actively managed funds finish behind the market averages, despite charging investors a substantial premium over index funds. Over longer periods their performance looks even worse. Chances are the CPP will revert to the mean as well.
The reasons are well known. The smartest investment manager is not going to consistently beat all the other smart investment managers. Some will outperform in a given year, some will underperform – that’s why they call it the average – but it’s mostly a matter of luck either way.
Why do they underperform as a group, then? Because of the fees they charge. An investor paying 2 per cent of assets annually to an investment manager is basically giving the market a two-percentage-point head start. This is why so many investment funds have been shifting from active to passive management in recent years. All except the CPP.
Again, the basic idea behind the CPP – a mandatory national retirement savings plan – has merit, on “moral hazard” grounds: If the state did not compel people to save for retirement, some people just wouldn’t, blowing their pay on present pleasures in the knowledge that, come retirement, society would bail them out anyway.
But again, the mistake is in equating a mandatory savings plan with a mandatory public plan. Rather than One Big Fund, it could take the form of a system of mandatory individual retirement savings plans, as in Chile, Singapore or Australia – like RRSPs, only compulsory, universal and more closely regulated (among other things, it might be limited to a selection of low-cost index funds).
Rather than pull out of the CPP, then, Alberta would be better advised to channel its energies into reforming it. Of course, in an individualized system, it would be clear how much you were paying in, and how much you would be eligible to withdraw at retirement. Alas, it would also be clear that there was no systemic discrimination against Albertans.
The Smith government has a choice, then. Does it want a better pension system? Or does it want one on which to grind its anti-Canadian axes?