Notes on pensions and risk

Canada’s finance ministers are meeting this weekend and a proposal to expand the CPP is at the top of the agenda. If implemented, this proposal would bolster an important public program at a time when public programs are under attack and the public sector as whole is shrinking. There are many good arguments in favour of strong public pensions, but I want to focus on one not often discussed: revitalized public programs are a counter to forces that aim to make us accustomed to taking on more and more (potentially disastrous) financial risk.

In yesterday’s post, I noted that austerity is not only a strategy to maintain business profitability, but also part of a broader agenda that can be neatly summed up by the phrase, “privatize gains, socialize losses”. From bailouts to public-private partnerships to the outright privatization of public services, the aim of much right-wing economic policy is to allow the private sector to capture economic gains, at the same time ensuring that society absorbs the costs of something going wrong. This removes financial risks from the private sector and distributes them throughout society.

Effecting such an agenda, however, requires more than just the appropriate policies – it also requires a fundamental change in attitudes towards risk. People have to become habituated to taking on ever-greater individual risks, especially in areas where risks were previously low. Pensions are a prime example of a policy area that can impact on attitudes toward risk.

A defined benefit pooled plan like the CPP nearly eliminates individual risk related to not having at least a basic income during retirement. By guaranteeing a defined benefit, the CPP removes risk from individual calculations about retirement savings. Individuals do not risk having insufficient resources to cover a longer-than-expected lifespan. They are also protected from the financial investment risks that are inherent in the administration of such a plan. The CPP is a social solution to a profoundly individual problem, namely the uncertainty of death. Both gains and losses are socialized, which means that individual risks are checked.

Such institutional design does not accord with the notion of individual responsibility pushed by the right. Today, the prevailing doctrine requires the exact opposite: a willingness on the part of individuals to give up the gains from collective management and a concomitant willingness to accept the individual risks of things going awry. For pensions, this translates into an ever greater push towards individualized private investment accounts such as RRSPs rather than pooled public pensions. A big problem with the CPP under this view is that it does not have risk built in for individual retirees, as it provides defined benefits.

Vehicles for retirement savings such as RRSPs, on the other hand, carry significant risk and the level of benefits they provide is intimately tied to the health of financial markets. RRSPs are not a secure safety net in the same way the CPP is; they subject pension benefits to the whims of financial markets on an individual level. Through vehicles like RRSPs, individuals are brought in greater relationships of dependence on financial markets. (Government-touted PRPPs (Pooled Retirement Pension Plans) operate on the same principles, merely pooling some of the risks and costs.) Future well-being is dependent on higher levels of present risk-taking. Individualized, market-based pension schemes such as RRSPs are thus not only vehicles for financial institutions to extract management fees and a means to funnel additional funds into financial markets, they are additionally a means to change individual attitudes toward the acceptance of risk-taking.

Economists and psychologists have become increasingly interested in the amount of risk people are willing to accept or willingly take on. Academic studies have looked at the relationship between attitudes towards risk and various other attitudes and behaviours. For example, greater acceptance of risk-taking has been correlated with an increased willingness to migrate for work. Individuals more willing to accept risk as a normal part of life are thus better suited to the new, “flexible” model of labour markets.

As the process of privatizing social gains for private profit gathers pace, we become increasingly subject to the incorporation of financial risk-taking into greater parts of our lives and economic arrangements. Trends from increasingly precarious work arrangements to higher debt levels to privatized social services introduce greater risk into the everyday as an additional by-product of their primary aims  – all couched in the benign-sounding language of “individual responsibility”.  On a broader scale, our economies have also become increasingly reliant on risk. The explosion of the number and kinds of financial derivatives that preceded the last financial crisis is perhaps the best example of this pattern. The outgrowth of derivatives was fundamentally an exercise in the formalization of risk. The value of paper gambles on everything from weather patterns to mortgage default rates has exceeded the value of tangible assets by many times over.

Pension reform is thus only one potential avenue out of many for changing attitudes toward risk. While the primary goal of pension reform remains pension reform, changes in attitudes toward risk are an important side-effect. When the reform comes from the right, the effect is most often one of acclimatizing individuals to greater tolerance for risk, thus setting the stage for future rounds of privatization.

Brute economic force is costly and can generate resistance. A slow change in social norms can have the same effect at lower cost and with smaller chances of failure. Why force people to accept risk when they can be gently eased into it alongside regular economic activity, such as the choice of how to manage their retirement savings?

This is why defending and expanding programs like the CPP is doubly important. The CPP is more efficient and equitable than private retirement schemes. Expanding it will only make this even more the case. In addition, however, expanding the CPP can transform saving for retirement into an aspect of economic life where we are not socialized to become risk-takers, where uncertainty is not made to appear normal and where political action can yet have an impact. Let us not let the moment to strengthen the CPP go to waste!

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