A question of values By Marcel Côté The debate over George Bush’s proposal to allow Americans to invest one-third of their contributions to Social Security — the US equivalent of the Canada Pension Plan — in private accounts similar to self-directed RRSPs, highlights the differences between Canadians and Americans. Social Security is a workers’ pension plan dating back to president Roosevelt. In return for contributions representing 12.4% of their salary, paid in equal parts by the employer and the employee, at age 65 US workers receive a pension equal to the capitalized value of their contributions, based on the rate of re-turn of US government bonds. Someone with a career-end sal-ary of US$100,000 will likely get the maximum, a little less than US$2,000 a month. CPP (and QPP) is slightly different. We contribute 10% of our income, paid in equal parts by employer and employee, and can expect to get a maximum of $10,000 a year at age 65. (Ca-nadian seniors also receive a minimum of $5,700 a year in old-age benefits, making the integrated Canadian system more generous.) Both are pay-as-you-go systems with no significant capital accumulation, as today’s workers are paying for the benefits of today’s retirees. Both countries have built up small reserves (mistakenly called trust funds), equal to two years of payments in the US and three in Canada. The lack of accumulated capital in pay-as-you-go systems is what distinguishes them from private pension plans, where contributions accumulate in the plan to be distributed later in the form of a pension. Tax treatment of pension plans is similar; there are caps on nontaxable contributions, and pensions are indexed to inflation and taxable in both countries. And, the 401(k) program is similar to our RRSP and will be capped at US$15,000 next year. The Bush proposal is simple: individuals would be able to divert one-third of their total contributions into a self-administered pension plan and would have their own benefits reduced by the same amount, prorated to the number of years of contribution. The problem is that workers who divert one-third of their contributions to a private plan will stop paying the pensions of current retirees. The Social Security Administration will have to borrow to pay the retirees’ benefits until those who opted for a reduced pension retire, at which time a surplus will be generated, allowing the government to pay back its massive borrowings. By then, that will total several trillions of dollars, exceeding the value of the trust fund’s current assets. In the US and Canada, one generation’s retirement is paid for by the following generation. The total pension benefits paid to a generation reflect what it contributed during its productive years — an intergenerational contract of sorts. The Bush reform would break this contract, allowing some people to evade their obligation by investing a third of their contributions in private plans in return for giving up a proportionate share of their Social Security pension. Those choosing this option will with-draw part of their support to the generation preceding them and will be asking the next generation to reduce their support to them by the same amount. In short, they will be opting out of the intergenerational contract at the heart of Social Security. Interestingly, this plan is expected to appeal mostly to the wealthy. In the current public debate on the proposal, these issues are being sidelined. Critics are focusing on the massive borrowing that would result from this plan, which could increase the US national debt by 15% to 20%. Bush promises that retirees who opt for private accounts will see their benefits increase because contributions will be invested in the better performing stock market. This argument is true, but incomplete. Currently, contributions aren’t invested; they are lent by one generation to the preceding generation and repaid by the following generation at an interest rate set by the gov-ernment and lower than stock market returns. Comparing returns doesn’t tell the full story, but what is surprising is that no one is questioning the legitimacy of a plan that lets the rich withdraw their mon-ey, leaving others to support the elderly. A debate on society’s moral fibre is difficult to imagine in the US, where collective solidarity is not perceived as a vir-tue but as a government intrusion into private affairs. In the name of individual freedom, the US value system makes solidarity an option. Private individual generosity is widespread and highly valued, yet collective expressions of generosity are criticized, even if they aim to benefit Americans’ own parents. What a country! Marcel Côté is a partner at SECOR Inc. in Montreal