E pluribus CPP

My recent piece on the Caisse de debacle elicited this strange response from Erin Weir at the Progressive Economics Forum, a frequent (and friendly) critic of this page:

Coyne’s secondary headline (and primary argument) is, “Compulsory plans like the CPP expose older investors to risks they shouldn’t have to face.” His logic is that, whereas risky assets with potentially high returns (e.g. stocks) make sense for young people with decades ahead of them, safer assets with modest returns (e.g. bonds) make sense for people closer to retirement. In buying some risky assets, the CPP Investment Board allegedly forces excessive risk upon older Canadians.

What Coyne seems to miss is that younger Canadians are also members of the CPP. If risky assets are appropriate for young people and safe assets are appropriate for old people, then the CPP should buy a combination of risky and safe assets . . . which is what it does.

Weir represents my point fairly: the Caisse fiasco is only an extreme example of a basic problem with compulsory public pension funds — that they expose everyone to the same risk, regardless of their tolerance for it.

It’s his rebuttal that’s baffling. Whatever combination of risky and safe assets the CPP buys, it’s only one combination. That combination will be optimal for some of its clientele, and entirely wrong for the rest. That’s the point: by throwing everyone, young or old, into the blender, the CPP homogenizes into one what are in fact a heterogeneous mix of risk preferences.

Isn’t this just risk-pooling, as in life insurance? No: the pensioner is not the risk, here. It’s the stocks that are risky. So it makes sense to buy a broad mix of stocks — ideally, the index — as well as bonds and other things. But it equally makes sense to leave it up to different individuals — or age groups, at least — which asset mix is right for them.

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