Tuesday, August 11, 2015

ORPP is a Better Deal than the CPP

Stephen Harper is "delighted" to make the implementation of the Ontario Retirement Pension Plan (ORPP) more difficult. At the same time, he is not proposing any changes to the CPP. However, the ORPP is a much better deal than the CPP:

- under the ORPP, workers contribute 3.8% of their earnings (1.9% themselves, 1.9% through their employer) in order to replace 14.24% of their income in retirement;

- under the CPP, workers contribute 9.9% of their earnings in order to replace 25% of their income in retirement.

In order words, for the ORPP to replace 25% of income, workers would only have to pay 3.8%*(25/14.24) = 6.67% of their income rather than 9.9%. Why?

- Part of the reason is that, while neither plans requires contributions on earnings up to $3,500/year and both still pay benefits on those earnings, the ORPP has a higher ceiling ($90,000) than the CPP (around $55,000 next year). But this difference is rather minor: with the same ceiling as the CPP, ORPP could still replace 25% of pensionable earnings with a contribution rate of 6.8-6.9%. There may be other minor design differences (I haven't done a full comparison), but it's pretty safe to say that ORPP could have the same design and pay the same benefits as the CPP with a contribution rate of around 7%.

- So why could ORPP offer the same benefit as the CPP with only 70% as much contributions? The answer is buried in the CPP actuarial report: even while (real) investment returns are assumed to be 4% going forward, the actual return for those born after 1970 is only 2%. This is because CPP contributions were too low for earlier cohorts as a result of inaccurate projections. Thus, younger workers are heavily subsidizing older workers and retirees: since contributions made to the CPP are withdrawn, on average, about 20 years after they are made, that 2% difference per year means that young workers have to pay 40-50% more than what they would pay if they didn't have to subsidize older workers. Lo and behold, that's roughly what you'd tack onto ORPP contribution rates to get to the CPP contribution rates.

In short, roughly 70% of the CPP contributions are actually retirement savings; the remaining 30% is a tax that makes up for insufficient contributions before 2000 - a tax of up to roughly $1,500 per worker each year. By contrast, because the ORPP isn't saddled with past mistakes, it is 100% retirement savings. Therefore, it is highly ironic that Stephen Harper is characterizing ORPP as a tax while doing nothing about the CPP.

Sunday, August 9, 2015

Vote Efficiency, 2015 Edition

No projection until Labour Day weekend, but I've started playing around with the numbers a bit to get a feel for things.

What would the seat count look like if the Conservatives, NDP and Liberals all get 30% nationally? Obviously, it depends on how that vote is distributed. Under the assumption that the swings to get from the current vote support (polls from late July) to 30% are uniform nationally, I get about 125 seats for the Tories, 110 seats for the NDP, and 100 seats for the Liberals.

Under the same assumption, what levels of popular support would translate to a three-way tie? In my model, it looks like 32% Liberals, 31% NDP and 28% Conservatives.

Obviously, the above numbers imply that when the race is tight, the Tories' vote is the most efficient, and the Liberals' vote is the least efficient.

Now, what vote share does each party need in order to achieve a majority? To answer this question, one needs to make assumptions about where each party's extra support comes from. I will assume that for every 3% gained by the NDP/Liberals, 2% come from the Liberals/NDP and 1% from the Conservatives. And I will assume that Conservatives draw evenly from the Liberals and the NDP (counterintuitive perhaps, but "2nd choice" questions in polls do not suggest that Liberals are much more likely to defect to the CPC than New Democrats). Under these assumptions, the majority thresholds are around 38.5% for the Conservatives, 41.5% for the NDP, and 40% for the Liberals.

Once again, the Conservatives have the most efficient vote, but while the NDP's vote is more efficient than the Liberals' when support levels are similar, the Liberals would actually have an easier time than the NDP cobbling together a majority.

Sunday, August 2, 2015

Campaign 2015: No Projections before Labour Day Weekend

The 2015 federal election campaign is underway! Due to professional obligations, I will not have the time to issue projections before Labour Day. My workload after that is not yet known: I may be able to provide daily updates after Labour Day, but I may also not be able to cover this campaign at all. In any case, I hope that you will check back then to see what's up on Canadian Election Watch.

I will say that, in my opinion, this year's Orange wave is increasing the chances that Stephen Harper would keep his job after all, though I still believe that they are low. Why?

- Orange wave or not, it was always going to be difficult for the Conservatives to secure a majority this year. But with the Orange wave, if the Liberals do not prove a viable option, disaffected Conservatives and Red Tories might conclude that Harper is still better than the NDP. That is, while the 2011 scenario is still not likely, it is likelier than it seemed before the Alberta election.

- Without the NDP surge, the Liberals would have been at least second, and the third-place NDP would almost certainly have opposed a Conservative throne speech and supported a Liberal one.

- With the NDP surge, if the Conservatives finish first with a minority, the NDP second and the Liberals third, it is unclear what the Liberals would do. On the one hand, most of their voters would be pretty unhappy if they let Harper govern. On the other hand, if they hand the government to Mulcair, they may be sending Canada straight to a two-party system and making themselves irrelevant.

I believe that the Tories' goal, if they can't win a majority, is to keep the NDP second and the Liberals third - this gives them the best chance to hold on to power. This also happens to be the scenario corresponding to the current poll numbers, so look for Conservatives striving to maintain this balance over the next few weeks.

The most important thing for the NDP isn't really to win, but rather to make sure the Liberals are third and to avoid a Conservative majority. This will either put them in power or at least position them as THE alternative to the Tories. And if the NDP wins, they would rather face a Conservative Official Opposition going through a leadership campaign than a Liberal Official Opposition that could coalesce the anti-left vote. The NDP seems to have decided that, given their current momentum, it is better to marginalize the Liberals rather than to attack them directly. But if Liberal support starts inching back up, don't be surprised if Mulcair becomes more aggressive toward Trudeau.

Conversely, the Liberals' main goal is to avoid third place. As explained above, if the Liberals are second with a Conservative minority, they will likely seize power. But even if the Conservatives win a majority, the Liberals wouldn't be too sad at being the Official Opposition: the party would avoid death, a real danger given the current situation. Therefore, it is in the Liberals' interest to go after the weaker of the two other parties, and it is too early to tell whether the Conservatives or the NDP is the better target.

So, in short, short of winning a majority, the parties' main goals are:
- Conservatives: maintain a Goldilocks scenario where the NDP is second and the Liberals, third
- NDP: make Liberals finish last
- Liberals: avoid finishing last

This will be an extremely difficult campaign for the Liberals because both their opponents want them last, and because they are already last. A second-place finish would have been disappointing from their perspective last year, but I'm pretty sure Trudeau would take it in a heartbeat today.

Still, 11 weeks is a long time, and my next analysis in 5 weeks may already look completely different, so stay tuned!