Pensions

[PHILLPS@xxxxxxxxxxxxxxxx (root@xxxxxxxxxxxxxxxxxxxxx [130.179.16.47]) by for <pkt@xxxxxxxxxxxxxxxx>; Mon, 6 Oct 1997 13:58:40 -0500 (CDT)]

A few years ago the Canadian government increased the
allowable limit for tax-shielded RRSP (Registered
retirement savings plans) for foreign stocks from
ten per cent to twenty.  The argument put forward to
support this by the investment community was the lack
of quality Canadian stocks to supply the pension
demand.  Now that the Canada Pension Plan (CPP) plans
to get into the stock market to partially fund the
pension scheme, I would think it would make the
problem more severe, particularly if the high corporate
profits are being used to buy up their own stocks.

It seems to me that if the supply of stocks is relatively
fixed and the demand keeps rising because of increasing
pension funds in search of stocks, then the prices
will continue to increase regardless of expected returns.
In fact, fund managers will continue to buy stocks as
long as they expect their prices to continue upward and
the continued purchases will keep the prices up.

I realize this is something of a ponzi scheme -- but
what will happen if stock prices start to fall?  Where
will pension fund managers put their money?  Bonds?
Would that not drive the interest rate down to the
point that the pension funds would not be able to
deliver adequate pensions.

Am I overlooking something or is this funded pension
thing a two headed monster?  Enquiring minds want to
know.

Paul Phillips,
Economics,
University of Manitoba.