Things They Should Invent: defined contribution to defined benefit pension conversion program

This economic crisis has really pulled the rug out from under defined contribution pension plans. People are seeing their pensions disappear with the tumbling stock market, which destroys consumer confidence among everyone with a defined contribution plan and makes people more likely to save than invest their pension contributions. At the same time, the economic turmoil must be making employers even more hesitant to set up defined benefit plans for the same reason that their employees are losing confidence in defined contribution plans. The impact of this is likely to be felt in our economy for a long time.

This is where the government could step in. They set up a system where you turn over your defined contribution, they invest it, and they guarantee you a defined benefit. The guaranteed benefit would simply be whatever is reasonable. Not an excessive amount that would put our public finances at risk, but not a stingy amount like EI either. There would be no ceiling - the bigger your contributions, the bigger your pensions. Perhaps people could add private contributions too, I'm not sure how that would affect it. The program would be completely optional. They'll tell you up front how much defined benefit they will guarantee, and if you think you can do better you can still invest your defined contributions yourself.

Advantages: The government already has pension-management expertise because they have to manage the CPP and their own employees' pensions. This would just be doing the same thing with more money. Since the government operates on a longer term than individuals, they can absorb losses in bad times and make them up in good times, which individuals can't do. This would boost consumer confidence among pensioners and older workers because they don't have to worry about what if they lose their pensions. It would also stimulate the economy by investing money that would otherwise be saved, and perhaps set an example for other investors. I seem to recall our PM recently saying something about how this economic turmoil provides a lot of good buying opportunities. This would be a chance to walk the talk, perhaps also increasing investor confidence. On a smaller scale, you know how every once in a while you meet someone who hates their job and is just marking time until their pension kicks in, to the detriment of the entire organization? This would let them leave their job for something they like better, without having to worry about losing security in retirement.

Question marks: This is based on the idea that larger investors with more principal can get a better return on investment than smaller investors. I'm not sure if this is actually true. It's in my mind as a pretty solid piece of conventional wisdom, but I have no idea where I got the idea from or how valid it actually is.

Disadvantages: People would have all their eggs in one basket and be entirely dependent on the government not going bankrupt.