In a column for The Hill Times, respected actuary Robert Brown responded to our criticism of the federal government’s case for expanding the Canada Pension Plan. While we’re pleased Mr. Brown has engaged collegially—in fact, despite disagreeing with our position, he acknowledges that our analysis is accurate. However, a rejoinder is warranted.
At the heart of the matter, Mr. Brown believes a “significant proportion of future Canadian retirees are going to suffer measurable deterioration in their standards of living.” He also believes that expanding the CPP will fix this perceived problem. We respectfully disagree with both the diagnosis and the medicine.
To begin, the best and most comprehensive evidence does not support claims of a widespread retirement savings problem in Canada. Any analysis of retirement readiness that fails to account for all assets available to Canadians—including those outside the formal pension system—is incomplete and will overstate the problem.
In addition to saving for retirement through the Canada and Quebec Pension Plans, Registered Retirement Savings Plans (RRSPs), and Registered Pension Plans (RPPs), Canadians also save in stocks and bonds in non-registered accounts and in their homes and other real estate, which can be sources of income when they retire. These other assets are not trivial. In 2014, Canadians held $9.5 trillion in assets outside the pension system compared to $3.3 trillion inside that system.
After accounting for all forms of savings, and recognizing that retirees tend to spend less as they age, most Canadians are actually doing a good job of preparing for retirement. The reality is fewer seniors live in low income today than at any point over the past four decades, and seniors are much less likely to experience low income than the rest of the working-age population.
That said, there are some problem areas in our current retirement income system, mainly affecting single seniors living alone (often widows or divorcees) with minimal work history. But because the CPP is a contribution-based program, expanding the program will do virtually nothing to help this group. The appropriate response is targeted policy aimed at helping this group, not a crude instrument such as expanding the CPP that will affect many Canadians who are already saving adequately.
There is, however, a more fundamental problem with CPP expansion. Forcing Canadians to save more through the CPP likely won’t increase how much they save overall for retirement.
Put simply, any increase in mandatory CPP contributions will be offset by lower savings in private accounts. This is because Canadians choose how much they save and spend based on their income and preferred lifestyle. If their income and preferences don’t change, and the government mandates higher contributions to the CPP, Canadians will simply reduce other savings.
In the end, overall savings won’t change but there will be a reshuffling, with more money going to the CPP and less to RRSPs, TFSAs, and other investments. A recent study that examined past increases in CPP contributions found that for every $1 increase in contributions, the average Canadian household reduced its private savings by roughly $1.
There are important consequences from reduced private savings such as loss of choice and flexibility. For example, money saved in an RRSP can be fully transferred to a beneficiary in the event of death. Not so, for the CPP.
And while some try to justify CPP expansion by claiming the program provides a competitive (if not high) rate of return for retirees, the reality is that individual Canadians—particularly those born after 1971—can expect to receive a meagre return on their CPP contributions. Even after expansion, the return for young Canadians is still modest, between 2.3 per cent and 2.5 per cent, depending on year of birth.
While we appreciate the response from Mr. Brown, we respectfully disagree with him on this issue. The facts remain, there’s no widespread retirement income crisis in Canada. Forcing Canadians to save more through the CPP will simply result in a reduction in how much we save privately.
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