Case for expanding the CPP based on myths—not facts
The upcoming meeting of Canada’s finance ministers in Vancouver has sparked speculation of major changes to the Canada Pension Plan (CPP). The federal government wants an agreement with the provinces to expand the program—a move that would involve increasing mandatory contributions on working Canadians. However, the arguments in favour of CPP expansion are largely based on incorrect analyses and misinformation.
For example, expansion proponents claim that Canadians don’t save enough for retirement. Not true. Most Canadians adequately prepare for retirement—a conclusion reached by a major research working group created by Canada’s finance ministers back in 2009.
The formal pension system consists of the Canada and Quebec Pension Plans, Registered Retirement Savings Plans (RRSPs), and Registered Pension Plans (RPPs). But when analyzing retirement income security, it’s important to account for all resources available to Canadians when they retire, which also include stocks, bonds, real estate and other investments. In 2014, these non-pension assets totalled $9.5 trillion, dwarfing the $3.3 trillion assets in the formal pension system.
In addition, Canadians contribute more to private pensions than generally thought. Pension expert Malcolm Hamilton points out that private pension contributions to RRSPs and RPPs have actually increased as a percentage of employment income, nearly doubling from 7.7 per cent in 1990 to 14.1 per cent in 2012.
A second key myth is that increasing the CPP will result in a net increase in overall retirement savings. In reality, an increase in the CPP will be offset by lower private savings. Why?
Because Canadians choose how much they save and spend based on their income and preferred lifestyle. If their income and preferences do not change, and the government mandates higher contributions to the CPP, Canadians will simply reduce private 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 more flexible private savings such as RRSPs, TFSAs and other investments. A recent study that found that for every $1 increase in CPP contributions, the average Canadian household reduced its private savings by roughly $1.
Another myth: the CPP is a “low-cost” pension plan. This is partly based on a myopic focus on the operating expenses of the Canada Pension Plan Investment Board, which manages the CPP’s investments. But the CPPIB’s operating expenses ($803 million) comprise a fraction of the total investment and administration cost of running the CPP ($2.9 billion).
Moreover, some people conflate the returns earned by the CPPIB with the returns individual Canadians receive in CPP retirement benefits. While the investments made with CPP assets have performed well since 2000, this does not directly translate into a greater retirement benefit for Canadian workers. In fact, for Canadians born after 1956, the CPP rate of return is a meagre three per cent or less—and that rate of return declines to 2.1 per cent for those born after 1971.
Finally, Canadians worry about financially vulnerable seniors. Surely expanding the CPP will help them have a more comfortable retirement? Unfortunately, it will not, partly because many vulnerable seniors have not contributed to the CPP and therefore will not receive additional CPP retirement benefits. And for those who have contributed, an increase in CPP income will trigger a reduction in government transfers.
The case for CPP expansion is weak and built on flawed arguments not supported by the facts.