Despite agreement among finance ministers, CPP expansion is unnecessary

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Appeared in the Financial Post, June 21, 2016

This week in Vancouver, Canada’s finance ministers reached an agreement to expand the Canada Pension Plan (CPP)—a move that will eventually increase mandatory contributions (payroll taxes) on working Canadians.

However, expanding the CPP is largely a solution in search of a problem. Contrary to what some say, the best available evidence shows that most Canadians adequately prepare for retirement, undercutting the main argument for expanding the CPP.

Back in 2009, Canada’s finance ministers created a major research working group to examine the issue of retirement financial security. The research concluded that: “Overall, the Canadian retirement income system is performing well, providing Canadians with an adequate standard of living upon retirement.”

Analyses to the contrary tend to overlook the substantial assets held by Canadians outside of the formal pension system, including the Canada and Quebec Pension Plans (C/QPP), Registered Retirement Savings Plans (RRSPs), and Registered Pension Plans (RPPs). In 2014, assets held in the formal pension system totalled $3.3 trillion.

But Canadians also save in other ways. For instance, in 2014, Canadians held an additional $9.5 trillion in assets split equally between financial assets (mostly stocks and bonds) and non-financial assets such as real estate. Even after deducting their debt load ($1.9 trillion), Canadians still had a net worth of $7.7 trillion outside the formal pension system.

Including these assets in projections of future retirement income can make an important difference. One prominent actuarial has calculated that by including assets outside of pension plans, and adjusting retirement income projections to allow for later retirement and changes in consumption behaviour as retirees age, many Canadians may in fact be over-saving for retirement. Specifically, more than 42 per cent of middle- and upper-income households will be able to consume more in retirement than during their working life.

In addition, Canadians contribute more to private pensions than generally thought. Pension expert Malcom Hamilton has shown that the household saving rate, which is how savings are often measured, can be misleading because it’s derived from net savings (contributions to savings minus withdrawals from savings). This means that even if gross savings (not accounting for withdrawals) increase, net savings could fall if more is withdrawn from savings than contributed.

Indeed, the household saving rate has been falling as the Canadian population ages because an increasing number of Canadians are withdrawing savings for retirement, not because working-age Canadians are contributing less to pensions.

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.

Nonetheless, some argue that expanding CPP is needed to counteract the downward trend in workplace pension coverage. For example, the federal government made this argument in its most recent budget.

This argument assumes that without access to a workplace pension such as an RPP, Canadians will not save enough for retirement. But research from Statistics Canada shows that, relative to their pre-retirement income, retirees without an RPP have a higher average retirement income than those who do (although the median is slightly lower). Simply put, lack of a workplace pension does not doom someone to a financially insecure retirement.

Taken together, the notion that CPP expansion is necessary because Canadians are under-saving for retirement is not supported by the evidence. Unfortunately, Canada’s finance ministers refused to take note.

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