Saskatchewan leads the way in opposing CPP expansion
According to a story in the Globe and Mail, Saskatchewan is set to oppose the federal government’s plan to expand the Canada Pension Plan (CPP). As Saskatchewan Finance Minister Kevin Doherty (pictured above) noted, “the last thing we need to do right now is impose an additional payroll tax on our business community.” This is a sound rationale but it’s only one small reason to oppose the CPP expansion. Here are several others:
(1) An expansion of the CPP is a solution looking for a problem
The Trudeau Liberals proposed an expansion of the CPP as “a means of providing an adequate standard of living for retired workers.” In 2009, however, the federal and provincial/territorial finance ministers created a research working group to explore whether or not Canadians were adequately prepared for retirement. The group’s summary report found: “Overall, the Canadian retirement income system is performing well, providing Canadians with an adequate standard of living upon retirement.”
Similarly, former chief economic analyst for Statistics Canada, Philip Cross, studied the adequacy of retirement saving in Canada and found proponents of an expanded CPP “stoke fears of a looming crisis by claiming that Canadians aren’t saving enough for retirement. These claims blatantly ignore the ample resources available to Canadians when they retire.”
(2) Expanding the CPP will lead to reduced private savings in RRSPs, TFSAs, etc.
Research led by University of Montreal economics professor François Vaillancourt finds that past expansion of the CPP resulted in reduced private savings by Canadian households. That is, Canadian families decide how much to save and how much to spend based on their incomes and preferred lifestyle. When governments increase mandatory savings (through CPP contributions), Canadian families reduce other forms of voluntary savings such as RRSPs and TFSAs. The end result is not a boost in savings but rather a reallocation from flexible, privately held savings to mandatory government savings.
(3) Reduced private savings will reduce much-needed small and mid-cap financing in Canada
Given the reshuffling of savings and reduction in voluntary private savings through RRSPs and TFSAs, there’s a risk that small and mid-cap companies in Canada will lose potential investors. Consider for example that the Canada Pension Plan Investment Board (CPPIB) currently invests only 7.3 per cent of the $273 billion in assets in Canadian equities. It seems unlikely that a large share of these investments is providing financing to small and mid-cap companies.
(4) CPP expansion is a bad deal for young Canadians
The narrative that CPP provides strong returns for all Canadians is simply false and in fact, young Canadians receive particularly modest returns. Indeed, the impressive double digit returns recently generated by the CPPIB are not enjoyed by individual Canadians. Unlike a private pension or RRSP account, the returns to the CPPIB are not directly shared with beneficiaries in the form of higher benefits or with contributors in the form of lower contribution rates. And since the benefits of current CPP retirees are partially funded by a younger cohort of workers, this raises concerns about fairness between generations.
For older cohorts of contributors, the CPP offers a higher rate of return (in terms of benefits relative to contributions). According to the Office of the Chief Actuary, someone born in 1980 could expect a 2.3 per cent annual real rate of return on their CPP contributions. For someone born in 1950, the rate of return is considerably higher at 4.2 per cent. According to a recent study published in the journal of Canadian Public Policy, a major reason why the rate of return is so much lower for younger generations is that contribution rates have increased without an equivalent increase in benefits. In 1986, the total contribution rate was 3.6 per cent, growing steadily to the current rate of 9.9 per cent in 2003. A report released by an interprovincial committee of government ministers noted that the current contribution rate would only need to be 6 per cent if a higher rate wasn’t required to correct the under-funding left by the low rates of older cohorts. Put differently, the rate of return from CPP for today’s youth is lower to compensate for the higher returns provided to the older generation.
(5) Expanded CPP will lead to a major tax increase on middle-income Canadians
While no specific proposal is currently being publicly debated, the reality is that expanding CPP will necessitate higher payroll taxes today to fund increased payouts in the future. The existing rules for CPP contributions already require $4,960 annually in employer and employee contributions for a single working Canadian making $53,600. Depending on the specific proposal for expansion, the end result could be a marked increase in the average Canadian family’s total tax bill, which already accounts for 42.1 per cent of income. Higher payroll taxes will drive the amount of income going to government ever higher, leaving less money available for families to allocate as they wish.
(6) CPP is not a low cost way to invest
Advocates of expanding the CPP often tout its supposed low costs. Simply put, the low-cost argument for the CPP does not withstand scrutiny. As a recent study found, the operating expenses cited by the CPPIB, which manages the CPP’s investments, cover only a select subset of the total costs involved in running the CPP. A fuller accounting of all the costs associated with the CPP, including external management fees and the transaction costs of executing its investment strategy, paints a different picture. The total costs are approximately four times higher than the narrowly-defined operating expenses ratio touted by the CPPIB. In fact, the total costs of the CPP now exceed many low-cost mutual funds and ETFs offered in the financial markets for RRSPs and TFSAs.
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