Canada has a growing investment problem.

Business investment (excluding residential structures—houses, condos, etc.) has dropped nearly 20 per cent since 2014, and the level of business investment (as a share of the economy) in Canada is now second lowest among 17 advanced countries. Meanwhile, foreign direct investment into Canada has plummeted, and the ongoing saga of the Trans Mountain pipeline raises serious questions about Canada’s ability to attract capital for major resource projects.

Unfortunately, expansion of the Canada Pension Plan (CPP), which begins next year, will make the investment problem even worse by reducing the money available for domestic investment. This matters, because a shrinking pool of domestic investment could leave less money available in Canada to finance innovative startup businesses, the maintenance and expansion of existing operations, and investments in new machines and technology—all of which are critical for improving the economy and living standards of Canadian workers.

Starting in 2019, Ottawa and the provinces will force Canadian workers to increase their CPP contributions, with increases phased in over seven years. However, in the past (between 1996 and 2004) when Canadian households were forced to increase their CPP contributions, they reduced the amount they saved in private vehicles such as RRSPs, mutual funds and TFSAs. In fact, research found that for every one dollar increase in CPP contributions, the average Canadian household reduced its private savings by approximately 90 cents.

As the CPP expands, and more and more money shifts from private saving vehicles to the CPP, there will be a decline in domestic investment. Why?

Because the private savings of Canadian households are predominantly invested in Canada, due to a phenomenon known as “home bias,” where private investors prefer investing in their home country over foreign countries. For example, in 2016/17, Canadian households kept 82.2 per cent of their financial investments in Canada, with only 17.8 per cent invested in other countries.

But the opposite is true for the Canada Pension Plan Investment Board, which manages the invested portion of CPP contributions. In 2016/17, 83.5 per cent of CPPIB’s holdings were invested outside Canada—only 16.5 per cent in Canadian investments.

To recap, as governments force Canadian households to increase their CPP contributions, they will reduce their private savings, which would have mostly been invested within Canada. So, the amount of money available for investment in Canada will decline compared to the amount available if the CPP was not expanded.

Crucially, as noted in a recent Fraser Institute study, if Canadians respond to the upcoming CPP expansion like they did during the last CPP expansion—that is, by reducing their private savings by roughly 90 per cent for each additional dollar contributed to the CPP—we estimate that in 2019 domestic investment would be approximately $1.1 billion lower. By 2030, five years after the CPP expansion is fully implemented, the annual reduction in financial assets invested by Canadian households in the domestic market will be $14.8 billion. Cumulatively, CPP expansion could result in a reduction in domestic investment up to $114 billion from 2019 to 2030.

The solution to the potential decline in domestic investment is not to impose foreign investment restrictions on the CPPIB. This is a bad idea—the CPPIB (and Canadians more broadly) should be free to invest broadly in assets that will generate the highest risk-adjusted rate of return, regardless of location.

But at a time when investment in Canada is declining, expanding the CPP will only add to the country’s investment woes. In response, Canadian governments should pursue policies to help spur investment, and in many cases this means a complete U-turn on the policy approach taken over the past three years.