As Jan 1, 2019 quickly approaches, the implementation of the expanded Canada Pension Plan (CPP) also draws near. The CPP’s expansion is a fairly complicated issue and unfortunately too many advocates for expansion ignore many of its costs, or outright misrepresent the benefits (and perhaps costs). Rob Carrick’s recent column in the Globe and Mail is the latest example of another piece on the expanded CPP worthy of response.

The first sign of bias in Carrick’s piece appears in the headline, which refers not to the expanded CPP but rather the “improved” CPP, which is a value judgement. In other words, in the headline and first couple paragraphs, the column asserts that the changes made to the CPP are “improvements,” meaning the piece has already decided, on net, that the reforms are beneficial.

Carrick’s predisposition to call the changes an improvement is made worse by the fact that the column does not actually include a calculation for the rate of return Canadian workers will receive. Instead, it simply states how much more workers will pay versus the increased benefit.

But a recent study calculated the probable rate of return for Canadian workers from the expanded CPP and concluded the average rate of return was a meagre 2.5 per cent. Put differently, when you actually compare what workers will pay into the expanded CPP versus what they will receive in benefits, the overall rate of return is 2.5 per cent.

The rather meagre rate of return is compounded by the fact that the CPP offers no inheritance other than a small $2,500 death benefit and provides no flexibility compared to RRSPs, which can be used to help in down payments for a home and financing education.

Carrick’s column also includes a mistake, which likely influenced the piece’s conclusion that the expanded CPP is an “improvement.” It asserts that the costs of the increase will be evenly split between employers and employees. In other words, Carrick suggests Canadian workers will only bear half the costs of the increase in the CPP. 

This is refuted by volumes of research regarding who bears the cost of payroll taxes. The overwhelming consensus is that workers alone incur the costs of payroll taxes in the form of lower wages. Essentially, the increase in the employer portion of the expanded CPP will be financed by lower wages in the future for employees. Payroll taxes are simply one form of compensation for employees, and the expanded CPP means that for the next number of years the increase in the employer tax will consume what could have been higher wages or increases in other benefits.

The column also repeats one of the explanations used for the expanded CPP—Canadians aren’t saving enough for retirement. This is unfortunate given the article doesn’t provide any counterevidence or at least acknowledge that there’s decent work refuting the idea Canadians don’t save enough.

For example, the standard analysis ignores savings in a person’s home and businesses. In 2014, for instance, the value of savings outside of financial assets such as RRSPs and pensions was $7.7 trillion, after deducting debt. This represents roughly almost two-and-a-half times the value of all pension and RRSP savings. 

Furthermore, one of the country’s leading pension experts, Malcolm Hamilton, raised concerns about how the household savings rate was being calculated since it ignores demographic effects. He concluded that contrary to popular opinion, the savings rate for pensions and RRSPs as a share of employment income had almost doubled from 7.7 per cent in 1990 to 14.1 per cent in 2012.

Along these lines, the column also ignores the fact that the expanded CPP will result in very little additional savings, if any at all. Both theory and empirical evidence indicate that savings rates will remain roughly the same. Simply put, people have a preference for how they split their current income between saving for the future and consuming today. Mandating an expanded CPP doesn’t change that preference. Thus, the overall rate of savings will likely remain unchanged but the mix will change to favour more CPP and less private savings. A 2015 study concluded that between 1996 and 2004 when CPP premiums were raised from 5.6 to 9.9 per cent, for every $1 increase in CPP premiums, the average Canadian household reduced its private savings by almost $1. 

Carrick’s column is an unfortunate addition to the dialogue on the benefits and costs of the expanded CPP. The column’s assertion that the expansion is an “improvement” is never substantiated and completely disregards many of the real costs Canadian workers will bear from the expanded CPP.