More caution needed in plan to expand CPP

Some provincial politicians are again trying to make the dubious case that we have a "retirement income crisis" to revive calls for a mandatory expansion to the Canada Pension Plan (CPP).  While the issue is set to be on the agenda at the annual federal-provincial finance ministers meeting in December, the reality is that the case for expanding CPP is built on shaky assumptions about retirement income inadequacy in Canada and on inflated expectations about the benefits of a bigger CPP. Politicians should therefore exercise more caution in their plan to expand CPP.

Start with recent claims from Ontario Premier Kathleen Wynne and PEI Finance Minister Wes Sheridan that Canadians are not saving enough and that current CPP benefits are just not adequate anymore. It is claims like these that spawned Mr. Sheridan's proposal for a doubling of the maximum retirement benefit and a virtual doubling of CPP contributions (including a payroll tax hike to 13 per cent from 9.9 per cent).

The pronouncements about retirement income inadequacy simply do not square with the evidence. In 2009, economist Jack Mintz led a group of pension researchers on an extensive probe into the issue. The conclusion: "Overall, the Canadian retirement income system is performing well, providing Canadians with an adequate standard of living upon retirement." For some low-income seniors, Old Age Security and the Guaranteed Income Supplement help to provide eligible seniors with income sufficient to prevent poverty. And these programs partly explain why Canada has one of the lowest rates of senior poverty in the developed world.

A key problem with arguments of inadequate savings is the failure to take a comprehensive view of the resources available to Canadians in retirement. Failing to do so overlooks significant components of savings in the form of real estate (Canada has a 69 per cent home ownership rate), non-registered investments, and owned-businesses.

In fact, a recent Statistics Canada study that accounted for the potential income Canadians could derive from such assets found that senior-led households are actually better off than those headed by younger adults.

Canadians clearly seem more prudent and prepared for retirement than big CPP advocates give them credit for.

However, to the extent that a small group of Canadians with modest income are deemed to have inadequate retirement income, more research is required to better understand who these individuals are and the factors that contribute to their circumstances. But expanding the CPP is a blunt instrument that would affect all working Canadians. And it would be illogical to impose a compulsory increase to the CPP when the current retirement income system is serving the great majority well.

As for the perceived benefits of a CPP increase, here too proponents may be overreaching. Their analysis often ignores a basic economic insight that higher forced savings for retirement through the CPP will likely lead Canadians to reduce their private voluntary savings elsewhere. That means an expanded CPP would not increase overall retirement savings to the extent anticipated but it would change the mix with more savings going in CPP and less in other saving vehicles such as Registered Retirement Savings Plans.

A recent Fraser Institute study examined what happened to RRSP contributions when the CPP payroll tax increased to 9.9 per cent in 2003 from 5.0 per cent in 1993. This preliminary analysis found that RRSP contributions actually declined as mandatory CPP contributions increased a finding consistent across different age and income groups.

Unfortunately, this type of analysis is largely absent from the current CPP debate. The risk then is that the benefits of a mandatory CPP expansion are being overstated. A broader and more complete debate about the CPP would consider the comparative benefits of the CPP (defined benefit in retirement) versus the benefits of RRSPs (flexibility and choice).

With RRSPs, the savings can be used to purchase a home through the Home Buyers' Plan, to obtain training as part of a transition into a new field of work through the Lifelong Learning Plan, to withdraw in the event of a terminal illness, and to transfer fully assets to a beneficiary upon death.

These benefits are lost when Canadians are forced to save more in CPP and offset those increases with decreases in their RRSPs.

As our political leaders deliberate expanding the CPP, they would do well to consider the evidence which does not support the notion of a broad retirement income crisis. They also need to consider that a compulsory expansion to CPP could reduce private savings and the flexibility they afford Canadians.