CPP tax hike hurts Canadian workers

The economy continues to struggle due to COVID and the lockdowns, so workers should be particularly unhappy to start 2021 with a tax hike. The combined employer/employee Canada Pension Plan tax rate rose from 10.5 per cent to 10.9 per cent on January 1, the third of five annual increases to bring the tax rate to 11.9 per cent by 2023. Proponents of the rate increase claim it will make workers better off by helping them save more. They are, for a number of reasons, quite mistaken.

First, worker payments into the CPP today are used largely to pay benefits to current retirees. The balance is invested by the Canada Pension Plan Investment Board (CPPIB) to help meet future liabilities, but when today’s workers eventually retire, the transfers they receive will be funded mostly by payments made by the next generation of workers. Therefore, paying into the CPP is not like contributing to a genuine retirement savings account.

Even if we overlook this important fact, increasing the CPP tax rate would not necessarily cause workers to save more. The evidence shows that increases to CPP contributions are offset by roughly equivalent reductions to private savings. But by forcing workers to save through the CPP instead of saving privately, the federal government reduces the choice and flexibility available to workers.

For example, when saving privately, Canadians can invest in funds that maximize returns. Others who place a higher priority on environmental, social and governance considerations can invest in different funds. Forcing everyone to save through the CPP eliminates these choices by imposing a one-size-fits-all investment policy.

Similarly, some workers might like the CPPIB’s active investment strategy. But others might object to its high administrative costs. Since switching from a passive to active strategy in 2006, the CPPIB’s costs have ballooned and its head count has increased eleven-fold to more than 1,800 employees last year.

Moreover, unlike an RRSP or TFSA, the CPP does not allow Canadians to withdraw money early to, for example, fund a down payment or handle an emergency. Nor is money disbursed to beneficiaries if a worker who pays into the CPP dies before collecting any benefits. Again, this investment program might possibly appeal to some Canadians, but many others would prefer the ability to withdraw money before retirement and name beneficiaries in case they die before collecting their CPP benefits.

Finally, a primarily justification for expanding the CPP—that Canadians are not saving enough for retirement—is not supported by evidence. How does Ottawa know that Canadian workers are not saving enough? In fact, the accumulation of assets by Canadians suggests workers are saving plenty for retirement. And there’s good reason to believe that an expanded CPP won’t help those Canadians who actually do save too little.

In reality, the government has no idea whether Canadians are saving enough or not. The amount of money an individual should save depends on his or her income, job security, age, risk tolerance, net worth, time preference for consumption, family circumstances and countless other factors beyond the reach of government.

Workers themselves, not governments, have the best information and incentives to ensure they save appropriately for retirement. So such decisions are best left to individuals. By increasingly transferring these decisions to the government, expanding the CPP—which includes a tax rate hike—harms Canadian workers.