Pension expert fuels misunderstanding about the benefits of CPP expansion

The “agreement in principle” to expand the Canada Pension Plan (CPP) is a major change to one of the key pillars of Canada’s retirement income system. While we encourage an informed debate about the costs and benefits of the change, it’s disappointing that a respected pension expert such as Keith Ambachtsheer has fuelled further misunderstanding over CPP expansion.

In a memo published by his consulting firm, which was covered by the Financial Post, Ambachtsheer, director emeritus of the Rotman International Centre for Pension Management, criticized a column we wrote summarizing a longer report and numerous studies that dispelled common myths surrounding the arguments for CPP expansion. Like the myths we dispel in our report, Ambachtsheer puts forth arguments that rely on incomplete analyses or flat out incorrect assumptions.

For starters, the best available evidence shows most Canadians are well-prepared for retirement. While Ambachtsheer agrees this is true for current day retirees, he claims that future retirees will suffer a different fate, though he provides no evidence to support his assertion. Presumably Ambachtsheer bases his assertion on model projections. However, many of these projections suffer from several important problems.

For one thing, they tend to consider only the savings accumulated in the formal pension system such as the Canada and Quebec Pension Plans, Registered Retirement Savings Plans (RRSPs), and Registered Pension Plans (RPPs). This narrow focus on pension assets overlooks the substantial non-pension assets that Canadians accumulate in stocks, bonds, real estate, and other investments. In 2014, savings in non-pension assets totalled $9.5 trillion, dwarfing the $3.3 trillion assets in the formal pension system. Moreover, consumption needs tend to decline as a retiree ages and retirement income adequacy depends on individual circumstances and preferences.

There are other problems. Ambachtsheer mentions a lack of workplace pension but this alone does not doom someone to a financially insecure retirement. Research from Statistics Canada shows that, relative to their pre-retirement income, retirees without a workplace pension have a higher average retirement income than those with a workplace pension (although the median is slightly lower).

A point that Ambachtsheer does concede is that higher mandatory CPP contributions will be offset by lower private savings. In the end, overall savings won’t change but there will be a reshuffling, with more money going to the CPP and less to private savings such as RRSPs, TFSAs, and other investments. This is exactly what happened the last time mandatory CPP contributions increased in the 1990s and 2000s.

Ambachtsheer calls this a “plausible outcome” but then asserts that the CPP offers a higher “quality” of savings than other forms of retirement savings. This is not a foregone conclusion. While the CPP does provide a defined benefit in retirement, lower private savings mean Canadians will lose choice and flexibility. For example, all money saved privately can be transferred to a beneficiary in the event of death. In the case of RRSP savings, Canadians can pull a portion of their funds out for a down payment on a home, to upgrade their education, or in the case of financial emergency. These benefits are not available through the CPP.

Ambachtsheer’s assertion that the CPP is a superior investment vehicle hinges on the rate of return earned by the CPP Investment Board (CPPIB), which manages CPP assets. But here Ambachtsheer makes the fundamental mistake of suggesting that future retirees will benefit from the strong investment performance of the CPPIB. This simply isn’t true.

There’s no direct link between the investment performance of the CPPIB and the retirement benefits received by eligible Canadians. In fact, the rate of return under the current system for Canadians born after 1956 is a meagre three per cent or less—declining to 2.1 per cent for those born after 1971. We re-calculated the new rate of return based on the limited details available on the proposed CPP expansion. While the results point to a slightly higher comparable long-term rate of return (2.5 per cent), this rate is still well below three per cent and hardly the great investment deal Ambachtsheer suggests.

Given the important changes being made to the CPP and the wider implications for Canada’s retirement income system, it’s unfortunate that an expert of Ambachtsheer’s stature has fuelled misunderstanding over the benefits of CPP expansion.