Current system already provides Canadians with an adequate standard of living upon retirement
News reports following the meeting of Canada’s finance ministers suggest that the brakes will put on the federal government’s plan to expand the Canada Pension Plan (CPP). As Saskatchewan Finance Minister Kevin Doherty recently noted, “the last thing we need to do right now is impose an additional payroll tax on our business community.”
But this is only one small reason to oppose CPP expansion. Here are several others:
1. An expansion of the CPP is a solution looking for a problem
In 2009, the federal and provincial/territorial finance ministers created a research working group to explore whether Canadians were adequately prepared for retirement. The group’s summary report found that “Overall, the Canadian retirement income system is performing well, providing Canadians with an adequate standard of living upon retirement.”
Similarly, an examination by Philip Cross, former chief economic analyst for Statistics Canada, concluded that proponents of an expanded Canada Pension Plan “stoke fears of a looming crisis by claiming that Canadians aren’t saving enough for retirement. These claims blatantly ignore the ample resources available to Canadians when they retire.”
2. Expanding the CPP will lead to reduced private savings in RRSPs, TFSAs, etc.
Research led by University of Montreal economics professor François Vaillancourt shows that past expansion of the CPP resulted in reduced private savings by Canadian households. Indeed, when governments increase mandatory savings (through CPP contributions), Canadian households reduce other forms of voluntary savings such as RRSPs and TFSAs. The end result is not a boost in savings but rather a reallocation from flexible, privately held savings to mandatory government savings.
3. CPP expansion is a bad deal for young Canadians
The narrative that CPP provides strong returns for all Canadians is false. Unlike a private pension or RRSP account, the returns to the CPPIB are not directly shared with beneficiaries in the form of higher benefits or with contributors through lower contribution rates. Young Canadians receive particularly modest returns. According to the Office of the Chief Actuary, someone born in 1980 could expect a 2.3 per cent annual real rate of return on their CPP contributions. For someone born in 1950, the rate of return is much higher at 4.2 per cent.
According to an academic study published in Canadian Public Policy, a key reason the rate of return is so much lower for younger generations is that contribution rates have increased without an equivalent increase in benefits. In 1986, the total contribution rate was 3.6 per cent, growing steadily to the current rate of 9.9 per cent in 2003. A report from an interprovincial committee of government ministers noted that the current contribution rate would only need to be 6 per cent if a higher rate was not required to correct the under-funding left by the low rates of older cohorts.
4. Expanded CPP will lead to a major tax increase on middle-income Canadians
While no specific proposal is currently being publicly debated, expanding CPP will necessitate higher payroll taxes today to fund increased payouts in the future. The existing rules for CPP contributions already require $4,960 annually in employer and employee contributions for a single working Canadian making $53,600. An expanded CPP could produce a marked increase in the average Canadian family’s total tax bill, which already accounts for 42.1 per cent of income, leaving less money available for families to allocate as they wish.
5. CPP is not an especially low cost way to invest
Advocates of CPP expansion tout its supposed low costs. But a recent study found that the operating expenses cited by the CPPIB, which manages the CPP’s investments, cover only a select subset of the total costs involved in running the CPP. A fuller accounting of all the costs, including external management fees and the transaction costs of executing its investment strategy, paints a different picture. The total costs are approximately four times higher than the narrowly-defined operating expenses ratio touted by the CPPIB. In fact, the total costs of the CPP now exceed many low-cost mutual funds and ETFs offered in the financial markets for RRSPs and TFSAs.
By Charles Lammam and Niels Veldhuis
Charles Lammam is director of fiscal studies and Niels Veldhuis is president at the Fraser Institute.