Downside to paying more to CPP/ORPP plans
A Fraser Institute study says they’ll reduce voluntary private savings.
TORONTO — Forcing Canadians to contribute more to the CPP or Ontario Retirement Pension Plan will reduce voluntary private savings, says the Fraser Institute in a new study.
The Canadian public policy think-tank said when Canadians were forced to contribute more to the Canada Pension Plan in the 1990s and early 2000s, they ended up saving less voluntarily.
“Calls for an expanded Canada Pension Plan, or the upcoming provincial pension plan in Ontario, often rely on the dubious claim that Canadians aren’t saving enough for retirement. Yet if Canadians are forced to save more in government-run plans, they’ll save less privately, with little change in their overall savings,” said Charles Lammam, director of fiscal studies at the Fraser Institute and co-author of Compulsory Government Pensions vs. Private Savings: The Effect of Previous Expansion to the Canada Pension Plan.
The study examines the saving patterns of Canadian households from 1986 to 2008 and focuses on major changes to the CPP between 1996 and 2004, when the total contribution rate rose from 5.6% to 9.9% of insurable earnings. It shows with each percentage point increase in the total CPP contribution rate, the private savings rate of the average Canadian household dropped by 0.895 percentage points (after accounting for interest rate changes and demographics shifts in age, income, and home ownership).
“The research suggests that for every one dollar increase in CPP contributions, Canadian households, on average, reduced private savings by one dollar,” Lammam said.
The reduction in private savings was more pronounced among the young (under 30) and mid-career households (ages 30-49) and less evident among those approaching retirement (ages 50-64). In addition, the study finds a larger drop in private savings among lower- and middle-income households and practically no drop for those with higher incomes.
The Fraser Institute contends private retirement savings such as RRSPs, TFSAs and other plans offer more choice and flexibility than CPP savings. With RRSP savings, Canadians can tailor their investments, pull money out for a downpayment on a home or to upgrade their education, transfer the money to a beneficiary in the event of death, and withdraw money in case of emergency.
Lammam says the benefits to a mandatory expansion of the CPP, or a new provincial plan in Ontario, should be weighed against the costs, which will include a reduction in private, voluntary savings.