A recent study from the Fraser Institute claims boosting premiums to pay for higher Canada Pension Plan benefits would not work, since individuals would simply save less in RRSPs and other individual savings vehicles. Thus there would be no overall increase in retirement income, and individuals would have less flexible access to their savings because CPP contributions are effectively locked in.
The study is flawed on a number of fronts and fails to consider the many advantages of saving for retirement through the CPP.
The main flaw of the CPP is the maximum benefit is just 25 per cent of average earnings, not enough in itself to pay for a decent retirement. That is why many pension experts and several provincial governments have called for a significant increase in CPP pension benefits, paid for through a modest premium increase.
RRSPs, by contrast, provide an uncertain return to savers. Investment returns are generally much lower than for the CPP, whose investment fund has made average annual returns of eight per cent over the past 10 years. The vast majority of people who do not belong to an employer pension plan fail to contribute the maximum amount to RRSPs, and there is a big risk of not saving enough for an inadequate retirement income.
The CPP has higher investment returns because management fees are much lower than for most mutual funds, and because big funds like the CPP can invest in assets such as infrastructure, which are not realistic options for individual savers.
The Fraser Institute claims CPP premium increases reduce household savings, leaving people no better off. But they completely ignore the fact investment returns in the CPP are much higher than for RRSPs.
The stock of retirement savings is a function not just of the annual flow of savings looked at by the Fraser Institute, but also of the rate of return on retirement savings, which they ignore. Thus even the same overall annual retirement savings rate will result in a higher stock of retirement funds if the system is tilted toward the CPP.
The Fraser Institute claim that past CPP premium increases reduced RRSP and other savings is not plausible. While a perfectly rational and informed individual might well save less in RRSPs if CPP benefits were increased, the fact is the basic CPP pension of 25 per cent of average earnings has not been changed since the plan was introduced. Premiums were increased to make up for the fact early retirees under the CPP paid less in premiums than they received in benefits.
The Fraser Institute also claims, with some reason, the CPP is less flexible than RRSPs. While this is true, the downside of flexibility is many individuals save only very intermittently and have insufficient savings for retirement. The fact CPP contributions are locked in also allows for long-term investments.
If the Fraser Institute was right, there would be no retirement income problem. But we know RRSP savings have not increased as private pension plan coverage has dropped sharply, and we know RRSPs come at a high cost and provide very uncertain returns.
Canada's best retirement option is to build on what already works well, the Canada Pension Plan.
Andrew Jackson is a senior policy adviser at the Broadbent Institute.
Photo: Raj Tenaja. Used under a Creative Commons BY-NC-2.0 license.
