CPP expansion would decrease private savings: Fraser Institute

Compulsory savings in public pension plans like the Canada Pension Plan can reduce private savings, limiting the financial flexibility of Canadians, says a new study from the Fraser Institute.

The report argues that expanding CPP, or creating new compulsory savings vehicles like the proposed Ontario Retirement Pension Plan, can have unintended negative consequences for some Canadians who could benefit more from investments in Registered Retirement Savings Plans, Tax-Free Savings Accounts, home equity and other vehicles.

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The Fraser Institute analyzed private savings rates between 1996 and 2004, when CPP contribution rates were increased from 5.6 per cent to 9.9 per cent of insurable earnings. It found that each percentage point increase in CPP contribution rates led private savings rates to decrease by almost the same amount, even after accounting for other factors like interest rate fluctuations.

Canadians under 30 years old saw the largest reduction in private savings, while the savings rate dropped least for Canadians nearing retirement age. 

The report concludes that some Canadians could benefit more from flexible retirement savings vehicles like RRSPs, which allow assets to be transferred to beneficiaries after death, and also let first-time home buyers withdraw funds for a down payment.

"The key to providing retirement income through savings is a set of rules that allows for an optimal mix of savings for different people in different stages of life and with different preferences," says the report.

"It's something that we're not talking about as we debate whether to expand CPP nationally, and certainly it's not being talked about in the context of the ORPP," says Charles Lammam, director of fiscal studies at the Fraser Institute and a co-author of the study. "We should be thinking about what we would lose if we were to expand CPP."

Analysis criticized as 'misleading'

The Fraser Institute's analysis of CPP is "misleading," says Andrew Jackson, an economist and senior policy adviser with the Broadbent Institute.

"I think they commit an elementary economic error in the analysis … if you're comparing savings through the CPP to savings through RRSPs, the returns on investment are much higher in the Canada Pension Plan and other large pension plans," says Jackson.

The CPP Investment Board currently boasts an eight per cent annualized rate of return over 10 years, and 12.3 per cent over five years.

Lammam, however, points out that the CPPIB's rate of return isn't the same as the rate of return received by CPP contributors, and argues that CPP returns are actually much lower than people think, especially for younger Canadians who have had to pay more into the program than their predecessors.

Almost two thirds of Canadians say CPP should be expanded with increased contributions and benefits, according to a Forum Research poll released today. Canadians aged 55 and older and Canadians earning less than $40,000 a year expressed especially strong support for an expanded CPP.