An increase to mandatory contributions to the Canada Pension Plan (CPP) could have the effect of reducing RRSP contributions says a new paper from the Vancouver-based think tank, the Fraser Institute.

Utilizing data from the Canada Revenue Agency (CRA) on CPP and RRSP contributions between 1993 and 2008, the study looked at two age groups (under 45, and 45 to 65), and it separated each age group by income ($10,000 to $50,000, and $50,000 to $100,000). It reports that it consistently found that RRSP contributions declined as mandatory savings to the CPP increased.

“While the results are broadly consistent across all age and income groups, the group most likely to be sensitive to changes in the CPP are Canadians aged 45 to 65 with income between $10,000 and $50,000,” it says. For example, it reports that in 1993, 40.2% of tax-filers in this group contributed to RRSPs, which fell 33.0% by 2003, over the same period the CPP contribution rate almost doubled to 9.9% from 5.0%.

It also says, for Canadians in the 45 to 65 age group with income between $10,000 and $50,000, the share of income contributed to RRSPs declined to 3.5% in 2003 from 4.4% in 1993.

And, it reports that a third measure showed the dollar value of RRSP contributions per tax filer also decreased as mandatory CPP contributions increased. Again, this was evident across all age and income groups, it says.

Of course, correlation does not necessarily equal causation. “While the conclusions drawn from the analysis are not definitive, they strongly suggest a substitution between CPP and RRSPs occurred in the past when mandatory CPP contributions increased,” said Charles Lammam, Fraser Institute associate director of tax and budget policy and co-author of the study.

“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. There may be benefits to a compulsory expansion of the CPP, but these benefits need to be weighed against the costs, which as our analysis shows could include a reduction in voluntary RRSP savings,” Lammam added.