The first step in fixing a problem is to define it. There have been plenty of opinions thrown around about financing retirement, but good luck finding a single credible study that says we have a real retirement problem now or that we will in the future. Casting aside anecdotal evidence, here are the hard facts.
Poverty among seniors is way down. Thanks to our current system of public pensions, Canada has one of the best records of poverty reduction among seniors in the developed world.
Middle- to high-income earners have the means to save for their retirement. They are able to make the choice between instant gratification or saving for retirement to augment other retirement income sources. And most of these people will have assets, such as their principle residence, inheritances and small businesses, that can be monetized in order to supplement their pensions and savings.
And, clearly, top income earners require no additional help to enjoy their retirement.
But because any improvements to the Canada Pension Plan (CPP) benefits will accrue to all who qualify, we will have a lopsided equation: the group that currently receives no help from CPP (those who do not yet receive benefits) and who often cannot afford higher premiums will be helping those who do not need more (those who are receiving benefits). You would think this would end the discussion.
But it probably won’t, so here are more reasons to question this proposal:
It’s a fact that overhead costs are very important to business owners; as a result, they strive to keep their costs down. An increase in CPP premiums will absolutely be an important factor in any decision about hiring or maintaining employee levels.
Unlike personal savings, public pensions do not allow savers to decide what sort of savings product are best suited for their individual needs and preferences. Along with that complete abdication of control, you lose the option of dipping into your savings on a rainy day because there is absolutely no way to access your CPP savings to provide the necessities of life if you lose your job, if you buy a home or if you need to pay for education for you or your children.
Then, there is the issue of diversification. A range of asset classes is a basic tenant of successful investing. Why direct even more assets to a large, existing asset, the CPP?
And estate considerations are a factor for many savers. When you own your savings, you can pass assets to your heirs. Not so with CPP. There are no guarantees that you or your loved ones will get back even 100% of what you’ve contributed.
Many other issues cloud the discussion. For instance, the debate over the level of fees for retail investment products. If you truly believe this, there are many low-cost options, such as exchange-traded funds or guaranteed investment certificates.
Some supporters of boosting the CPP contend that Canadians are not good savers. But if people cannot find a way to put aside anything in individual savings, how will they be able to afford more CPP contributions?
CPP supporters also point out that the majority of Canadians do not make full use of the RRSP contribution room available to them; this shows that private savings vehicles are a failure, they say.
But, how much of the billions in unused contribution room is held by people who shouldn’t be contributing to RRSPs anyway, because they will be in the same marginal tax rate when they retire as they are while they’re working? And how many people don’t need to contribute to RRSPs because they have other assets or retirement lifestyle plans that will be covered without an RRSP? Low RRSP contribution rates do not equate to a failure of the program.
Then, there are those people who say that mutual funds are too risky. The CPP invests in publicly traded stocks and bonds – just like mutual funds. Why is one fund risky but the other is not?
CPP supporters also laud the so-called “guarantee” that comes with CPP benefits. But if securities markets don’t co-operate or demographic projections don’t play out as anticipated, the only way to continue to pay out CPP benefits at promised levels is to increase the premiums. Any perceived guarantee depends on our willingness to prop up the plan.
It’s difficult for me to see all this as anything more than a push for more income redistribution for the sake of an ideology. Generations of Canadians have retired comfortably on their savings when coupled with public pensions. What’s different now? Why can’t this – and future generations – live within their means and plan and save for their retirement?
The need is being manufactured and repeated over and over by politicians and the media. I sincerely hope that this issue is put to a serious debate before we proceed.
Because, when you look at it logically, I’m afraid this emperor has no clothes.
Don Janzen is a senior financial planning partner with Bowman & Partners in Windsor, Ont.
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