Re: “Forced savings work best for retirement

(IE, June 2014)

A supposed growing shortfall in pension savings is a refrain frequently heard from those advocating an expansion in the Canada Pension Plan (CPP) or similarly structured provincial arrangements. Such a plan was proposed earlier this year by Ontario Finance Minister Charles Sousa before the recent provincial election and may now be back on the table.

But there are a couple of problems with the argument. The analysis in your editorial is a good example. It is deeply flawed for two reasons. First, no evidence of rigorous analysis is offered to confirm the lamented shortfall in pension savings. Your editorial assumes that with the disappearance of defined-benefit plans and greater reliance on defined-contribution [pension] plans, Canadians are not saving enough.

Indeed, in a recent paper for the Fraser Institute, Philip Cross, former chief economic analyst at Statistics Canada, concludes that the widespread perception of a pension savings shortfall in Canada is grossly exaggerated. This is partly due to failure to take proper account of significant savings by government and business for future pensioners that are not included in the personal household sector accounts and, perhaps more importantly, by ignoring the large pools of private savings outside formal pension vehicles. These include CPP and RRSPs, non-registered accounts and home equity.

As employer-sponsored, defined-benefit plans have disappeared from the private sector, Canadians have responded through increased savings in other tax-sheltered investment vehicles, such as the popular tax-free savings accounts (TFSA) and RRSPs, and through investment in their principal residence, as well as through conventional non-registered accounts. The Cross study notes that those concerned that Canadians are not saving enough refer to the steady decline in personal savings rates in the past two decades to 5% from 11%. However, adding back in the mandatory CPP contributions, which clearly are forced personal savings, results in savings rates consistently above 10% and touching 12% in 2012 – back to the savings rate of two decades ago.

Further, one in four Canadians aged 65 to 70 years now delay retirement, double the one in eight Canadians just 13 years ago. This delay allows further asset accumulation and postpones drawdown of pension savings. Finally, the Cross study refers to research demonstrating that generally presumed replacement rates for gross pre-retirement income of 70% might be overstated.

Second, the editorial concludes that if retirement savings fall short of pension needs, the solution should be “forced savings” through contributions to an expanded CPP or something along the lines of the proposed Ontario Retirement Pension Plan (ORPP). This recommendation illustrates a conceit that somehow individual Canadians are incapable of making voluntary decisions to build up their retirement savings if warranted, relying on their investment advisors to design financial plans to meet their personal needs. This flies in the face of evidence that Canadians have already built up considerable savings in recent years, and have taken full advantage of new tax-assisted vehicles such as TFSAs. Moreover, the editorial is silent on the negative economic consequences of higher payroll taxes on businesses that would result from an expanded CPP or introduction of the proposed ORPP. These higher payroll taxes discourage investment and employment, and undermine the retirement savings prospects of those who would fill those jobs.

The best thing policy-makers could do to make it easier for Canadians to finance their retirement goals is improve the calibre of existing tax-assisted investments, such as increasing the annual contribution limits to TFSAs and RRSPs, provide payroll deductions for employer contributions to group RRSPs, and eliminate mandated annual withdrawals from registered retirement income funds. Canadians don’t have to be compelled to save for their retirement; they just need more opportunity.

Ian Russell
President and CEO, Investment Industry Association of Canada,

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