A mandatory CPP expansion or the Ontario Retirement Pension Plan (ORPP) could lead to a reduction in voluntary savings, finds a Fraser Institute study.
“Canadians choose how much they save and spend based on their income and preferred lifestyle,” says Charles Lammam, director of fiscal studies at the Fraser Institute and co-author of the study, Compulsory Government Pensions vs. Private Savings: The Effect of Previous Expansion to the Canada Pension Plan.
“If their income and preferences do not change, and the government mandates additional savings through government pension plans, Canadians will simply reshuffle their retirement savings, with more money going to forced savings and less to voluntary savings.”
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The study examines the saving patterns of Canadian households from 1986 to 2008. It focuses on major changes to the CPP between 1996 and 2004, when the total contribution rate rose from 5.6% to 9.9% of insurable earnings.
According to the study, past increases in mandatory CPP contributions were followed by a decrease in private savings among Canadian households.
Specifically, with each percentage point increase in the total CPP contribution rate, the private savings rate of the average Canadian household dropped by 0.895 percentage points (after accounting for interest rate changes and demographics shifts in age, income, and home ownership).
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“The research suggests that for every one dollar increase in CPP contributions, Canadian households, on average, reduced private savings by one dollar,” he says.
This reduction in private savings was more pronounced among the young (under 30) and mid-career households (ages 30 to 49) and less evident among those approaching retirement (ages 50 to 64).
In addition, the study finds a larger drop in private savings among lower- and middle-income households and practically no drop for those with higher incomes.
This decrease in private savings could lead to a decrease in RRSP savings, which the study argues could be used for the Home Buyers’ Plan or the Lifelong Learning Plan. It also notes the assets in an RRSP can be transferred to a beneficiary whereas the CPP only offers reduced benefits to survivors.
“Calls for an expanded Canada Pension Plan, or the upcoming provincial pension plan in Ontario, often rely on the dubious claim that Canadians aren’t saving enough for retirement,” says Lammam. “Yet if Canadians are forced to save more in government-run plans, they’ll save less privately, with little change in their overall saving.”
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