Upcoming enhancements coming to the Canada Pension Plan will lead to a reduction in investment in Canadian enterprises, a new paper from the Fraser Institute argues.
The paper noted the Canada Pension Plan Investment Board has shown an increasing preference for foreign investments, with 83.5 per cent of the fund’s assets outside of Canada in 2016/17. As the paper pointed out, enhancements to the CPP have historically resulted in Canadians saving less for retirement through other mechanisms. The average Canadian investor has a significant bias for domestic investments, with the $5.3 trillion in domestic assets held by Canadian households far exceeding the $1.2 trillion in foreign holdings in 2016/17. With less cash going to savings vehicles like tax-free savings accounts and registered retirement savings plans, the amount of capital deployed into Canadian investments will shrink, the paper suggested.
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Research based on prior CPP enhancements suggests that for every dollar of additional contributions made, there will be a reduction in private savings of almost 90 cents. By that estimation, by 2030 the reduction in investments made in domestic enterprises would come to $14.8 billion.
The report refrained from recommending that the CPPIB should adhere to a minimum domestic investment policy, admitting the freedom to invest globally is valid when it comes to the need to achieve the greatest risk-adjusted return possible. Instead, the report recommends that Canadian policy-makers should take the potential for a decrease in investment into account and act accordingly to enhance the prospects of Canadian enterprises.
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