An article entitled “A nudge and a wink” in the Economist last April observed, “Governments are trying to ‘nudge’ people into doing what is good for them.” Around the world, governments are trying to force people, for their own good, to save more for retirement. They are expanding programs and using techniques such as auto-enrolment and mandatory participation.

The thinking appears to be that people should save more for retirement, but since they are uninterested in doing so voluntarily, we have to entice them, cajole them or force them to save. But why is it so difficult to drag these unwilling savers to better pensions?

Behavioral explanations are often given: people have trouble imagining themselves that far into the future, or maybe they are financially illiterate and don’t know any better.

But let’s lose the condescending attitude and consider the crazy notion that Canadians might actually know what is best for them, or at least what they want. I can think of a number of reasons—affordability, better alternatives, flexibility, uncertainty—preventing individuals from allocating more money to retirement savings.

Affordability
Canadians have traditionally had an appetite for tax-assisted retirement savings. When the RRSP limit increased in 1991, Canadians contributed more. Contributions doubled between 1990 and 1995. However, the latest round of limit increases, starting in 2003, has not resulted in the same surge in contributions. According to Statistics Canada, by 2009, RRSP holders had collective unused contribution room of $671 billion.

Perhaps Canadians have hit personal affordability limits that are now below the RRSP limits. Which means, by forcing Canadians to save more for retirement, we may be forcing them to do without something else (larger homes, better food or clothing, better education for their children, etc.). Maybe they would rather live well than die rich.

Better Alternatives
We should not assume Canadians are wasting money on frivolous consumption instead of saving for retirement. Some may have found better alternatives than the retirement savings vehicles.

For many, home ownership has functioned as an alternative means of saving for retirement. Over extended periods, increases in real estate prices have outstripped other investment returns. However, of course, U.S. residents can attest to the fact that the family home is a dangerously undiversified portfolio.

But there is a strong tax incentive in Canada to use home ownership rather than a pension plan to fund retirement. Saving for retirement is assisted in Canada by a tax deferral; retirement income is taxable when paid out. The gains on home ownership are tax-free. So it should be no surprise that many Canadians are still relying on their primary residence as a major source of retirement funding.

Tax-free savings accounts may fulfill some of this role in future. For some, the advantage of a source of funds that is not included in income and therefore does not affect income tests for supplemental benefits or clawback purposes outweighs the advantages of tax deferral through retirement savings.

Flexibility
A major distinction between pooled registered pension plans (PRPPs) and RRSPs is that the PRPP is a pension plan while the RRSP is a savings plan. In other words, the money in a PRPP will be locked-in, whereas money can be withdrawn from an RRSP if needed (with the appropriate tax being paid). But pension regulators have, to varying degrees, been increasing flexibility in terms of access to money, realizing that most Canadians prefer an arrangement where they have more control over their money.

Restricting Canadians from accessing their own money is not “for their own good.” It is for the benefit of the government and society. We do not want to care for a group of destitute seniors. This may be valid social policy, but from the individual’s point of view, limiting monetary control makes increased contributions into either an expanded CPP or PRPP appear to be more of a tax and less of a benefit.

Uncertainty
Canadians’ reluctance to contribute more to retirement plans is understandable when the connection between contributions and the end result is so tenuous, especially with DC plans where a downward market movement can wipe out years of contributions. DB plans provide greater certainty, but are only appreciated if the ultimate benefit is understood and can be seen to justify the contributions required to achieve it. A major problem with CPP is the difficulty many have in equating the contributions to the ultimate benefit.

Also, investment markets are not the only source of uncertainty. Tax policy is constantly changing, and we do not know what level of taxation we may face in future on our retirement income, especially when issues such as clawbacks and income-tested eligibility are considered. Tax planners can only say that saving for retirement in future is beneficial assuming tax rules do not change. This is probably a bad assumption.

Canadians may have valid reasons for not saving more for retirement. Perhaps they cannot afford to do so, they have better uses for the money, they do not want to lose control of their money or they are unconvinced the savings will lead to the desired result. Pension reform will end up being an exercise akin to rearranging the deck chairs on the Titanic if we make the mistake of not addressing these concerns and merely forge ahead with another new program “for their own good.”

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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Bob:

unused room of $671 Billion may be a number from the tax department but is not a meaninful number. My children have worked part time for 5 or so years, now have unused room of about $12,000, not only individuals making less than $25,000 have no reason to save, those with good DB plans such as those in the Public Sector have little value in saving as well as those who already retired. Add up the bits from these souces and then discuss the lack of use of RRSP room. from the remaing.

Wednesday, August 03 at 3:28 pm | Reply

Neil Craig:

Hear, Hear.

Thursday, August 04 at 7:36 am | Reply

Priscilla Healy:

My take is that young people, with their first real jobs, before they have spouses, houses, children and elderly parents in nursing homes, and before repaying student loans, should be encouraged to amass a solid amount for investment. In equities. The miracle of compounding will do the rest. Then, when the pressures Robin Pond refers to come to bear, saving is less of a priority. They will still have a cushion for retirement.

Thursday, August 04 at 3:19 pm | Reply

Marty:

I agree with him that the PRPP is not the magic answer that many think it will be. As Bob says, if people feel they don’t need to put money into RRSPs why would they put money into PRPPs — a locked-in version of the same thing?

Tuesday, September 20 at 3:53 pm | Reply

adezseaw:

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Tuesday, February 28 at 11:57 am

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