Expanding the Canada Pension Plan may do little to increase Canadians' retirement incomes because most people will simply save less on their own and offset the benefit, a new Fraser Institute study argues.
A report to be published Tuesday looked at private saving levels during the 22-year period between 1986 and 2008 as CPP contribution levels rose steadily, and found private savings fell as CPP rates increased. For every percentage point increase in the total CPP contribution rate, the private savings rate fell by an almost-matching 0.895 percentage point on average.
CPP contribution rates climbed from 3.6 per cent of earnings in 1986 – shared equally between the employee and employer – to 9.9 per cent by 2003, where they have remained since. The rates increased steadily over the period in large part because governments grew concerned that CPP funding was inadequate to meet estimated long-term payouts.
Report co-author Charles Lammam, director of fiscal studies at the Fraser Institute, said more attention should be paid to Canada's track record in the current debate about whether to further expand the Canada Pension Plan to increase future payout rates.
"The overall savings bucket doesn't change, but the mix does – there's more savings going into government plans and less into private alternatives," Mr. Lammam said in an interview. "Because of this insight not being in the debate right now, I think we're not getting a full comparison of the respective benefits of each mode."
Mr. Lammam said his study did not attempt to measure the benefit of saving more money through the CPP versus private savings, including whether CPP earns higher returns than people can achieve with their own investment strategies.
But he said there are benefits to saving privately rather than through CPP, such as flexibility to withdraw funds from RRSP accounts to use for home purchases or emergencies, and the ability to pass along private savings as an inheritance. Money saved in the CPP fund, by comparison, is locked in for retirement so cannot be withdrawn, and it is not distributed to heirs upon death.
The impact of higher CPP rates varies across income groups and for different age groups, the study said. For example, for Canadian households with income below $34,140 a year, the impact of a one-percentage-point increase in the total CPP contribution rate was associated with a 1.56-percentage-point reduction in private savings.
However, middle-income households earning up to $59,920 a year cut their private savings by 0.72 percentage points, or less than the full amount of the CPP increase, and high-income earners earning more than $59,920 showed almost no change in their private saving rate as CPP rates increased.
Mr. Lammam said it may be logical that poorer people have less ability to absorb higher CPP rates without having to cut elsewhere, but he said the reality isn't being discussed in the CPP expansion debate.
Mr. Lammam added only a small portion of the population is undersaving for retirement – primarily people who are elderly, widowed or single, and don't have a work history to be eligible for CPP. He said expanding CPP will do nothing to help them.
While some studies have argued middle-income earners are not saving enough to maintain their standard of living in retirement, Mr. Lammam said other studies show middle-income earners are not facing a problem in retirement.