CPP changes could stunt RRSP savings: report

As Canada’s finance ministers continue to mull an increase in mandatory Canada Pension Plan contributions, they may be forgetting one important aspect of saving for retirement – human nature.

A new report from the Fraser Institute warns more forced CPP contributions will mean people putting less money into voluntary savings programs such as registered retirement savings plans (RRSPs).

The end result could be lower overall retirement savings, which could be a problem as Baby Boomers retire in large numbers in the years ahead and Canada’s household debt remains near record levels.

“People choose how much they save and spend based on their income and preferred lifestyle. If their income and preferences do not change and the government mandates additional savings through the CPP, economic theory predicts people will simply reduce their voluntary savings, such as RRSPs, with little or no increase in overall savings,” Charles Lammam, associate director of tax and budget policy at the Fraser Institute.

“Unfortunately, the debate around expanding the CPP has largely ignored this basic economic insight and by doing so, overestimates both the likely increase in savings and benefits resulting from expanding the CPP.”

Canada’s finance minister, Jim Flaherty, and his provincial counterparts discussed "modest" mandatory increases in CPP contributions at a meeting held late last year. The conversation was expected to continue this summer, but a meeting date hasn’t been set, the Fraser Institute says.

Some recent media reports suggest the discussion is on hold as the federal government focuses first on curbing retirement benefits for public sector workers. Still, it’s only a matter of time before the people that oversee public money will revisit plans to increase CPP handovers.

While there may be benefits to expanding the CPP, the Fraser Institute says they should be weighed against the impact of reduced RRSP savings.

The Fraser Institute study looked at CPP and RRSP data between 1993 and 2008, a time period that included several increases to CPP contributions – including a near doubling between 1993 and 2003. As forced CPP savings grew, the study shows voluntary RRSP savings fell.

To drill deeper, the study broke down the data into two age groups: People under 45 and those between age 45 and 65. It also separated each age group into two income groups: $10,000 to $50,000 and $50,000 to $100,000. The results were the same: more CPP contributions led to decreased RRSP savings.

The age group most sensitive to changes in the CPP were Canadians aged 45 to 65 with income between $10,000 and $50,000, the study found.

“Increasing mandatory CPP contributions is a policy reform that may have unintended consequences,” says Lammam. “By forcing Canadians to save more for retirement through the CPP, the government inadvertently encourages them to change their behaviour and reduce their voluntary retirement savings elsewhere.”

Instead, the Fraser Institute recommends new rules that “allows for an optimal mix of savings for different people in different stages of life and with different preferences.”