The debate on pension reform is heating up again. Ontario Premier Kathleen Wynne is leading a charge to pressure the federal government into boosting CPP contributions. In a recent interview at Queen’s Park Wynne said, “It doesn’t matter where you are in the country, people are not saving enough.” Premier Wynne also hinted that Ontario may go it alone with a provincial pension plan, if the federal government refuses changes to the CPP. “I am determined to address this problem… one way or another.” Wynne said.
There is no denying the low average savings rates among Canadians today, so I agree that retirement planning is a critical issue that needs to be addressed. However, I’m not convinced that more government intervention is the solution. Premier Wynne is pushing her prescription for the retirement savings problem, but what are the potential side effects? Most economists would agree that free markets are the most efficient way to allocate scarce resources, but sometimes markets produce undesired outcomes (like air pollution) so governments have to step in when necessary for the greater good (i.e. passing environmental protection laws). Intervention is never cost free, so it’s crucial to consider the market distortions or “side effects” of any government action. One obvious cost of increasing CPP contributions is the extra burden on employers.
Higher CPP premiums would put Canadian companies at a relative disadvantage in an increasingly competitive global economy. This jeopardizes GDP growth, the key to future prosperity. Individuals would also be impacted by a mandatory increase in CPP contributions. Increasing employee contributions would likely crowd out savings in more flexible accounts like RRSPs and TFSAs. For example, first time home buyers have the option of temporarily using money in their RRSP as a down payment on a home. Extra CPP contributions would not be available for home purchase decisions. Is it the place of government to effectively coerce Canadians to prioritize retirement saving over home ownership?
A timely upcoming research paper in the Journal of Finance offers a refreshing new perspective to the pension debate. Titled “A Pension Promise to Oneself”, authors Stephen Sexauer of Allianz Global Investors and Laurence Siegel of the CFA Institute, argue that saving for retirement is not hopeless, whether you have a company pension or not. Sexauer and Siegel point out that the human species is far more dynamic and adaptive than any planner can anticipate. Given the proper knowledge and incentives, average individuals have the capacity to ensure a comfortable retirement for themselves.
The authors admit that providing for one’s retirement today is not easy, requiring more savings than most people are accustomed to, but it is achievable. Sexauer and Siegal also provide real world success stories in support of their thesis. For better or worse, labour markets today are much more fluid than they were just a generation ago. Old businesses fade away and new, previously unimagined industries rapidly emerge. Jobs are created and destroyed. Workers change employers more frequently, take sabbaticals, and change careers. Savings and retirement options today need to be more flexible and dynamic, not less so.
A mandatory increase to CPP contributions is an old remedy that is simply too rigid and simplistic to work in today’s economy. Policies that focus on improving financial knowledge and aligning incentives are more durable and dependable solutions for today’s dynamic work force.
Paul Carvalho MA CFA is President, Chief Economist and Wealth Advisor with Reeves Private Wealth. He has spent 15 years in finance with a global custodian bank, a major investment firm and a Canadian Chartered Bank.