There's certainly been no lack of ink spilled or pixels illuminated on the subject of saving for retirement. We're constantly bombarded with that message, whether it is from banks, financial planners or the media. The campaign to encourage us to put away more is a constant murmur in the financial background, volubly rising during RRSP season, only to quiet down again in March.
That some of these messages are delivered by people with an undeniable self-interest in seeing us follow through does not diminish the reality that some Canadians do, indeed, need to save more for their later years if they want to maintain their pre-retirement level of consumption.
The figures show that millions of us are putting away next to nothing in RRSPs. Millions more are putting away only a fraction of what they’re entitled to. Millions more don’t have a workplace pension plan.
Add to that reality the fact that we are up to our necks in record amounts of debt, with students often graduating owing tens of thousands of dollars. Saving for retirement will be the last thing on their minds.
Savings rates for the rest of us aren't much better. Surveys show that many of us will be carrying mortgages well into our retirement years. More than one financial prognosticator has forecast difficult times ahead.
So the question must be put. Should we force people to save more? Is it justifiable, from a public policy perspective, to not only encourage people to put more aside but also to require them to?
The perspectives couldn't diverge more.
On one side are those who say it shouldn't be the state's business to force families to save for something 30 years away when they may have more pressing financial priorities. "Draconian" is a word you'll hear this side use.
The other side says we already do that to some extent through the CPP, so why not boost the mandatory part so people won't be struggling in their old age?
This is no mere philosophic musing. Countries around the world, including Canada, have been variously probing strategies to get people to contribute more now so they can have more later.
The tax break awarded for RRSP contributions is the most obvious sweetener Canada has come up with. Providing tax-free withdrawals from the relatively new tax-free savings account is a more recent sweetener. And those enticements are enough for many.
But for a variety of reasons — procrastination among them – many Canadians still aren’t biting.
Enhanced CPP put on back burner
In Canada, so far, the "force them to save more" camp has had limited success. Yes, mandatory CPP contribution rates were boosted years ago to put the plan on a more solid footing.
But the CPP is designed to replace only a quarter of one's pre-retirement earnings. Even a full CPP retirement benefit is worth $11,840 a year in 2012. Government figures show the average retirement benefit is barely half that.
In the last couple of years, we’ve seen lobbying from some provinces, unions and others to gradually raise CPP contribution and payment rates to perhaps double what they are now. This would not happen overnight, but would eventually result in an enhanced CPP retirement benefit that would be equal to 50 per cent of the average industrial wage.
But that would also require gradually boosting CPP contributions from employers. Serious lobbying from business groups and a few provinces convinced the government to back off on this, at least until the economic recovery has a firmer foothold.
Of course, there are other ways of helping to make sure there’s enough public pension money to go around — such as raising the official retirement age or otherwise restricting early access to the money. Many countries are already doing this. But this won’t do anything to get the current crop of non-savers to save.
In November, the federal government put a bit of flesh on yet another new product designed to encourage us to save more – a new retirement savings vehicle known as the Pooled Registered Pension Plan (PRPP). On the surface, the plans are voluntary. But it’s a qualified voluntary. Here’s why.
The federal framework unveiled Nov. 17 establishes basic rules. But it will be the implementation legislation from the provinces that will be watched more closely.
Quebec — the only province to so far issue its own PRPP rules — is proposing that employers be required to offer the plans. Employees will be able to opt out. That’s the voluntary part. But unless they take the initiative and exercise that right, the workers will find themselves auto-enrolled in the plans and will find themselves contributing.
The 'nudge' strategy
What Quebec has done with its version of the PRPP is to enter the "nudge ‘em" camp. By mandating employers to offer them and requiring workers to make the effort to opt out, the province is hoping that once the default option is to save for retirement, many more people will end up doing exactly that. Other provinces may follow suit.
Pension auto-enrolment is already offered by millions of American businesses. One study has shown that with auto-enrolment, 90 per cent of workers were paying into their company’s defined contribution pension plan at the three-month mark, versus 20 per cent among those employees who had to make the effort to opt in.
Auto-enrolment is at the core of the new National Employment Savings Trust (NEST) in Britain, which went into effect this January. Like Quebec’s version of the PRPP, Britain’s version requires almost all employers to offer these plans and will automatically enrol employees in the trust unless they take the time to opt out.
A recent white paper from pension consultants Exaxe muses about whether PRPPs are a gateway to compulsory pensions.
"It is only a short step from auto-enrolment with an opt-out to auto-enrolment without an opt-out," writes Tom Murray, Exaxe’s head of product strategy.
"Given the scale of the problem in funding pensions and the fact that longevity increase are not going to stop, it is hard to see how Canada can avoid … moving to a fully compulsory system over the next decade."
In Australia, the question is no longer theoretical. Employers down under are all required to contribute nine per cent of an employee’s salary to a superannuation account. KPMG estimates that this pool of compulsory superannuation savings has now grown to more than $1 trillion.
What's wrong with forcing?
So what’s wrong with forcing people to save for their retirement? Isn’t it in the state’s (and the citizen’s) best interest to make sure that people aren’t on public assistance in their senior years?
While some studies have found that a sizable minority of Canadians may not be saving enough for retirement, the data suggests that the majority are.
A 2009 study estimated that 78 per cent of Canadian households are saving enough to replace 90 per cent of their consumption levels in retirement.
Thanks to public pension benefits in Canada, those at the lowest income levels are most likely to replace their pre-retirement incomes. An OECD study found that 4.4 per cent of seniors are living in poverty in Canada — well below the 13.3 per cent average among OECD countries.
There's also the libertarian argument. Robin Pond, a consultant with Buck Global Investment Advisors in Toronto, argues that Canadians may have valid reasons for not saving more for retirement.
"To force people to save more for their retirement out of their own money is, I think, blurring the line between benefit and tax," he told CBC News.
"Really what you're doing is very draconian. You're reducing the amount of money people have at the moment, and taking away their right to choose how they want to spend this portion of their disposable income."
Forcing Canadians to save more, he says, could mean they'll be forced to do without something else that may be very important to them, like a larger house or a better education for their children.
Pond suggests that efforts to encourage, cajole or compel Canadians to save more for retirement tend to overlook the reality that people may actually know what’s best for them and have made an informed choice — not one guided by financial illiteracy or ignorance.