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CPP expansion would decrease private savings: Fraser Institute

07/21/2015 12:00 EDT | Updated 07/21/2016 05:59 EDT
Compulsory savings in public pension plans like the Canada Pension Plan can reduce private savings, limiting the financial flexibility of Canadians, says a new study from the Fraser Institute.

The report argues that expanding CPP, or creating new compulsory savings vehicles like the proposed Ontario Retirement Pension Plan, can have unintended negative consequences for some Canadians who could benefit more from investments in Registered Retirement Savings Plans, Tax-Free Savings Accounts, home equity and other vehicles.

The Fraser Institute analyzed private savings rates between 1996 and 2004, when CPP contribution rates were increased from 5.6 per cent to 9.9 per cent of insurable earnings. It found that each percentage point increase in CPP contribution rates led private savings rates to decrease by almost the same amount — 0.895 percentage points — even after accounting for other factors like interest rate fluctuations.

Canadians under 30 years old saw the largest reduction in private savings, while the savings rate dropped least for Canadians nearing retirement age.

The report concludes that some Canadians could benefit more from flexible retirement savings vehicles like RRSPs, which allow assets to be transferred to beneficiaries after death, and also let first-time home buyers withdraw funds for a down payment.

"The key to providing retirement income through savings is a set of rules that allows for an optimal mix of savings for different people in different stages of life and with different preferences," says the report.

"The benefits to a compulsory expansion of the CPP or of similar provincial policies (i.e., the ORPP) need to be weighed against the costs."

No analysis of CPP returns

The Fraser Institute report does not, however, compare the actual rates of return from CPP against the rates of return from private investment vehicles, which could vary widely.

The CPP currently boasts an eight per cent annualized rate of return over 10 years, and 12.3 per cent over five years.

The Fraser Institute report acknowledges that expanding CPP could increase savings for Canadians in financially precarious situations.

"For those who have no alternative savings, raising the CPP would force them to save when they would have chosen to consume today rather than save," says the report. "For this latter group, total savings may increase with an expanded CPP."

Almost two thirds of Canadians say CPP should be expanded with increased contributions and benefits, according to a Forum Research poll released today. Canadians aged 55 and older and Canadians earning less than $40,000 a year expressed especially strong support for an expanded CPP.

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