When Canadians were forced to contribute more to the Canada Pension Plan in the 1990s and early 2000s, they ended up saving less voluntarily, finds a new study by the Fraser Institute.
"Calls for an expanded Canada Pension Plan, or the upcoming provincial pension plan in Ontario, often rely on the dubious claim that Canadians aren't saving enough for retirement. Yet if Canadians are forced to save more in government-run plans, they'll save less privately, with little change in their overall savings," said Charles Lammam, director of fiscal studies at the Fraser Institute and co-author of Compulsory Government Pensions vs. Private Savings: The Effect of Previous Expansion to the Canada Pension Plan.
The study examined the saving patterns of Canadian households from 1986 to 2008. Specifically, it focused on major changes to the CPP between 1996 and 2004, when the total contribution rate rose from 5.6 per cent to 9.9 per cent of insurable earnings.
Past increases in mandatory CPP contributions were followed by a decrease in private savings among Canadian households. With each percentage point increase in the total CPP contribution rate, the private savings rate of the average Canadian household dropped by 0.895 percentage points, after adjusting for various factors.
"The research suggests that for every one dollar increase in CPP contributions, Canadian households, on average, reduced private savings by one dollar," said Lammam.
This reduction in private savings was more pronounced among those under 30 and mid-career households, ages 30-49 and less evident among those approaching retirement, found the institute. In addition, there was a larger drop in private savings among lower- and middle-income households and practically no drop for those with higher incomes.
"Canadians 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 government pension plans, Canadians will simply reshuffle their retirement savings, with more money going to forced savings and less to voluntary savings," said Lammam.
Private retirement savings can offer more choice and flexibility than CPP savings, said the institute. For instance, with RRSP savings, Canadians can tailor their investments, pull money out for a down-payment on a home or to upgrade their education, transfer the money to a beneficiary in the event of death, and withdraw money in case of emergency.
These benefits are lost when Canadians are forced to save more in CPP or the Ontario Retirement Pension Plan.
"The benefits to a mandatory expansion of the CPP, or a new provincial plan in Ontario, should be weighed against the costs, which will include a reduction in private, voluntary savings," said Lammam.