By Charles Lammam
and Hugh MacIntyre
The Fraser Institute
The Trudeau government recently introduced legislation to expand the Canada Pension Plan – a move that will require working Canadians to pay higher payroll taxes in exchange for increased benefits in retirement. The government’s case for expansion rests on a claim that nearly one in four Canadian families nearing retirement (1.1 million families) are “at risk of not saving enough.” Sounds troubling, except the analysis leading to this conclusion falls short of a convincing argument.
For starters, the analysis somewhat arbitrarily determines what an adequate retirement income will be for Canadian families.
Seniors typically need less income in retirement than during their working life to maintain a similar living standard because some expenses such as mortgage payments or raising children are usually lower or non-existent. According to the government, anyone whose retirement income is below 60 per cent of their pre-retirement income is at risk of under-saving.
But there’s no strong case for the 60 per cent target.
Experts differ on how much pre-retirement income should be replaced in retirement. The recommended replacement rate can range from 50 per cent to 70 per cent. (Notably, Finance Minister Bill Morneau co-authored a book that argued 50 per cent is more reasonable).
In reality, the amount Canadians need for a comfortable retirement depends entirely on individual circumstances and preferences. For example, a lower replacement rate may be appropriate if retirees downsize their home or move to a lower-cost area. Individual Canadians, not government bureaucrats, are best placed to know how much retirement income they need. A one-size-fits-all rule is of little help.
Moreover, the government’s analysis does not account for the fact that retirees tend to spend less as they age, which means their required income decreases. The drop in spending may be due to greater physical limitations, being less-inclined to purchase durable goods such as a new car, or other personal reasons. As a result of this tendency, the analysis likely overestimates how much Canadians need to save for retirement.
Yet another problem with the analysis is that many of the families supposedly at risk of under-saving are relatively affluent, based on the 60 per cent replacement rule. By contrast, families in the lowest income group are the least likely to be at risk, as an assortment of government programs (such as Old Age Security and the Guaranteed Income Supplement) and other savings provide sufficient replacement income. It’s hard to see why public policy should force all working families to contribute more to CPP because some middle- and upper-income families are not saving as much as the federal government thinks they should.
Finally, putting aside all these issues, it’s striking that, by the government’s own measure, the proposed CPP expansion, which could mean several thousands of dollars more in annual contributions from working Canadians, will have a surprisingly small impact on the government’s measure of retirement income readiness. The government estimates that the percentage of all Canadian families at risk of under-saving will fall from 24 per cent to 18 per cent after the CPP expansion takes place. However minor this effect is, it likely overstates the decline because evidence shows that forcing Canadians to save more in government pensions will lead to a decrease in private, voluntary savings, with little or no increase in overall saving.
Put simply, the government fails to make a convincing case for CPP expansion.
Charles Lammam is director of fiscal studies and Hugh MacIntyre is policy analyst at the Fraser Institute.