A new
Fraser Institute report raises serious questions about the accuracy of the
Ontario government’s claim that a new provincial pension plan, intended as a
supplement or alternative to restructuring and expanding the Canada Pension
Plan, is needed because of a savings shortfall among retiring Ontarians.
Increasing
government-run mandatory retirement savings programs could lead to less
voluntary saving, with no overall impact on how much Canadians have to fund
their elder years, according to a new study from the Fraser Institute.
The
study looked at savings rates in the late 1990s as mandatory contributions to
the Canada Pension Plan began to rise, and into the first four years of the
following decade.
The
study found that with each percentage point increase in the total CPP
contribution rate, the private savings of the average Canadian household
dropped by 0.895 percentage points.
With
each new percentage point of earnings mandated for contribution, the report
finds, there was a “substitution effect,” namely a 0.895 per cent drop in
voluntary savings. In other words, an additional dollar contributed to the CPP
led to a decrease of 89 cents in the average household’s private savings. Therefore,
the argument is that we should not increase contributions to the CPP or have
any new government run Pension Plans.
However,
the employer would match an increase in CPP and the new Ontario plan would have
the employer match the employees’ contribution. Therefore, in the end, the
worker has more money for savings. The other argument against the increase of
CPP and the Ontario Pension plan appears to be that the drop in savings by the
consumer is coming at the expense of private pension plans, although no evidence is presented to
support that view.
The
income effect has also not been taken into account in the calculations done in
the study. The income effect is the idea that as income for an individual rises
they will spend and save more than they did when they had a lower income. Therefore,
if income increases over time, the amount of money saved will increase over time.
I do
not think it is correct to say that the amount of money saved by the
individuals went down. The authors of the study appear to assume that money put
into the Canada Pension plan is not savings. If we consider the money put into
the Canada Pension as savings then the amount saved by the average worker went
up .11% not down.
Behavioural Economics
shows that voluntary savings programs do not work as effectively as mandatory
savings programs. Studies show that when a voluntary program is put in place
for retirement savings, most people do not sign up. In
one study, enrolment of new employees reached 90 percent immediately when
the program was mandated, whereas under the old opt-in approach it was only 20
percent after three months and only 65 percent after three years enrolled.
The
Canada Pension Plan should be increased, as it is a mandated program, well run
and well-funded.
As
well, people should be educated on the fact that this program is a very
important saving plan for them. Canadians are better prepared for retirement
than we were in the past because of our existing programs of Old Age Security,
the Canada Pension Plan, the Guaranteed Income Supplement as well as the Tax Free Savings Account
program and the Registered Retirement Saving Program.
The
study that shows that there was a decrease in overall savings because of
increases in the Canada Pension Plan assumes that the money put into the Canada
Pension Plan is not savings and that is not a realistic assumption.
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