There has been a lot of discussion lately regarding the expansion of the Canadian Pension Plan (CPP), so I felt this was an appropriate discussion. CPP is a program for people living outside of Quebec aged 18 to 70. Anyone earning work income have to pay into the CPP program.
Currently, as an employee, you’ll pay 4.95% of your pre-tax income to CPP with a basic exemption on the first $3500 up to a total income of $54,900 (as of 2016 - this is an indexed to inflation number). This equates to a maximum of $2544.30 for 2016 as an employee. An employer also has to pay into the CPP program, for the employee, the same amount. This amounts to a max of $5088.60 for 2016.
The push for expanding CPP has been mainly been from large unions; such as CUPE and the Canadian Labour Congress (CLC). The desired CPP expansion from the CLC is to double contributions. They also wish to increase CPP replacement rate (essentially pay out) to grow from 25% to 50% (also doubling). The argument for this expansion is that some studies show that Canadians won’t be able to save enough for retirement.
The Case Against
When it comes to the actual argument for the expansion of CPP, I wouldn’t deny that some don’t save enough for retirement. From my own personal experience people seem to put a lot more value into a hard asset like a house, rather than actual retirement savings (more liquid investment vehicles). With that said, The School of Public Policy, at the University of Calgary published a study titled “Expanding Canada Pension Plan Retirement Benefits: Assessing Big CPP Proposals” by Jonathan Kesselman. It stated the following when analyzing the studies addressed in the main argument:
Several studies have examined how well the Canadian retirement income system has been fulfilling the income replacement goal, and how well it is likely to perform in future years. The studies reach varying conclusions on the adequacy and/or deficiencies of the current system. However, they agree that the system performs adequately for the lowest earners (mainly through the OAS/GIS and with some CPP benefits) in maintaining pre-retirement living standards. While most studies find adequate income replacement for most middle-income earners on average, they also find that a significant proportion of middle- and upper-middle-income earners face deficiencies in sustaining pre-retirement living standards.
Summing it up, lower income individuals (often the poster child of retirement poverty) are the ones that do fine with their retirement. They receive pre-retirement living standards. For those in the middle class and upper middle class tend to have a harder time maintaining their pre-retirement standard of living.
CUPE uses the phrase “can’t afford” and afford is based on the standard of living a retiree chooses to have. A low income person isn’t going to experience any sort of strain unless they adopt a more expensive retirement. The ‘deficiencies’ between pre and post living standards for middle and upper-middle class is the progression of their career salary. For example, an engineers last 10 years of working should be their highest paid years. This peak in salary is not exactly a standard for retirement income requirements.
My first point regarding people not being able to afford retirement is that it really isn’t true. Lower income individuals will experience similar outcomes. Middle class and above individuals will experience a decline in living standards only because we are measuring pre-retirement income - which should be at a peak.
I think microeconomics plays a big part of this and it’s the concept of choice. People trade finite items for other finite items. We trade our time, money, experiences - everything because we can’t do everything and have everything. Saving more for retirement, through the government, is forced. The concept of choice is taken away from the individual. That individual is impeded in making the important choices in their life.
Saving more for retirement might be good for some people, but not all. We all work hard today for our income, but what is the appropriate amount to trade today for tomorrow? Or better put, how much do I live today versus how much I prepare for tomorrow? There’s no universal answer to this question. Each individual has to make this choice based on their values. Some may want a modest retirement, while others want to travel the world. Others may die before they ever receive it.
When looking at doubling CPP we’re looking at nearly 10% of salary deduction and another 10% from an employer - we’re looking at massive chunk of cash. If we ignore the employers cut and the implication of costs (lost salary of employees - as CPP matching is a cost), we’re talking about 10% of an individuals income, along with regular income taxes, EI deductions, and other benefit deductions
Expanding CPP makes individuals more dependent on government to take care of them in retirement because they have even less after tax income to allocate as they see fit.
Another side of this choice premise is that an individual should be able to use their own judgment on what they do with their money and live with results of such a choice. CPP forces an individual into the government program. This program may have changing standards in the future (such as an increased benefit age), which lowers your overall return. An individual may not receive back a decent return because the program does have aspects of wealth redistribution.
An individual should be able to use the money that goes into an expanded CPP to spend on the here and now, or invest it for the future how they see fit. This could mean risky stock market investments, safe bonds, in their own businesses, or into their house - which they may sell in the future to fund their retirement.
An expansion of CPP is something that reduces an individual’s choices in life. They are forced to buy into a government program that may not provide the necessary flexibility or return that their own personal choices may desire. This lack of choice is fundamentally taking away from an individual to live on their own judgment. The proponents of expanding CPP argue that many Canadians won’t be able to afford retirement, which isn’t what the studies actually show. Many Canadians may have trouble maintaining the standards of living of their peak income years, but the case hasn’t been made whether this is a problem or that it needs to be fixed.
Summing it up simply, the best person to determine the course of an individual’s retirement is the very person that is going to live it.