The Canada Pension Plan is a model of how to get people to save for retirement – require them to do it and get their employers to pay as well.
Some people have a problem with this and recent changes to the CPP have set them off. The changes will cost workers and their employers more while paying higher retirement benefits to future retirees.
Critics say the CPP pay outs offer a poor rate of return on contributions, and that employers will deal with the cost of rising contributions by lowering wages. They also doubt the stated reason for the increase, which is that people are not saving enough for retirement on their own.
Full details of the CPP changes were covered in a recent column, but here’s a quick summary: Premiums will rise gradually over seven years to pay for a phased increase in pay outs that hits full stride for new retirees in 2065. Finance Department numbers say the 2018 maximum annual retirement pension of $13,610 would be worth about $20,750 in 2018 dollars by the time the process is done – an extra $7,140 a year.
The Fraser Institute think tank critiqued this column, partly for not deploring the rate of return people will get on money contributed to the expanded CPP. The institute quotes a study saying the overall return is 2.5 per cent, which is described as “meagre."
Based on numbers only, maybe so. Guidelines for financial planners set out after-fee returns of 3.2 per cent for conservative portfolios (25 per cent stocks, 75 per cent bonds and cash), 3.9 per cent for balanced portfolios (50 per cent stocks, 50 per cent bonds/cash) and 4.7 per cent for aggressive (75 per cent stocks, 25 per cent bonds/cash.
Some people will do better with their retirement investing, some worse – such as those who buy at market peaks, sell at market lows, make poorly thought out investments or do not invest at all because they can’t find the money or are too afraid of the stock market. A 2.5-per-cent return from the CPP helps insulate you from all these mistakes and more.
Payments last as long as you live, so you don’t need to worry if the stock market crashes early in your retirement. Also, they’re adjusted for inflation each year and are pretty much risk-free. The most recent report by the Chief Actuary of Canada said the CPP was sustainable for the next 75 years. Over all, there’s value baked into that 2.5-per-cent return.
The Fraser Institute doesn’t think the changes to the CPP are an improvement because of the cost to workers. It’s not the higher contributions they’ll pay. Rather, it’s that they’ll lose out on future improvements to wages and benefits as employers try to recoup the extra cost they face from rising CPP premiums.
This would be an unfortunate outcome, but let’s say it happens. Future wage and benefit gains would be converted into higher retirement benefits in retirement. This is not a bad thing to happen at a time of growing concern that two-thirds or so of Canadians don’t have a pension plan at work and are saving too little for retirement.
The Fraser people think the retirement-saving problem is overblown because of the wealth people have tied up in their homes and businesses. They also say that increasing CPP premiums will result in less private saving. According to the group’s own research, $1 in extra CPP costs has, in the past, come alongside a drop in household saving of almost $1.
If you believe that prudent saving is the norm in this country and everyone can handle their own retirement, then the CPP is without question an intrusion. But you’d have to be quite the optimist to believe that. Record-high debt levels, expensive house prices, modest growth in wages and the rise of temporary employment stand in the way of people putting enough money away month by month over the decades to pay for retirement.
In this world, the real world, an improved CPP makes sense. It’s worth the money.
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Rob Carrick