10 reasons why CPP expansion is dumb


  1.  Where’s the crisis? CPP expansion is supposedly required to save the Canadian middle class from retirement penury. “A large number of Canadians – particularly middle-income earners in the work force today – are at risk of seeing their living standards fall in the golden years,” says a recent Globe and Mail editorial. The Big CPP cheerleaders cite lack of pension coverage in the private sector, and dismal RRSP saving rates to cement their case. They conveniently forget inter-generational wealth transfers, home ownership, business ownership, the adequacy of existing government programs, including tax-free saving accounts (TSFAs), and the fact that many Canadian work past 65.

    Big and bigger CPP, rah, rah, rah

    Cheering for a bigger CPP

  2. Working past 65. Many Canadians choose to work past 65. According to the Big CPP cheerleaders, the only reason to work past 65 is because you need the cash. Regardless, Canadians are healthier and living longer and some Canadians are working well into their senior years and that isn’t factored into Big CPP thinking.
  3. Big CPP, big taxes, bigger debt. Most Canadian governments are broke or close to it – federal, provincial and municipal. Canadian governments are employers. CPP expansion means increased employer contributions – one to two percentage points. Public sector payrolls are an estimated $200 billion. A one percent increase in payroll taxes equals an additional $2 billion in government expense.
  4. Government pensions. “If you work in government, your employer pension plan is solid,” says the Globe. While that claim may be debatable, on a list of government spending priorities, spending on public sector pensions would be at the bottom of the list. So, explain why we are prepared to spend billions more on public pensions? (See #3)
  5. Public sector unions are Big CPP cheerleaders. Why? “The real motivation can be found in the massive unfunded liabilities that exist in several public sector pension plans across the country,” says Dan Kelly, president of the Canadian Federation of Independent Business. “A CPP/QPP hike would actually reduce government’s pension liabilities, masking the problem of overly generous plans.”
  6. Be aware of unintended consequences. Middle-class Canadians do not save enough for retirement? So, let’s increase payroll taxes during a stagnating economy, tell Canadians that Big CPP will look after them, and now let’s watch retirement-saving rates really plummet.
  7. Ditto for employers. Big CPP will become another excuse for employers who want to exit the pension business.
  8. You can’t take it with you. A CPP pension ends when you die. You can’t take it with you. Same for personal savings. You can’t take your savings with you either but you can leave those assets to your spouse and family.
  9. Rock solid. “The CPP retirement benefit amounts to a rock-solid, lifetime annuity that is fully indexed to inflation.” Again, I am quoting the Globe from their October 18 editorial. By the way if you read the editorial online you will see it has a picture of the CEO of the CPPIB Mark Wiseman. The CPPIB goes to great lengths to proclaim its independence from government interference and its mandate to maximize investment returns without undue risk of loss. But the CPPIB is not CPP. And Mark Wiseman has nothing to do with the CPP. The CPP is under the “stewardship” of the federal and provincial Ministers of Finance. Every three years they can make changes to benefits and contribution rates. Rock solid?
  10. Past Performance is not a predictor of future performance. CPPIB invests CPP contributions on behalf of Canadian workers. And they have done an excellent job. Its 10-year annualized rate of return is 7.4%, or 5.5% on a real return basis over price inflation. This result exceeded the 4% real rate of return that is required to sustain the CPP under the demographic and other assumptions made by the Chief Actuary of Canada. But saddle up CPPIB with twice as many assets and they may be challenged to continue out performing. Just because you are big doesn’t mean you are the best. The $700-billion Norwegian sovereign fund has achieved little over 3% per annum over the last 10 years. A similar performance by CPPIB would be disastrous.
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18 thoughts on “10 reasons why CPP expansion is dumb

  1. There are different flavours of expanding the CPP. What about making a Defined Contribution component governed by the CPPIB? You could then leave it to family when you die. Employers could use it as their pension offering for employees. It could effectively create a funded version of the OAS. People need a safe place to put money that is well-managed.

    The biggest problem right now is ultra-low interest rates that were induced and maintained by the Conservatives by red-lining the economy since before 2006 through the housing sector and reducing the GST. All the wealth of older people who saved and managed their money all those years is now eroding quickly. The Harper Cult is ruining the future of Canada as these savers may eventually end up needing government handouts.

    • Thanks for your comment.
      The UK introduced a mandatory defined contribution scheme for small employers and their employees. It is a low-cost solution. The plan members have some independence on choosing a manager, if they so choose.

    • I agree with this comment. Making a Defined Contribution component governed by the CPPIB will be the best alternative. Keep CPP rate the same but add DC plan. Now we will never see that happen because the mutual fund industry will collapse!! Bank would be furious because of the lost of investment and fees benefits. So we poor investors will always pay for high fees!! And Yess the CHMC is the same as Freddy mac and Fannie May in the states. We are in real trouble !!

  2. I agree with all 10 reasons NOT to raise contributions to the CPP. Since I’m from Quebec, the same reasoning apply and I vould vote against raising contributions for the RRQ. If governments are worried about me (middle income worker) then make RRSP’s contributions more valuable by giving a 50% deductable credit to all. Since it is much more difficult to save for retirement for those of us who earn under 70 000 $, make it worth the extra effort. That way our savings can benefit our spouses and children after we die. (which we cannot do with our CPP or RRQ pensions.
    Also, lower the income tax payable on monies taken out of RRSPs (after retirement). make it half the rate that would be expected for the income.

    Last idea, let’s be fair: make all government employees and MPs pensions fully funded, and make them resemble those offered in the private sector. Don’t saddle the taxpayers with another unwanted liability that eventually will raise our taxes, making it even harder to save for retirement.

    • Thanks. I totally agree with you. The real issue is stagnating middle-class incomes. Political parties and their bureaucrats have no solutions. If RRSPs are a problem than fix that problem. The CPP expansion idea is “easy.”

  3. Improved CPP is a GOOD thing for the VAST majority of Canadians. There are a few rich and brilliant investors who can do better than CPP but they don’t need CPP anyway.

    • The CPP can always be improved. For example, it can be become more transparent. Do you know how CPP calculates your benefit on retirement? If you don’t try finding an explanation on the CPP website. Thanks for your comment.

  4. I don’t know where I sit on this argument, but one of your cornerstones in this argument seems to be that inter-generational wealth transfers will make up part of this deficit. On the other hand you state that Canadians are living longer, which seems to indicate, at least to me, that those people who were smart enough to save probably have plans for that money in their golden years. People will not put themselves into penury because they are worried about how their children’s retirement plans work out. The parents worked hard and would like to enjoy their savings. We are at a point here where currently employed generations will probably never have the same quality of life as their parents’. I’m not saying this is right or wrong, but it is how I see things currently playing out.

  5. I feel increasing CPP will only interfere with those middle class families that are sincerely attempting to save thru TFSA and RSP. As it stands Canadians are the highest taxed in North America. Our net income can barely cover the ever increasing costs of property taxes, utilities, gas, insurance and groceries. The little we can set aside for investing should be transferrable upon our death. I understand that some people have this ” you can’t take it with you” view on retirement, but what about illness and early death. Many of my Family members passed away well before 68 years of age. Where does the benefits they paid into their entire lives go? Certainly not to their Family members.
    I disagree ” Do Not Increase CPP.”

  6. The comments against changing the CPP are persuasive HOWEVER summer employment or other seasonal employment deducts CPP from employees paycheques and then it is returned as an ‘overpayment’ included in a tax refund. The contribution amount is small and would not qualify for an RRSP contribution nor any other long term, relatively inaccessible savings plan. Keeping the contribution in the CPP ‘pot’ would allow it to grow safely. Employers get to deduct the portion they contribute as an expense so, in the long run, it really doesn’t cost them. I see a change such as I suggest as being good for everybody.

  7. Good post Paul. It never ceases to amaze me how people look to CPP as some magical thing that is perfect, never goes down in value and is guaranteed. In fact, they invest in the same things a mutual fund invests into – and you can get the same low fees if you use ETFs and unlike other savings vehicles you never get a statement so you never see the negative performance of the fund and it’s guarantees entirely illusionary.

  8. One of the biggest arguments against expanding CPP contributions and benefits seems to be in reference to the soft economy and the impact on employers having to match contributions. I’m not understanding why employers would have to contribute on the “over and above” amount. Why couldn’t Canadians individually decide if they were going to contribute “over and above” to CPP, without an employer match? The key is stability – many Canadians have seen the growth in their savings/investments erode due to the 2008 market crash, nervousness in getting back into the market, low interest rates on savings etc. While the rate of return on the CPP isn’t guaranteed, it is probably better than most folks would get investing their RRSPs on their own. I like the idea of a voluntary contribution, with that contribution and the earnings earned (based on the overall CPP earnings for the year) accumulating for the contributor’s retirement.

    • Greg, I like your idea about making additional contributions not mandatory for employers. I wish I could opt out of the plan entirely (I’m self employeed so I don’t have an employer to split the premium with). But you know that you can easily match the cpp’s performance by investing like they do – stocks, bond, real estate, infrastructure, and private equity. Use ETFs if you want to do it yourself and keep the fees on par with the CPP fund. And then you get good performance
      and all the control and estate value you don’t get with CPP. BTW, the CPP fund declined in value in 08-09 just like everyone else did. But they don’t have to mail you a statement every quarter like the rest of the biz does so they maintained their aura of invincibility.

    • This list touches on points that I didnt raise. For example, the Caisse has a dual mandate when it comes to investing Quebeckers’ QPP premiums. And this has led to some poor investment decisions in the past.

  9. Big CPP
     
    The first step to fixing a problem is to define the problem. There have been plenty of opinions thrown around on this topic but I have yet to see a legitimate comprehensive study that says we have a retirement problem currently or that we will in the future. Who is suffering now? Who is anticipated to suffer in the future and why? What metrics are being used to determine who will be in trouble? Casting aside entirely useless anecdotal evidence, here are the hard facts that anyone can unearth with a little research.
     
    Senior poverty is way down. We have one of the best records of senior poverty reduction in the developed world. And there are millions of seniors that on paper may appear to be poor that live very comfortably because they have always and continue to live within their means.
     
    Because of our current system of public pensions, two thirds of the lower wage earners will receive more income in retirement than they do at age 50.
     
    For middle to high income earners, they have the means to save for their retirement so why are we concerned about providing them with retirement income? If these people are unable to afford the retirement they envisioned because they decided to allocate their incomes to other pursuits, why should the rest of us pay to get them back on track? A better use of time and resources would be education and coaching on how to budget and manage personal finances. I suspect that a major reason people fall short of their personal goals is the misuse of credit driven by the aggressive tactics of credit “pushers” so let’s fix that problem.
     
    And finally, the top income earners deserve no additional help from taxpayers to enjoy their retirement but changes to universal programs like CPP will put more money in their pockets so clearly increasing  CPP benefits across the board is a waste.
     
    By the way, back to poor seniors. Those who never worked or contributed small amounts to CPP will never benefit from an increase in CPP benefits anyway. Two times zero is still zero. Increasing OAS by shifting benefits from rich seniors to poor seniors would be a much better way to provide more income to any seniors that aren’t able to afford decent housing or adequate and nutritious food. In my opinion, this reason and the previous one should be enough logic to stifle any further talk about increased CPP.
     
    So who exactly needs help? It’s ludicrous to create a solution if we don’t know precisely what the problem is. Simply repeating over and over again that Canadians aren’t saving enough to retire comfortably doesn’t make it a fact. Throw out the old chestnut about comparing current incomes against savings and stating that people aren’t saving enough to maintain post retirement incomes of 70% of their working incomes and drawing a line from that to the need for higher public pension rates is lazy at best. Seventy percent is too much for some and not enough for others. You will need the assets to create a safe income for the lifestyle you choose. It takes some effort to do this math but to make broad changes for undefined objectives is not good policy.
     
     
    Aside from that, here are more reasons not to implement any CPP changes:
     
    Cash flow drag for all employees, employers and self-employed Canadians.
    It’s a fact that overhead costs are very important to business owners so they try their best to keep their cost down and an increase in CPP premiums will absolutely factor in on any decision about increasing or keeping employees. Anyone who disagrees has never run a business. Earlier this year, Ken Georgetti the head of the CLC, agreed that this was not a good time to increase EI premiums for that exact reason. But now he’s doesn’t perceive an increase in CPP premiums as a drag. I sent him an email asking why but he didn’t answer. And don’t forget the millions of self-employed Canadians. They will not feel kindly towards anyone who foists an increase on them because they don’t have an employer to stick half the premium with. They get to pay 100%.  
     
    Reverse Robin Hood
    ​It’s universal so working poor will take home less income so rich retirees will get more
     
    Pensions will adjust
    ​More CPP benefits mean that pensions will be motivated to reduce their payout
     
    Bad social policy
    ​Discourages self-reliance, accountability, saving and planning
     
    Loss of flexibility and options
    Unlike personal savings, you can’t decide what sort of savings vehicle is best suited for your specific needs and temperament. Along with that complete abdication of control, you lose the option of dipping into your savings on a rainy day because there is absolutely no way to access your CPP savings to provide necessities of life if you lose your job, to buy a home or pay for education for you or your children. If you have saved adequately and you’ve determined that you don’t need more for your retirement you will continue to be forced to make contributions instead of going on vacation, buying a rental property or buying that “toy” you’ve always wanted.

    Diversification of savings
    Is it smart to put even more of our eggs in one basket? Common sense dictates that we should diversify more instead of putting more in CPP? Diversification of managers is as important as diversification of assets. And there comes a point where an investment fund can become too big. With additional size comes less flexibility and nimbleness. Gargantuan positions in securities cannot be changed with the speed of much smaller funds.  And an even bigger CPPIB could distort markets especially small ones like Canada – if CPPIB investment managers favour one sector over another, it could hurt un-favoured economic sectors in our economy.
    Estate value  
    When you own your own savings you can pass any leftover assets to your heirs. Not so with CPP. There are small spousal and dependant benefits and a very small death benefit but that’s it. There are no guarantees that you or your loved ones will receive back even 100% of what you’ve contributed.
     
     
     
     
     
    Red Herring, “conventional wisdom” issues that cloud the discussion
     
    “Excessive fees of retail investment choices”
    The myth that Canadian mutual funds are higher than other jurisdictions has been busted. It’s simply not true (Hallett & Rothery). There is a cost associated with mutual funds though and if anyone doesn’t think they’re getting good value for the fees there are plenty of low cost options including ETFs and GICs.  
     
    “Canadians can’t save”
    How is it that if people cannot find a way to put aside anything in savings they will be able to afford more CPP contributions? Is it merely a discipline issue? Then let those without discipline sign themselves up for CPP at a level of their choice and let others opt out? And if self-discipline is a problem, mutual funds with deferred sales charges and a professional advisor’s advice and coaching will help to keep people on course and resisting the urge to let their emotions drive the bus.  This is where those fees with mutual funds become very cost effective. To paraphrase the Mastercard commercials – Helping people stay the course with their investments…. Priceless.
     
    “Mutual funds are too risky”
    The CPPIB invests in publicly traded stocks and bonds just like mutual funds. Why is one fund risky but the other is not?
     
    “CPP benefits are guaranteed”
    Well yes and no. If markets don’t co-operate or demographic projections don’t play out as planned, the only way to continue to pay out at promised levels is to increase the premiums. It’s not magic. Any perceived guarantee depends on our willingness to prop up the plan.
     
     
     
     
     
    In the interest of full disclosure, I am a Financial Planner. I have a vested interest in this topic because my income is derived from people saving for their goals. If CPP is increased it will likely affect my income because even more people will decide not to be responsible for their own finances and let the state provide for them via increased income and wealth distribution. So there’s my bias. Hopefully people will be able to accept the logic and sensibility of my position without simply dismissing my opinion.

    • Don, you just about sum up the entire argument about CPP expansion. Thanks

      • I started consolidating all of the reasons I’ve been putting forth in various forums, with various people over the past couple of years since I first got wind of this. I’ll be looking your list over to add some of your points to mine. I just wish there was a way to get my list more exposure to those in power and the media. So far the biggest “ear” I’ve managed to connect with (other than a couple of form replies from Flaherty’s office) is Bill Tufts at http://fairpensionsforall.net/ . I sent something to Terrence Corcoran at the Financial Post a while back but nothing came of it. I guess my MP and MPPs are next.

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