Rising CPP Pensions: A Help or Hindrance to Retirement Savings?

Expanding the Canada Pension Plan has been a priority for the federal government from the start of their mandate. The goal is to shore up retirement income at a time when access to company pension plans is dwindling. To that end, a steep increase to CPP contribution rates looms in 2019. But will this do the trick to close the savings gap? There is debate on the issue.

A study by Statistics Canada suggests that the answer depends on your level of education.

The study shows that workers with lower levels of education rely more heavily on mandatory workplace savings vehicles such as registered pension plans (RPPs) and the CPP, and save more infrequently in non-workplace accounts. For those Canadians, mandatory retirement savings plans are helpful in guaranteeing retirement income. On the other hand, those with higher levels of education are more likely to save for retirement on their own in tax-deferred accounts like RRSPs. Raising mandatory savings requirements can take precious resources from this savings initiative, and in particular, away from tax free savings opportunities in the TFSA.

This reality is underscored in the study: it found that workers actually reduce their RRSP contributions when exposed to an increase in RPP contributions. Among all workers, every additional $1 in RPP contributions results in workers reducing their RRSP contributions by approximately 53 cents. Those with a university degree reduced their RRSP contributions even more — 69 cents for every $1 of RPP contributions. Thus, for more educated workers, higher levels of mandatory workplace savings effectively crowded out their own savings behavior in non-workplace accounts.

The paradox appears to be that when the government implements mandatory measures to benefit the non-savers, it actually hurts those who do have the discipline to save for their own future, encouraging them to rely more on forced saving programs and disincentivizing them to save for their own retirement. Awareness of this trend will enable you to help your clients better plan and prepare for retirement by exploring their retirement savings behavior. Start the conversation to ensure that they avoid an over-reliance on mandatory savings plans.

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