Here we go again . . . Should the government allow voluntary CPP contributions? I was asked to share some of my personal thoughts on expanding CPP on the Calgary morning show on CBC Radio.
Recently Finance Minister Joe Oliver floated the idea of giving Canadians the option to voluntarily contribute more to CPP to supplement their current CPP and help bridge the significant retirement gap that currently exists. This is not a new idea. I wrote about this back in 2010 when the idea of enhancing CPP was a hot topic
Related article: Don't enhance CPP, Leave the CPP Alone
So why is this issue coming back again? At the end of the day, savings rates have not changed. They have been under 5% for 20 years and that's the real root of the problem. The retirement gap is growing because Canadians have not been saving enough money for their retirement.
Related article: Saving for retirement is simple, not easy
However, we can't really blame the government for not trying. In the past 5 years, we have seen the implementation of the Pooled Registered Pension Plans (PRPP) and the recent increase of the TFSA limit to help Canadians with more tools to save more money.
Unfortunately, adding the PRPP and increasing the limit of the TFSA has not translated to results as of yet. Maybe we are too early to judge results or maybe we don't need more options.
Why would Canadians want to voluntarily contribute to CPP?
I guess the real answer will depend on what details unfold from the implementation of this option. Right now there are no details and the govermnet has simply said we are going to work on it. So it's just an idea
Will there be employer matching? If there is no employer matching, then what's the difference between voluntary contributions to RRPS vs voluntary contributions to RRSPs? Not much really. Especially a Group RRSP where they both come off the paycheque and make it rally easy to save. There is currently over $600 Billion in unused RRSP contribution room for RRSPs. I don't think the problem is opportunity to save for most people. It's not hard to open up a RRSP and automate contributions from your bank account.
Some articles like this one from Rob Carrick of the Globe and Mail, have said that CPP might be a good investment vehicle. CPP has reported strong returns and lower fees that high cost retail mutual funds. In Carricks article, he quotes a source that “the CPPIB isn’t a notably cheap option in terms of fees . . . these costs at about 0.9 per cent to 1 per cent”. Although 0.9% to 1% fees are a lot lower than high priced retail mutual funds (2% to 3%) but investors already have access to lower cost investments either through Exchange traded Funds (ETFs). I've also seen many employer sponsored savings plans like Group RRSPs and Defined Contribution Pensions with lower Investment Management Fees than 1%.
Personally, I'm not convinced this is an investment option issue. Sure, one can argue that the CPPIB has had good investment success but let's be honest, there are already lots of really great investment options out there for Canadians. In fact, i would argue we have too many investment options and one of the problems we have is too much choice. As a result, I am not convinced voluntary CPP contributions will help with the real problem and that is Canadians are not saving enough money for retirement.
How can we save more money?
I believe most people need personal incentive to save more. Few people have the natural personal propensity to save. Why? Becasue it's more natural to spend than it is to save; It's easier to spend than it is to save; And it's more fun to spend than it is to save.
Related article: Principles of Saving Money
If you ask people why they buy RRSPs, their first most natural response is to “Save on taxes” If you ask why people participate in Workplace savings plans like a Group RRSP or Pension it's because of the employer match or FREE MONEY.
Unfortunately, if I am right about people needing incentives, another voluntary option will just crowd the already crowded space of options. I'd like to see the government explore incentives to employers to implement more matching Group RRSPs or DC Pensions. It would not only get more employees to save through work but also help businesses attract, retain and reward employees (which is their most valuable asset). What do you think?