Are voluntary CPP contributions a good idea?
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 limitto 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?
Iguess the real answer will depend on what details unfold from the implementation of this option. Right now there are no details and the goverment 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 pay cheque 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 sourcethat “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? Because 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?
Depends on what voluntary means.
Voluntary opt out .. let inertia take care of the rest.
For people who save to retire early, they can opt out. Usually informed, so would be the ones to have that fore thought.
There is no proof there is a ” significant ” gap in the savings for retirement
Voluntary contributions are okay as long as you have the discretionary income to contribute. I work for a company that has a share plan with a 35% match as well as a rrsp contribution plan and I feel quite comfortable that I will have enough money when I retire in 2.5 years, to live a comfortable lifestyle without going without. To me, it’s a no brainer. Most are not so lucky. Like you said Jim, there are so many great investment vehicles already that adding another will just be that; another.
I also agree with you Jim. I think the government needs to look even longer term. The education system needs to teach, at a young age and all the way through the years of learning the power of compound interest, living within your means, and the importance of saving no matter how small the amount. Lay the foundation early and keep hammering away at all the concepts of personal finance. This will benefit the future generations much more than yet another investment option.
The unfortunate part of the teaching world is the conflict. The students, are learning from people who are in debt up to their own ears already; who own the boats cars, quads, huge house and should be the ones that teach their children the value of a dollar but are so in debt themselves that now, there is almost a conflict between their personal situations and the curriculum.
The parents of the children are in the same boat, so yes, they should be taught the values of a dollar, compound interest etc and it should be pounded into them by both the teachers and their parents but to what end. The teachers teach it; the kids go home and the parents don’t reinforce it. Such is life.
Bottom line, voluntary retirement plans hasn’t worked. Or, we all would have fully funded RSP’s, TFSA’s, etc. We don’t need another voluntary plan. So, the CPP should be increased and should be mandatory – likely the best plan would be incrementally, 6% this year, rising to 10% over 5 years, perhaps. Yes, employers should be encouraged to match employee contributions. But, I would be called “biased” because I had the dumb luck to work for an employer who put away roughly 20% every year for 35 years and my management costs were less than 0.5%. Mandatory, I had no choice, I couldn’t go to my boss and tell him I was short this month so I had to cut back on my pension, I had to live on what I took home. So, I lived in a slightly smaller house, drove a slightly older car which I kept longer, etc.
When I first proposed the idea of creating a voluntary CPP supplemental account in October of 2004 See: http://www.bpmmagazine.com/02_archives/2004/october/reforming_canada_pension.html
the idea was simple.
Let’s give those who trust the CPP managers an ability to increase their basic pension benefits by contributing more. It was never meant to ensure all Canadians would save for retirement. In fact, depending on the personal circumstances of people, it may not even make any sense to be saving when they have other commitments that are negatively impacting their overall net worth.
What is the point of contributing $10,000 to an RRSP or TFSA, if I still have to pay a credit card bill of $10,000 at 18% interest. I’ll make $1,000 in my RRSP (10% return if i am lucky) but have to pay $1,800 in interest, so really will be $800 poorer.
We’ll have to see what, if anything, the Federal Government eventually proposes before this old idea is dismissed by all of the commentators.
Simple question: if NOT gainfully employed between age 62 to 65 will the CPP accept my contributions to the Plan out of my own discretionary funds? I will apply for CCP benefit when I turn 65.
Simple answer. No!