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retirement and rrsps

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Proposals to expand the Canada Pension Plan to boost retirement incomes for Canadians may have the unintended consequence of causing some people to save less in their personal RRSPs, offsetting any potential income gain, a new report argues.

A study by the Fraser Institute looked at CPP increases between 1993 and 2008 and argues there was a parallel decline in private savings through Registered Retirement Savings Plans (RRSPs), reducing the effectiveness of the increases to improve bottom-line retirement incomes.

"Increasing mandatory CPP contributions is a policy reform that may have unintended consequences," Charles Lammam, associate director of tax and budget policy at the Fraser Institute, said in a release Tuesday.

"By forcing Canadians to save more for retirement through the CPP, the government inadvertently encourages them to change their behaviour and reduce their voluntary retirement savings elsewhere."

The federal government and provinces have been discussing a CPP increase as a way of improving retirement incomes for middle-income Canadians amid concerns that many people are not saving enough in an era when an increasingly smaller proportion of private sector workers have company pension plans.

After a meeting last December, finance ministers said they would revisit the idea of a CPP increase in 2013, but no proposal has been tabled to date.

Mr. Lammam said any consideration of boosting the CPP must consider the findings that people will save less privately when their CPP contributions rise.

"Unfortunately, the debate around expanding the CPP has largely ignored this basic economic insight and by doing so, overestimates both the likely increase in savings and benefits resulting from expanding the CPP," he said.

The study says the group most sensitive to changes in the CPP are Canadians from ages 45 to 65 with income between $10,000 and $50,000 annually. In 1993, 40.2 per cent of tax-filers in that group contributed to RRSPs, but that proportion fell to 33 per cent by 2003 and to 26 per cent by 2008. In the same period, the CPP contribution rate for employees and employers combined moved from 5 per cent to 9.9 per cent of income.

The proportion of people between 45 and 65 with incomes between $50,000 and $100,000 who contributed to RRSPs fell to 56.5 per cent by 2008, down from 70.4 per cent in 1993.

The reductions were lower for people under 45, who were somewhat less likely to make RRSP contributions. The proportion of tax-filers earning $10,000 to $50,000 who made RRSP contributions fell to 23.3 per cent from 31.6 per cent in 2003, while the percentage earning between $50,000 and $100,000 who made RRSP contributions fell from 66.8 per cent to 57.3 per cent.

During the same period, RRSP contributions also fell as a percentage of income for all the groups and also fell in nominal dollar amounts. RRSP contributions for those between 45 to 65 who earned $50,000 to $100,000 a year fell steadily from an average of $3,688 per tax filer in 1993 to $3,087 by 2008.