It's not as if the Harper government doesn't want to talk about retirement savings. And it's not as if it hasn't taken steps to encourage and enable Canadians to save more. This government can, with a straight face, claim to have introduced more retirement savings initiatives than any government in recent history, and to have improved the retirement savings opportunities of all Canadians. True story. But it comes with some big caveats, which we will get to in a moment.
But first, all those retirement savings initiatives. The Harper government's opening move was the Tax Free Savings Account, introduced in 2009. They started out allowing savers to tax-shelter as much as $5,000 per year. The amount was then indexed to inflation. And this year the government nearly doubled the annual maximum contribution, to $10,000.
Next came Pooled Retirement Pension Plans, also a voluntary savings program, designed to encourage companies without pensions to offer employees some kind of savings vehicle. There's been limited interest so far, but six provinces have passed enabling legislation.
The Harper government also substantially increased maximum RRSP contribution limits, continuing a move begun under the previous Liberal government. Between 2002 and 2010, maximum annual RRSP room rose from $13,500 to $22,000; it has since been indexed to inflation, and is now just shy of $25,000.
And this week, Finance Minister Joe Oliver said he was working on allowing people to contribute more to the Canada Pension Plan – but only for those who want to.
The common threads running through these undertakings? These programs are all voluntary. Canadians have the opportunity to save more than ever, but they can also choose to save little, or not at all. And each of these programs is about saving individually, in individual accounts. Investing's many risks are not shared. Costs, benefits, misadventures and rewards remain with the individual.
All of the above applies to Mr. Oliver's plan for voluntary CPP contributions.
Now, giving people the option to contribute more to CPP isn't necessarily a bad idea. If the alternative is doing nothing, it's the better choice. But if the alternative is a mandatory expansion of CPP, with slightly higher contributions today delivering higher retirement pensions tomorrow? Pick Door No. 2, every time.
In a country where the vast majority of private sector workers do not have a pension plan, where corporate Canada has scaled back pensions, and where studies suggest that a substantial number of middle-class Canadians face the possibility of a decline in living standards come retirement, raising mandatory CPP contribution rates and boosting future payouts are the most prudent, most effective and least costly fix.
CPP is a defined-benefit pension plan, meaning you know how much you're going to eventually get out, based on how much you put in. It's what most people think of when they hear the term "pension." It's guaranteed. And thanks to the premium increases of the 1990s, under which future pensions will increasingly be paid for by present savings, the program is actuarially sound as far as the eye can see. CPP's only defect is its modesty. The maximum possible monthly pension is a little more than $1,000, and the average is just $639.44
If middle-class Canadians need to save more, why should they want to do it collectively, rather than be left to their own devices? There's the obvious problem that, given the choice, some people simply will not save enough – the situation we now face. Those under-savers will end up falling back on the support of taxpayers – precisely the outcome to be avoided. A mandatory program addresses that. What's more, acting collectively and pooling risk across people and time has another major benefit. It's seen every day in the insurance industry.
Consider car insurance. One way to insure against a car accident would be for each of us to save as much money as possible, socking it away in our own personal savings account, as self-insurance against any possible vehicular mishap. An accident involving injuries can cost hundreds of thousands of dollars. Instead of each Canadian putting aside hundreds of thousands of dollars, individually, we pay premiums to an insurer – and pool risks. The same goes for health care insurance, whether public or private. Nobody knows if or when they'll get sick. Pooling risk in such cases seems fair. It's also more efficient.
Investing isn't exactly the same, but it is similar. Consider two people working at the same company, earning the same salary, paying equivalent amounts into individual retirement savings plans, and even choosing the same investments. Only difference: One retires just before the financial crisis of 2008, and one in the midst of the crisis.
The first retiree's investments were riding high on her retirement date. So were interest rates – allowing her to purchase a substantial annuity with her savings, guaranteeing her an excellent pension. The second retiree, in contrast, sees his portfolio beaten down during the slump. Interest rates have also fallen, which means that annuities are offering far lower rates of return than a year earlier.
Result: Retiree No. 2 ends up with a monthly pension of, say, half the size of retiree No. 1. The first retiree is not smarter or more moral than the second. One was prudent and lucky, the other was prudent and unlucky. That's the only difference.
Under CPP, however, these two people would each get the same pension, based on contributions and years of service, not where the stock market or interest rates were the day they retired. It's possible to do this when you have pooling of assets and sharing of risk.
That's why the Conservative government's long-standing resistance to increasing CPP pensions by raising payroll contributions for middle-class workers is mistaken. That's why Tuesday's vague plan to give people the option of somehow contributing more to CPP, voluntarily, looks like a smokescreen. It looks as if the government, in the face of opposition proposals for expanding CPP, wants to be able to say that it too is expanding CPP – without actually doing so.