Provincial and federal finance ministers will soon meet to discuss expanding the Canada Pension Plan and Quebec Pension Plan. But increasing payroll taxes for employees and employers in order to pay more into public retirement plans is a “solution” for a problem that’s not nearly as widespread as some claim.
The diagnosis of certain governments and experts is that many households are failing to save enough to maintain their standard of living in retirement.
How many of these households are there? Estimates vary widely, but a study by consulting firm McKinsey & Co. provides the most exhaustive figures to date. Based on a poll of 10,000 Canadian households carried out in 2011, the study reveals two important points for this debate.
First, 23 per cent of Canadian households are ill-prepared for retirement, most of them wealthier households. A portion of the middle class is also in the same situation, as well as many young people who have not yet saved much at all.
Second, Canadians with the lowest incomes are those whose financial situations in retirement are best protected by current programs. This explains why of all age groups, those aged 65 and over have the lowest poverty rates, whereas this was not the case 30 years ago. Many even see their incomes rise when they retire.
However, the McKinsey study does not take housing values into account, although these are a popular savings vehicle for middle-class households, nor does it consider other non-financial assets, such as the value of small family businesses. Yet, all told, this category accounts for 38 per cent of household assets. A Statistics Canada study shows that if we add the value invested in property to household income, it increases by 10 to 15 per cent. Among the 23 per cent of households whose savings are considered insufficient, many actually have perfectly adequate retirement incomes, by this measure. In fact, it is a very small proportion of Canadians who are ill-prepared for retirement.
In other words, the current combination of public plans and private savings generally functions well. For a less-well-prepared minority, there will have to be some belt-tightening at 65, or an extra year or two of work. This may not be ideal, but neither is it the end of the world. The retirement age is or will soon be 67 in many OECD countries, such as Denmark, Germany, the United States, Australia and Norway. This is certainly not a problem that justifies raising retirement plan premiums, which would have the effect of lowering net salaries.
Besides, relying on greedier public plans to force people to save also has the effect of reducing private saving. And although it is too rarely acknowledged, private saving has numerous advantages.
Certainly, a public plan spreads risk and sometimes allows for economies of scale that reduce administrative costs. However, personal savings that we set aside are ours by rights. If it so happens that you do not use it all up, your nest egg becomes an inheritance handed down to your children, to your loved ones or to charitable causes you hold dear. We constantly keep an eye on how our assets are evolving because we are responsible for them. Who actually knows the value of their CPP or QPP?
In addition, private savings are invested according to personalized preferences in terms of risk and rates of return. Investment decisions can also reflect individuals’ values and promote certain industries or companies. Finally, private savings are sheltered from the political risks that have in the past resulted in serious problems of intergenerational fairness or political favouritism in the investment policies of retirement funds.
In the case of the QPP, for example, nothing is stopping politicians from giving instructions (explicit or implicit) to the managers of the Caisse de dépôt in order to promote “Quebec’s economic development” by investing in sectors that are the flavour of the day, the net effect of which could well be to reduce returns on these collective savings.
For many Canadians, the promise of more money for retirement can seem tempting, but they must understand that this government “gift” is to be paid for with their own money. Our finance ministers should let Canadians make their own decisions, instead of choosing for them.
Michel Kelly-Gagnon est président et directeur général de l'Institut économique de Montréal. Youri Chassin est économiste à l'Institut économique de Montréal. Ils signent ce texte à titre personnel.