Even without "Big CPP," government is doing plenty on retirement savings

Much gnashing of teeth today over the federal government’s decision not to play ball with PEI and Ontario over expanding the Canada Pension Plan into a so-called “Big” CPP. Probably the best summary of it came in Terry Corcoran’s column today flagged on both the front of the National Post and the FP: billed respectively as “Failure to move ahead on big CPP a big relief” and “The right call on big CPP.” (double entendre on the word “right?”) It’s also instructive to read the reader comments on the various online pieces. These tend either to be of the “my mum lives on CPP/OAS/GIS and is doing fine” variety or else the “I’ve been saving all my life for retirement, so why do we have to go back to government for more?” type. It is a bit outrageous that the Ontario government – fresh from the gas plant debacle, following which we all pay way too much for electricity – is now claiming it’s willing to go it alone to introduce a big CPP in the province. As Terry Corcoran rightly points out, many of Canada’s large public sector union plans and their supporters are pushing for a big CPP in case they need to mitigate the downside of unfunded liabilities in their cushy DB pensions: larger CPP benefits would mean lower unfunded liabilities, since many of these plans factor in CPP payments. CFIB: battle won, war not over

Naturally, the private sector – as represented by the Canadian Federation of Independent Business – does not want to be overly burdened with even higher payroll taxes. As the CFIB declared yesterday here, while the CPP battle may have been won, the war is not over and the “threat of payroll tax hikes remains.”

It points out the federal government has already created the Pooled Registered Pension Plans (PRPPs) and that the majority of the provinces have announced plans to launch them in the coming months. True, PRPPs act more like RRSPs and defined contribution pensions than guaranteed defined benefit pensions but that’s the world we now live in. Investors have to bear some investment risk and in this world of “financial repression,” most are forced by low interest rates and constant central bank quantitative easing to go further out on the risk curve than they may be comfortable with.

On Sunday, the Toronto Star ran a column more sympathetic to an expanded CPP but used a spurious argument that RRSPs have high investment fees, a malady that would also afflict PRPPs. As I pointed out on Twitter and to the writer by email, that’s a bit disingenuous: RRSPs and PRPPs might have high fees if you choose inappropriate investments like high-fee mutual funds but there’s no reason why they couldn’t also hold low-fee mutual funds like index funds, or ETFs or even individual stocks and bonds that have no fees whatsoever beyond trading costs. As with the act of saving itself, individuals have to take some responsibility for how their investments are to be optimally managed.

Individuals need to be their own pension managers

As someone who has been saving and investing for the better part of three decades, and who also edits Canada’s leading personal finance magazine, I do find it hard to muster too much sympathy for those who failed to do so, have not paid attention to these issues and now expect governments to make it all better by waving their magic wands.

On top of RRSPs and PRPPs, don’t forget we also have the Tax Free Savings Account or TFSAs, introduced in 2009. As of January, Canadians will have $31,000 contribution room for TFSAs, or $62,000 per couple. In retirement, you could soon build a nice source of tax-free income (interest or dividends) from TFSAs, which would not affect yet another two sources of federal government retirement income: Old Age Security and (for the least-prepared seniors), the Guaranteed Income Supplement.

Let’s recap: the RRSP has been around more than half a century, the original CPP since 1966, OAS and GIS for several decades, the TFSA since 2009 and PRPPs are on the horizon. The last two programs have been under the watch of the Harper administration and Finance Minister Jim Flaherty (pictured above). On top of this, some but not all workers will have DB pensions if they’re lucky and DC pensions if they’re not. And yes, the original CPP is there as it was always intended: to replace SOME but not ALL of the income workers enjoyed when employed. And finally, of course, there’s also non-registered investment accounts or saving.

Modest tweaks to CPP still welcome

Would it be nice to have a little more CPP income? Yes. Personally, I notice that towards the end of every summer, CPP is no longer taken off my paycheque (or that of my wife), because we’ve maxed out on the year by then. Clearly, it wouldn’t greatly affect our lives if the same amount were taken off for the whole year — with a commensurate higher payment down the road. In our case, however, we just take the CPP “savings” in the second half of the year and start accruing for January’s TFSA contributions. Once a saver, always a saver!

The feds have in the past conceded that at some point there might be a “modest” improvement in the CPP. A tweak of the kind I mention above would be welcome at some point, especially for middle- to high-income earners who lack employer DB plans. But I can see the argument for maintaining the status quo: it would cost employers more to “match” such CPP premium increases, and meanwhile the federal government is still trying to balance the books. Remember, once they do, they had promised to double TFSA contribution room.

Bottom line: the Canadian government already does PLENTY to encourage citizens to save for retirement. You can lead a horse to water but you can’t make it drink. Those who expect a Big CPP to save them from themselves should instead consider another form of saving: doing without some luxuries and putting money aside for a rainy day. Day in and day out, year in and year out. If you need some encouragement, subscribe to MoneySense!

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.