CPP Debate

A July 5th study from the Institute for Research on Public Policy (IRPP) has renewed the debate on the future of retirement plans in this country.  Many pieces have been published arguing both sides of the studies’ findings; so this week I’d like to summarize the issue and outline both sides of the debate.

The study’s findings state that  “25 to 30 percent of today’s modest-and middle-income workers are not saving enough to avoid a significant drop in their living standards at retirement” Furthermore, people are living longer, and decreasing savings will only make the problem worse.  The plan suggests three options for resolving the issue; a mandatory defined benefit program, or one of two defined contribution plans.  He suggests a national defined benefit program would be the most beneficial and would entail an expansion to the existing Canada Pension Plan.

Detractors to the plan include Neil Mohindra, Director of the Centre for Financial Policy Studies at the Fraser Institute.  He argues that Canada has one of the lowest senior citizen poverty rates in the world and an increase to the pension amounts would not prevent poverty but would increase lifestyle income.  Mohindra bluntly explains that the IRPP solutions will “save a minority of retirees from having to downgrade to basic cable by forcing all working Canadians to contribute more of their earnings to a government-sponsored defined-benefit plan, such as an enrichment of the existing CPP”.  He argues that optional programs such as RRSPs allow individuals to choose their own level of retirement savings and allows them to balance the choice of saving against other investments such as paying down debt or investing in a small business or education.

Proponents of expanding the CPP suggest that a defined benefit plan provide somewhat higher benefits per dollar invested than individual savings plans.  They suggest that by pooling many beneficiaries with many different ages into one overall plan; they are able to increase the potential benefit because a higher risk can be tolerated with investment choices. 

The debate will continue as Federal and Provincial governments will meet later this year to discuss any potential changes.   If you have any thoughts or comments on this subject or would like more information I’d love to hear from you.