The federal government has brought the issue of CPP back to the forefront this week by stating they’re open to the idea of voluntary expansion. Their new stance is an about-face on the matter; in 2013, despite calls from the provinces to expand CPP to address the looming retirement crisis, the late Finance Minister Jim Flaherty put the kibosh on CPP expansion. Flaherty made it clear at the time he’d rather a targeted approach to address the retirement savings issues plaguing the middle class.
Fast forward less than two years later and the Tories seem to be singing a different tune. Current Finance Minister Joe Oliver said consultation will soon start on a possible voluntary enhancement to CPP, though no official promises have been made or put into writing.
Different Views on Retirement Savings
The Conservatives, Liberals and NDP parties have different approaches to addressing Canadians’ lack of retirement savings. While the Tories are backing voluntary CPP contributions, the Liberals and NDP prefer that CPP expansion be mandatory. They’d like to see a hike in basic premiums to help Canadians who are failing to save suffciently. The Tories are strongly opposed to this, calling mandatory CPP expansion a “job-killing, economy-destabilizing, pension-tax hike on employees and employers.”
Other Retirement Savings Options
The Conservatives have introduced a number of vehicles to encourage Canadians to save, including Pooled Registered Pension Plans (PRPPs), Target Benefit Plans (TBPs) and TFSAs. The problem is that these accounts are voluntary – the onus is on the individual to contribute. Canadians don’t have a great track record of saving. According to Statistics Canada, less than one in four Canadians (24 per cent) contributed to an RRSP in 2011. Canadians already have plenty of ways to save for their golden years – the problem is many are choosing not to take advantage.
CPP Expansion vs. RRSPs and TFSAs
While RRSPs and TFSAs offer tax-sheltered ways to save, they’re not necessarily the best option for everyone. Low-income seniors who qualify for Guaranteed Income Supplement can actually see their government benefits clawed back from RRSP withdrawals. While the TFSA doesn’t affect means-tested government benefits like the RRSP, TFSAs don’t help low-income Canadians who don’t have any money to save, struggling to make ends meet.
While voluntary CPP expansion sounds great on paper, it would only help those with extra money to save. With employers and employees both sharing the cost, mandatory CPP offers a better solution for those who lack workplace pensions.
Why Aren’t Canadians Saving For Retirement?
Although the middle class has money to save, they’re choosing not to. Why is that? The plethora of investment choices could have something to do with it. With RRSPs and TFSAs, Canadians have a laundry list of investment choices: bonds, savings accounts, GICs, ETFs and mutual funds to name a few. This can be intimidating for some Canadians, who may forgo investing altogether.
Mandatory CPP expansion would offer a simpler solution – the money would be automatically deducted off the paycheques of Canadians before they’re tempted to spend it. Best of all, the choice of a suitable investment would be taken care of by the Canadian government.
With the battle lines clearly drawn, it will be interesting which side most Canadians take. Pensions played a big role in the Ontario election and could very well be a key issue federally as well.
Sean Cooper is a Financial Journalist and Personal Finance Expert, living in Toronto, Ontario. He offers Unbiased Fee-Only Financial Advice, specializing in pensions and the decumulation of financial wealth in retirement. Follow him on Twitter @SeanCooperWrite and read his blogs and request his writing services on his personal website: http://www.seancooperwriter.com/