CPP enhancement is crucial to helping Canadians save adequately for retirement, according to a new report released David Dodge, the former Governor of the Bank of Canada. Canadians do not save enough to support accustomed standard of living. Two-thirds of Canadians dont have pension plans or access to savings vehicles that would produce the returns needed to secure finances in retirement.
It is precisely in this context that Mr. Dodge notes in Macroeconomic Aspects of Retirement Savings, that an enhanced CPP would represent a retirement savings vehicle that is superior to many corporate defined-benefit (DB) plans and group or individual savings vehicles.
In the report released by the Ontario Ministry of Finance, Mr. Dodge notes that Canadian households and governments need to do more to prepare for impending increase in retirees. Increasing CPP in the near future would be an efficient measure to increase household savings and to provide for higher retirement incomes, the report notes.
The effectiveness of the CPP has long been touted by CARP and most pension experts, but Mr. Dodge addresses a key concern raised by CPP enhancement skeptics. Opponents of CPP enhancement, including the federal government, claim that increasing the CPP would have negative impact on the economy.
The report confronts that concern directly, but notes that while there may be a negative effect on the economy initially, On balance the net [negative] impact of an increase in household saving via the CPP [will be] relatively small and short lived while the structural impact on growth would be relatively quite significant and long lived, according to Mr. Dodge. Even the initial impact, small though it might be, would be lessened by a phased-in approach to CPP increase, he notes.
One of the reasons the economic benefits outweigh the short term negative effects is that large pension plans invest in provincial and national infrastructure, creating jobs and boosting the economy. As study of large defined benefit plans released in 2013, showed that the top ten Canadian pension funds have invested roughly $400 billion in Canada, including $100 billion in real estate, infrastructure and private equity.
Despite this, the federal government has decided that it wont lend its consent to CPP enhancement. In lieu of federal leadership, Ontario announced a new provincial pension plan its calling the Ontario Retirement Pension Plan (ORPP). While the ORPP is a significant step in the right direction, Canadians outside of Ontario wouldnt be covered unless other provinces choose to participate.
Theres a lot of evidence and popular support for CPP enhancement. Now we need federal and provincial governments willing to work together on a national solution to the national retirement savings problem.
May 2, 2014