Increasing mandatory contributions to the Canada Pension Plan (CPP) could lead to reduced voluntary RRSP contributions, according to a Fraser Institute report released this morning.
In RRSPs and an Expanded Canada Pension Plan, Fraser Institute associate director of tax and budget policy and report co-author Charles Lammam said that increasing CPP contributions may have unintended consequences. He argues that by forcing Canadians to save more for retirement through the CPP, the government may actually be encouraging them to reduce other ways of saving for retirement.
"People choose how much they save and spend based on their income and preferred lifestyle," Lammam said. "If their income and preferences do not change and the government mandates additional savings through the CPP, economic theory predicts people will simply reduce their voluntary savings, such as RRSPs, with little or no increase in overall savings.
"Unfortunately, the debate around expanding the CPP has largely ignored this basic economic insight and, by doing so, overestimates both the likely increase in savings and benefits resulting from expanding the CPP."
The study found that in the past, increases to mandatory CPP contributions have led to decreases in the percentage of tax filers who contribute to RRSPs, the percentage of income contributed to RRSPs and the dollar value of RRSP contributions.
The group most sensitive to changes in mandatory CPP contributions was found to be Canadians aged 45 to 65 making between $10,000 and $50,000 per year.
The study looked at contributions between 1993, when the mandatory CPP contribution rate was 5%, and 2003, when the mandatory contribution was 9.9%. Specific findings found that over the 10-year period:
- the percentage of those who contributed to RRSPs declined from 40.2% to 33%;
- the share of income dropped from 4.4% to 3.5%; and
- the dollar amount of RRSP contributions per tax filer also fell.
"While the conclusions drawn from the analysis are not definitive, they strongly suggest a substitution between CPP and RRSPs occurred in the past when mandatory CPP contributions increased," Lammam said.
The possibility of increasing mandatory CPP contributions surfaced in December 2012, when provincial finance ministers met with federal Finance Minister Jim Flaherty. The ministers said they would continue to discuss the issue in mid-2013. No meeting date has been set.
