CPP hike may put dent in investment, think tank says
Private savings dollars seen going offshore
Increased contributions to the Canada Pension Plan could deny the country billions in retirement savings that might be used for investments at home, the Fraser Institute warned Thursday.
The think tank predicted in a new report that the plan for workers to make greater CPP payments, starting in 2019, will cause “unintended consequences,” including a reduction in the amount of money that Canadians voluntarily sock away into accounts such as RRSPs and TFSAs.
A migration of those savings to the CPP would have its own consequences, the Fraser Institute warned, such as reducing funds that would have been available for Canadian investments.
The think tank says this is likely because the CPP’s investment manager, the Canada Pension Plan Investment Board, has most of its portfolio based in foreign markets, while Canadians tend to have more of a “home bias” for their own savings. According to the report, 83.5 per cent of the CPPIB’s assets were invested outside of Canada in the 2016-17 fiscal year, whereas Canadian households had 82.2 per cent of their financial assets invested in-country.
“As Canadian households are forced to increase their CPP contributions, they will reduce their levels of private saving, and the majority of those substituted private savings would have been invested within Canada,” the report said, citing previous research on past CPP contribution hikes.
“This means that there will be a reduction in the amount of money available for investment in Canada, compared to what would have been the case if the CPP was not expanded.”
The extent to which this will happen, the think tank says, depends on how much Canadian families throttle back their voluntary savings as a result of the CPP boost. Based on past CPP expansions, the reduction in the amount of assets that would have been available for investment in Canada could add up to a combined $49.9 billion to $114.4 billion by 2030, the report said.
“So there’ll be fewer funds available to fund start-up businesses, to expand business operations, to invest in new machines and technologies, all things that will help create opportunities for Canadian workers and grow the economy,” said Charles Lammam, director of fiscal studies at the Fraser Institute and a co-author of the study.
Such a prospect comes as a corporate tax cut in the United States and ongoing uncertainty over the fate of the North American Free Trade Agreement have weighed on the outlook for the Canadian economy.
“A decline in investment within Canada will have negative effects on the Canadian economy, as investment is critical to making workers more productive, increasing wages and improving living standards,” the report said. “The decline in investment will also come at a time when business investment in Canada is already decreasing and lagging behind other industrialized countries.”
Even so, the report’s authors said they do not recommend forcing the CPPIB to invest at home in response to the pension contribution increase, as the fund’s freedom allows it to invest in assets that generate good returns. Rather, the Fraser Institute suggested that the government offset the added CPP contributions by pushing policies to boost investment in Canada, such as reducing taxes on capital gains and business investment.