Mandatory CPP tax boost no solution for Canadians
For the third time in recent months, the question of whether Canadians are prepared for retirement will be on the table at a meeting of provincial leaders when finance ministers from across the country meet in mid- December.
The discussions so far have been plagued by three common policy dysfunctions. Tunnel vision After the economic meltdown in 2008, concerns about retirement were top of mind for many Canadians, particularly baby boomers. Governments took notice and many unions started pushing the idea of a mandatory increase in Canada Pension Plan taxes (which would lead to an eventual increase in benefits). Effective problem solving requires serious analysis of alternative options.
But tunnel vision has set in around the idea of a mandatory CPP increase, an option which, interestingly, would have zero benefit for the baby boomers. There has been no serious discussion of alternatives. Solution in search of a problem The idea that Canadians are not prepared for their own retirements taps into nervousness that most of us have about how we will adjust to retirement - a major life shift.
But evidence does not support that Canada has a retirement savings crisis. Several well- respected economists have argued this point and said the problem, to the extent that we might have one, is limited to a narrow group of middle-income earners. They agree that more analysis is needed to understand this issue because this group may be counting on savings in their homes, businesses or other sources not typically included when measuring retirement savings. If we don’t have a widespread retirement savings problem, why are we talking about a mandatory CPP tax increase? Cure is worse than the disease This is a common policy dysfunction. The desire to do something in the face of a perceived or real problem is strong.
It’s a natural human instinct that leads to some bad policy making. Much of the discussion around a mandatory CPP increase ignores its negative impacts.
Forcing people to save more through CPP would reduce savings in other areas, including voluntary retirement savings plans. The impact on the economy overall would not be pretty either, causing notable drops in employment and wages. A better way Finance ministers who don’t want to fall victim to these policy dysfunctions can make a stand at their mid-December meeting.
They can advocate for more consultation and more research on the important question of how the government can best help Canadians save for retirement, without prejudging that the only answer is a mandatory increase in CPP.
The question of a mandatory CPP increase needs to be a question of if, not when.