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September 11, 2013
Increasing CPP could lead to reduced RRSP contributions

Increasing mandatory contribution levels of the Canada Pension Plan (CPP) may result in lower registered retirement savings plan (RRSP) contributions, the Fraser Institute says.

In its study entitled RRSPs and an expanded Canada Pension Plan, the Institute says that, based on CPP and RRSP contribution patterns from 1993 to 2008, individual RRSP contributions declined when mandatory savings requirements of the CPP increased.

“Increasing mandatory CPP contributions is a policy reform that may have unintended consequences,” says Fraser Institute Associate Director of Tax and Budget Policy Charles Lammam.  “By forcing Canadians to save more for retirement through the CPP, the government inadvertently encourages them to change their behaviour and reduce their voluntary retirement savings elsewhere.”

In its review of retirement savings patterns of Canadians, the Institute found that retirement savings dropped significantly among those between the ages of 45 and 65 earning between $10,000 and $50,000 annually, when mandatory CPP contributions rose.  For example, in 1993, 40.2 per cent of tax filers in that group contributed to RRSPs.  However, as mandatory CPP contributions increased from 5.0 per cent to 9.9 per cent from 1993 to 2008, the percentage of those making RRSP contributions slipped to 26 per cent.  Similar declines were recorded among those in the same age bracket earning between $50,000 and $100,000 per year.  Contribution declines were also recorded among people under age 45 in both income groups.  

In addition, the Institute says, the proportion of income channelled to RRSPs declined from 4.4 per cent to 2.8 per cent during that time for the age 45-65 group earning between $10,000 and $50,000 annually.  Similar declines were noted in the other demographic groups studied.

In effect, as the contribution requirements for the CPP increased, the overall proportion of those contributing to RRSPs and the amounts directed to the retirement savings plans, decreased.

“The key to providing retirement income through savings is a set of rules that allows for an optimal mix of savings for different people in different stages of life,” Mr. Lammam says.  “There may be benefits to compulsory expansion of the CPP, but these benefits need to be weighed against the costs, which, as our analysis shows, could include a reduction in voluntary RRSP savings.”

The ratio of the declining proportion of RRSP contributors to the increased CPP contribution levels is illustrated below:

Note: CPP contribution rate combines rates of employees and employers.
Sources: Canada Revenue Agency (various issues); Canada Revenue Agency (2013a);
Revenue Canada (1995, 1996, 1997);
Service Canada (2013); calculations by authors.

Reproduced from RRSPs and an expanded Canada Pension Plan: A preliminary analysis, Fraser Institute, 2013.

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