Writing in the Financial Post, MLI senior fellow Philip Cross points out that measures of personal retirement savings that seem to show a decline are ignoring the vast funds in forced savings that are being held for them by government, such as CPP and the Quebec Pension Plan, which have grown enormously in recent years. "It is duplicitous that the very people who want to increase the CPP contribution rates don't count the forced savings in social insurance funds when measuring personal savings. They want households to have more savings available for retirement, but don't count the very savings they are imposing", Cross writes.
Philip Cross, JANUARY 14, 2014
Underlying the campaign to increase contribution rates to the Canada Pension Plan is the assumption that Canadians are not saving enough. Critics readily point to the decline in the personal saving rate from 11% to 5% over the past couple of decades, with the rate at times dipping below 2%.
However, this measure of personal savings from the National Accounts, where I worked at Statistics Canada, only includes savings that are held by persons themselves. It excludes all the mandatory savings held by governments for persons. These funds held in social insurance programs are enormous, standing at $85.7-billion in 2012, over twice the size of personal savings. These savings include money held in the Canada and Quebec Pension Plans, the Employment Insurance fund, as well as Workers Compensation. In 1981, EI and Workers Compensation accounted for nearly two-thirds of these forced savings; today, the Canada and Quebec Pension Plans account for nearly two-thirds, reflecting how higher contribution rates for pensions since the 1990s have led to a vast expansion of savings in these plans.
The conventional personal saving rate measures savings held by persons as a share of personal disposable income. Total savings held for persons includes this plus all social insurance funds set aside for use by the personal sector, such as CPP money reserved for your retirement. To calculate the total savings rate for persons, these contributions need to be added back to income, since they are subtracted from the calculation of disposable income.
The total savings rate now includes two parts; the personal savings made voluntarily by individuals, and the "forced" savings mandated and held by governments to be dispersed to individuals when circumstances warrant, such as after retirement or when layoff or injury at work results in a temporary loss of wages.
Looking at this measure of total savings held for persons presents a much different picture than the conventional personal savings rate. Instead of straying perilously close to zero like the conventional measure does before the recession, total personal savings have been consistently above 10%, reaching 12.2% in 2012. Of course, broader measures of savings that include things such as capital gains from housing or financial market investments would boost the savings rate even further.
It is duplicitous that the very people who want to increase the CPP contribution rates don't count the forced savings in social insurance funds when measuring personal savings. They want households to have more savings available for retirement, but don't count the very savings they are imposing. But clearly households understand that savings held for them by government is the same as their own savings, reducing the need to save in their own personal accounts. Hiking CPP contribution rates as a way to boost overall savings may be in vain, if households react the same way now as they did in the 1990s. When CPP contribution rates rose sharply in the 1990s to 9.9%, the personal savings rate fell sharply, lowering the total savings rate despite higher mandatory savings.
So people are already saving more than 10% of their income, with the majority of these savings clearly ticketed for retirement. Saving for retirement already is increasing, even without an expansion of CPP benefits. CPP contribution rates went up again on Jan. 1, and further increases will likely be needed just to sustain the current level of benefits when it becomes evident that its projected rate of return is unrealistic. Government workers across the country are being asked to contribute more to their gold-plated pension plans.
At some point, you have to ask whether Canadians are saving too much for retirement. Is the goal of working just to have a secure retirement? What about paying the mortgage or buying a car to get to work? It could be that the hidden agenda of the academics and provincial premiers who propose more forced savings is to prevent ordinary people from spending on things they don't approve of, like houses and vehicles, by forcing incomes into government-controlled savings accounts.
Philip Cross is the former chief economic analyst at Statistics Canada.