All roads lead to increased pension savings

Posted on December 21, 2013 in Social Security Policy Context – ROB/Economy/EconomyLab
Dec. 20 2013.   Todd Hirsch

When it comes to governments in this country, agreeing to disagree is about as Canadian as maple syrup and hockey.

The latest bickering revolves around an issue that is certain to gain attention in the years ahead: How can we adequately prepare ourselves for financial retirement?

Most of the quarrelling focuses on what to do (or not do) with the Canada Pension Plan. And while there’s more disagreement than consensus, a key piece of logic is missing from the discussion.

By better preparing Canadians for retirement – be it through an enlarged CPP, a proposed pooling of voluntary savings or some combination of the two – the government cannot avoid one obvious truth. Saving more for tomorrow will mean a leaner economy today.

Federal Finance Minister Jim Flaherty insists that the national economy is too fragile at this point to enlarge the CPP. Forcing companies and employees to pay more in premiums would pummel the still-enfeebled Canadian consumer and stall economic growth. More importantly for the federal Conservatives, it would rob them of precious GST and business tax revenue, which could jeopardize their plan to balance the budget in time for the next general election.

The federal NDP and the Canadian Labour Congress, on the other hand, want the CPP doubled in scope for all income earners. Their focus is clearly on taking actions now to ensure economic security for seniors in the future, even if that causes trouble for companies today. Ontario’s government is generally in this school of thought as well, and is flirting with acting alone to establish its own provincial pension plan.

Various business advocacy groups, such as the Canadian Federation of Independent Business, side with the federal government in the belief that enlarging the CPP would crush business investment and unfairly penalize small businesses. Alberta and Quebec broadly share this view, although they’re probably less concerned with GDP growth than they are with the idea of an enlarged CPP – a federal institution. While there is no separatist Alberta movement to speak of, the concept of “less Ottawa” still plays well in the province and its pro-business sentiments.

The counter-proposal to an enlarged CPP is a pooled registered pension plan (PRPP). Other than contributing one more confusing acronym to the language of public finance, the PRPP would enable workers without a pension plan to voluntarily set money aside in a pooled fund that would be professionally managed.

Agreement among the provincial and federal governments may prove elusive. The crux of the matter is a fundamental disagreement about who should be responsible for ensuring adequate retirement income: the state or the individual. Intelligent arguments can be made supporting either position.

But ultimately, if we don’t want to be eating tins of cat food when we retire, we need to save more today. Full stop.

Opponents of enlarging the CPP on economic grounds (“The economy is too fragile!”) miss the point that retirement savings cannot be created out of nothing. If it does its job effectively, a PRPP would pull just as much spending out of the economy today by encouraging workers to save. On balance, a larger CPP or an effective PRPP would each impose an approximately equal drag on today’s economy.

Those who oppose the CPP option because it would unduly punish businesses seem to ignore the fact that businesses would see falling sales under an effective PRPP, because consumers would be saving more and spending less.

Economists on each side of the debate will fuss over complex calculations supporting their positions. But everyone – Ottawa, the provinces, the unions and the business groups – needs to face one very unpleasant reality. If we don’t save more today, we’ll have less tomorrow. Nothing is free.

We can get caught up in the mechanics of how we save, or the philosophical debate about the role of the state. But there is a distinct danger that by endlessly debating the pros and cons, we fail to take action altogether. And cat food might not taste very good.

Todd Hirsch is the Calgary-based chief economist of ATB Financial, and co-author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.

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