Social Policy in Ontario

In defending their analysis of the effects of expanding the Canada Pension Plan on RRSP savings, the three Fraser Institute researchers find my critique “disparaging” (Vancouver Sun, July 18).

While the authors seek to substantiate the credibility of their research, they prefer ad hominem slur to reasoned response. Here, I pose further questions about the validity of their research and then turn to substantive discussion of the issues.

In their first line of defence, the authors assert, “our study was formally reviewed by two academic economists.” That claim would be consistent with the Fraser Institute’s standard of “a rigorous review process for its research … with two external experts. Reviewers are expected to have a recognized expertise in the topic area being addressed.”

The two academic economists cited in their study are both Fraser Institute “senior scholars” with one formerly employed by the institute and the other having more than 80 studies published by the institute.

Their research spans economic history, international trade, regulation, education, crime, and “sports economics” but neither reviewer has expertise in pension policy and savings behaviour.

In further defence of their research, the authors reiterate that their study is only preliminary, using simple aggregative data, and requires “more detailed analysis … controlling for a host of potential explanations.” So true — in its current state the study would be rejected by any established scholarly journal, which perhaps explains why the authors chose to pursue in-house publication.

The authors also seek to dismiss my critique as that of a partisan advocate of CPP expansion. Not true. My study of the topic fully assesses the pros and cons, as well as the complications, of these proposals. My study cites how RRSPs offer greater flexibility for individual savings, but finds that the balance weighs in favour of CPP expansion.

I am not alone among pension and economic experts on this topic in concluding, after careful analysis, that CPP expansion is the best direction for Canadian pension policy. Among those reaching this conclusion are the former chief actuary of the CPP, the former president of the CPP Investment Board, Finance Canada’s foremost analyst of pension policy, and other non-partisan economic experts.

Indeed, even Financial Post columnist Jack Mintz has come around to the view that some expansion of CPP would be desirable. He himself commissioned my review of CPP proposals and published it at his University of Calgary School of Public Policy.

Turning now to more substantive issues, nothing in my critique of the Fraser Institute study denied that expanding CPP might reduce voluntary savings in RRSPs by some individuals. Rather, my critique is that their deeply flawed study did not prove that impact nor did it provide any reliable insight as to the magnitude.

I do not dispute that some people who are already saving enough (via CPP, RRSPs, and workplace pensions) for their retirement would be induced by an expanded CPP to offset that with some reduced voluntary savings.

Perhaps the institute authors would be surprised to learn that that point and its implications were assessed in my study.

The slow phase-in of expanding the CPP would allow ample opportunity for those individuals with enough savings to make the requisite adjustments. Even if it resulted in a dollar-for-dollar offset with no increase in their total savings (including their CPP entitlement), most of these individuals would still enjoy significant advantages.

Unlike savings in an RRSP, the forced savings in the CPP are professionally managed, have minimal cost and excellent returns, and generate assured benefits that are inflation-indexed.

Moreover, RRSP savings impose a retirement date risk arising for a retiring individual needing to draw on his savings when both equity markets and interest rates are depressed like in 2008; the CPP eliminates this individual risk via pooling.

Few private investors can match the CPP Investment Board’s 7.4-per-cent annual rate of return over the past 10 years. And no individual can undertake investments like the CPP Investment Board’s recent participation in two prime office properties in downtown Vancouver, Brazilian shopping centres, and a Hong Kong industrial facility.

Thus, apart from reduced flexibility, each dollar of savings via CPP is superior to each dollar of RRSP savings, even if the former were to fully displace the latter.

What the authors ignore in citing the “standard economics textbook” theory of life-cycle consumption behaviour is that many individuals depart from the simple rational model.

As shown in numerous empirical studies from behavioural economics, many workers do not save in a rational way, with myopic behaviour leading to far less savings than one would predict from the model.

As a result, studies of Canadian workers find that substantial proportions are saving inadequately through low or nil RRSP contributions and shrinking workplace pensions. One study forecasts that about half of those born between 1945 and 1970 with average earnings of $35,000 to $80,000 will suffer a decline of 25 per cent or more in their living standards when they retire. For younger cohorts, the outcomes are even worse.

An expanded CPP would address these problems and improve the lifetime well-being of many current working-age Canadians. Exactly how to expand the CPP should be guided by sound research, not by flawed, methodologically primitive studies.

Rhys Kesselman is Canada Research Chair professor in public finance with the School of Public Policy, Simon Fraser University. His research has assessed proposals to expand the Canada Pension Plan.

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