On January 1, 2024, Canadians earning between $68,500 and $73,200 will be forced to make additional contributions to the Canadian Pension Plan. The year after that, earnings subject to the additional contributions will again expand.
This change comes on top of years of increases to the mandated CPP contributions Canadians are already required to make, both as employees and self-employed people.
While there’s a clear case for Canadians being forced to save for retirement through a vehicle like the CPP, a one-size-fits-all approach to mandating increased contributions isn’t the right framework — especially at a time when so many Canadians are already struggling with the cost of living.Â
Instead, Canadians should be given the option of contributing more to the CPP than the mandated minimum, by either requesting increased payroll deductions or making contributions from their savings.Â
To be clear, it is good that the government does mandate a certain level of required savings.
One reason is that people tend to be bad at saving: people tend to over-value cash in the present versus cash in the future.Â
Another reason is forced savings reduce the burden on the government when people retire. It would likely strike many people as unfair if the government had to cover the retirement costs of someone who had earned substantial income through their working years but failed to save.Â
However, forced savings come with a downside. Creating one framework for every household across the country does not respect the very reasonable differences people may have in their spending and saving needs. In this time of high inflation and high interest rates, families may prefer to prioritize costs like shelter, groceries, kids’ activities and debt repayment over future income.Â
In order to balance these two imperatives, the government should instead give Canadians the option of voluntarily contributing more than the amount that they and their employers are mandated to remit.
This approach would respect the differences in household preferences.
It would also be beneficial to the tens of millions of Canadians — particularly low-income and gig workers — who do not have a registered pension plan. The CPP model, of an arms-length pension fund that provides inflation-indexed benefits to pensioners, may be a better savings option for some than stocks, bonds or mutual funds.Â
People of limited means can also struggle to get investment advice. Many investment advisors only offer their services to people with considerable net wealth or income. Increased CPP would be open to all Canadians, regardless of wealth.
Companies, by turn, might also choose to not offer their own pension plans if they knew their employees could voluntarily contribute more to CPP. This would be a good thing, as running a pension plan is an additional complexity for an employer. And relying on a company as an ultimate backstop puts pensioners at greater risk than relying on the government.Â
To be sure, CPP does have downsides as an investment option. If you pass away, your contributions to the CPP would not pass to your estate. Your funds with the CPP are also locked in and cannot be accessed to, for instance, buy a home or start a business.
In short, a mix of mandated contributions and optional CPP top-ups would get the balance right: forcing people to save something for their future, while giving them the option of saving more if they have the means and inclination.
Or Canadians could be allowed to invest a separate amount with the CPP to take advantage of their investment strategy. No need for advisors or purchasing your own funds. The money would be separate from CPP amounts, and available to be taken out at any time.
Completely agree. We’ve actually wondered about writing an editorial on this topic as well!