The push to expand CPP has been strong lately. The idea is that too many Canadians won’t save for their retirements and must be forced to save more money. Setting aside the argument over whether it is a good idea to force Canadians to save more money, I wonder if it is even possible because of debts.
For various reasons, many Canadians simply won’t save for their retirements. Some have good reasons, but most don’t. If we expand CPP, we can force people to save more through increased payroll deductions. Those who already save for their retirements can afford to save a little less because they can expect higher CPP benefits. So, by expanding CPP, we’re mostly affecting those who don’t save now.
But how can we stop people from simply building larger debts as they head into retirement?
When Canadians carry debt into retirement, it’s as though they have pre-spent part of their CPP benefits. If CPP expands, they can borrow even more and pre-spend the increase in CPP benefits.
You might object that people aren’t this calculating. That’s generally true, but lenders are definitely that calculating. Lenders have been wildly successful at marketing debt to Canadians in recent decades. Sadly, many people just keep borrowing until lenders say no. If a borrower has higher CPP benefits coming, then lenders will delay saying no for a little longer allowing borrowers to pre-spend their increase in CPP benefits.
According to Douglas Hoyes, “it is very difficult, if not impossible, for a creditor to garnishee a pension,” but if the debts are backed against seniors’ homes, then the threat of losing one’s home will keep seniors making interest payments out of their expanded CPP benefits.
You might think that I’m offering this line of thought as an argument against expanding CPP, but that’s not where I’m headed. I’m actually a supporter of a modest expansion of CPP as long as the higher benefits go to those who make the higher payroll contributions. What I’m looking for is some sort of solution to the debt problem I described.
If we were to expand CPP, how would we stop Canadians from building up larger debts that eliminate some of the upside of higher CPP benefits?