I’ve read many articles on the debate over whether we need an improved pension system, and I’ve noticed some patterns. The two sides rarely address each other’s issues.
Arguments for Change
Supporters of change usually point to the alarming number of Canadians who save little and are headed to a dismal retirement where their standard of living will drop significantly. They rightly point out that the only remedy is forced savings. They call for an expansion of CPP or support Ontario’s plans to create a new pension system. Either option leads to higher payroll taxes as a form of forced savings.
Status Quo Side
Supporters of the status quo say that Canadians are doing just fine with their retirement savings. They say that the average level of retirement savings among Canadians is quite healthy. They observe that few retired Canadians live in poverty. They say that forced saving would just reduce voluntary saving.
Who is right?
These two arguments seem to contradict each other, but they don’t. Average savings levels are quite good. However, the average includes those with substantial savings along with those with little or no savings. So, it’s possible for the average to be good and still have many people with inadequate retirement savings.
The statements about many Canadians facing a big drop in their standard of living in retirement and few retirees living in poverty don’t really contradict each other either. Most Canadians facing a big drop in their standard of living will still have an income above the poverty line.
The claim that forced saving would just reduce voluntary saving appears to be at odds with the claim that forced saving would help people. But there really isn’t a contradiction here either. It’s true that people who are saving some money now for retirement would likely save less voluntarily if they were forced to save more in a government-run plan. However, those who save nothing now can’t save any less voluntarily; they would benefit from forced saving.
If it were possible to aim a new savings plan only at those who save little or nothing now, there would be little opposition. However, with expanded government retirement savings plans, everyone who works would contribute more involuntarily. This would take a significant bite out of voluntary savings. The money management industry would face a big drop in assets under management and a corresponding drop in total income. This is their real concern.
I think we would be better served if the two sides of this debate were to directly address each other’s issues instead of talking past each other. We’re weighing the benefit of forced saving for those who don’t save voluntarily against the reduced choices for those who are already saving enough. I suspect that many who struggle with how to invest their RRSPs would welcome forced savings in a government plan, but others prefer to handle their own money.