The Fraser Institute

The Fraser Institute

June 25, 2013 06:32 ET

Fraser Institute: Expanding CPP May Have Unintended Result of Decreasing Canadians' RRSP Contributions

VANCOUVER, BRITISH COLUMBIA--(Marketwired - June 25, 2013) - If the federal and provincial governments decide to increase mandatory contributions to the Canada Pension Plan (CPP), Canadians may in turn reduce voluntary contributions to RRSPs, according a new study from the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.

"Increasing mandatory CPP contributions is a policy reform that may have unintended consequences. By forcing Canadians to save more for retirement through the CPP, the government inadvertently encourages them to change their behaviour and reduce their voluntary retirement savings elsewhere," said Charles Lammam, Fraser Institute associate director of tax and budget policy and co-author of RRSPs and an Expanded Canada Pension Plan.

The notion of expanding mandatory CPP contributions resurfaced during a December 2012 meeting of provincial finance ministers with their federal counterpart, Jim Flaherty. Following that meeting, the ministers said they would revisit the idea in mid-2013, although a meeting date has not yet been set.

RRSPs and an Expanded Canada Pension Plan examines readily available data from the Canada Revenue Agency on CPP and RRSP contributions between 1993 and 2008 to explore what happened to voluntary RRSP contributions when mandatory CPP contributions increased.

"People choose how much they save and spend based on their income and preferred lifestyle. If their income and preferences do not change and the government mandates additional savings through the CPP, economic theory predicts people will simply reduce their voluntary savings, such as RRSPs, with little or no increase in overall savings," Lammam said.

"Unfortunately, the debate around expanding the CPP has largely ignored this basic economic insight and by doing so, overestimates both the likely increase in savings and benefits resulting from expanding the CPP."

The study looked at historical CPP and RRSP contributions among Canadians in two age groups: those under 45 and those aged 45 to 65. It also separated each age group into two income groups: $10,000 to $50,000 and $50,000 to $100,000.

Using three different measures, the study consistently found that RRSP contributions declined as mandatory savings to the CPP increased.

For instance, the percentage of tax-filers contributing to RRSPs in each age and income group decreased as the CPP contribution rate increased.

While the results are broadly consistent across all age and income groups, the group most likely to be sensitive to changes in the CPP are Canadians aged 45 to 65 with income between $10,000 and $50,000. In 1993, 40.2 per cent of tax-filers in this group contributed to RRSPs, with the proportion falling to 33.0 per cent by 2003-a decline of 17.9 per cent. Over the same period, the mandatory CPP contribution rate almost doubled to 9.9 per cent from 5.0 per cent.

The result is similar when the share of income contributed to RRSPs is examined. For Canadians in the 45 to 65 age group with income between $10,000 and $50,000, the share of income contributed to RRSPs declined to 3.5 per cent in 2003 from 4.4 per cent in 1993. Meanwhile, the share contributed to CPP doubled to 3.0 per cent from 1.5 per cent of income as the government hiked CPP payroll taxes.

A third measure showed the dollar value of RRSP contributions per tax filer also decreased as mandatory CPP contributions increased. Again, this was evident across all age and income groups.

"While the conclusions drawn from the analysis are not definitive, they strongly suggest a substitution between CPP and RRSPs occurred in the past when mandatory CPP contributions increased," Lammam said.

"The key to providing retirement income through savings is a set of rules that allows for an optimal mix of savings for different people in different stages of life and with different preferences. There may be benefits to a compulsory expansion of the CPP, but these benefits need to be weighed against the costs, which as our analysis shows could include a reduction in voluntary RRSP savings."

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The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of 86 think-tanks. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit

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