As the calendar flipped this month to 2020, the federal government has again made the Canada Pension Plan (CPP) tax more expensive. The combined employee and employer contribution rate has risen from 10.2 percent in 2019 to 10.5 percent this year, while the maximum taxable amount (but not the exemption amount) has also gone up.
This means workers of all incomes, as well as their employers, will pay more. It is the second of five annual planned increases; by 2023 the CPP tax is scheduled to rise to 11.9 percent. Unfortunately, expanding the CPP does no good for the economy and workers – indeed, the entire plan is a bad idea to begin with.
The claim from the Liberals that expanding the CPP helps workers save for retirement is false. The CPP is a “pay-as-you-go” plan, meaning that workers paying into it aren’t really saving for their retirements – their CPP taxes are instead used mostly to pay benefits to current retirees. When today’s workers retire, the funding for their benefits will in turn rely on the next generation of workers’ taxes.
But even if we suppose, incorrectly, that the CPP was a program through which workers did save for their own retirements (instead of paying for somebody else’s), expanding it would still be a foolish idea. Forcing all Canadians to save a certain percentage of their income is unfair and unreasonable.
Take for example a worker with a terminal illness who is not expected to live to the retirement age. The federal government then comes along and forces this worker to put aside 10.5 percent of their income for retirement – savings that will prove worthless. Does anybody think this makes sense?
This specific example proves a more general point – the amount that workers should save for their retirements depend on their own circumstances and preferences. It is preposterous to have a one-size-fits-all government approach to retirement savings for a diverse population of millions of workers.
As Milton Friedman put it: “Why is it that it is appropriate for government to tell me what fraction of my income I should save for my old age? If that’s okay, why can’t it come in and tell me exactly what fraction of my income I have to spend for food, what fraction for housing, what fraction for clothing?”
Yet another problem with the government’s one-size-fits-all approach is that not everybody wants their money invested in the same way. Some Canadians might want their money invested in riskier assets with higher expected returns. Others might want to invest in safer assets, even if the expected returns are lower.
Because of the Canada Pension Plan Investment Board’s active investment strategy, its costs are $3.3 billion per year, or 0.83 percent of assets. But many Canadians might prefer a passive investment strategy with much lower costs.
At bottom, the conceit of the CPP is that when it comes to how and how much individual Canadian workers should save for retirement, the federal government does not know better than the workers themselves. By expanding the CPP, the government is unfairly treating adult workers as if they were children, unable to make their own financial decisions.