How the government wants to trick us into saving more

Never mind the hypothetical cuts to OAS, Ottawa’s got some actual pension measures before Parliament

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According to how economists have long imagined us, the way we plan for retirement works somewhat like this:

  • Phase one: straight out of school, we calculate how much money we’re going to need after our working days are over, and lay down a carefully thought-out savings plan;
  • Phase two: as we climb the corporate ladder, we’re happily shaving larger and larger slices off our paycheques, pouring the cash into carefully selected and closely monitored investments;
  • Phase three: we bid good-bye to our fellow co-workers of a lifetime and joyfully retire to freedom sixty-…. whatever.


Now, many of us have little to do with this picture-perfect rational saver: We don’t know how to figure out how much money is enough; we’ve had so many temp jobs before landing the steady gig that it was impossible to plan (or so we tell ourselves); we have an instinctive aversion to payroll withdrawals; and we forever postponed filling out the paperwork to enrol in our company’s pension plan.

That’s why the Harper government’s new pooled registered pension plans are set to include an auto-enrollment feature. We’re talking about bill C-25, which lays out the federal government’s vision of PRPPs and–unlike anything to do with Old Age Security–is the pension reform measure that’s actually before parliament right now. PRPPs are voluntary pension schemes aimed at the 34 per cent of Canadians–mostly self-employed and small business employees–who have no workplace pension. Under the government’s proposal, contributions would be pooled (allowing for lower administrative costs) and managed by private financial institutions.

While employer participation in a PRPP is voluntary, the employees of a company that opts in are automatically enrolled. They may choose to opt out of the plan, but no one will ask permission to sign them up. That little trick, Ottawa believes, will be enough to boost the number of Canadians with a retirement savings account. There’s plenty of evidence to support this view. In the U.S., after Congress modified the rules around 401ks to favour automatic registration, the number of Americans saving through that type of retirement account grew dramatically, reaching almost 90 per cent in some companies. New Zealand and Australia have played around with auto-enrollment as well, with similarly staggering results. And the U.K. is currently in the process of rolling out similar automated schemes.

All of these pension reforms–and Ottawa’s own bill, the Department of Finance confirmed–are based on research from the increasingly popular field of behavioural economics, which recognizes that many people in many circumstance don’t act like rational actors. Behaviourists have been drawing up economic models that seek to incorporate factors that may muddle our rationality, such as instincts, myopia, inertia and laziness, and they’ve helped design a number of public policies that play off of those irrational tendencies to nudge us towards certain desired behaviors. Automatic enrollment for retirement accounts is just one example. The Obama administration, for instance, used behavioural economics to package its 2009 Making Work Pay tax credit in a way that was supposed to make Americans spend, rather than save, the extra money (judgment is still out on whether this one worked).

Needless to say, libertarians call policies like pension plans with auto-enrollment paternalistic. On the other hand, one could easily argue that if we can’t behave like rational adults, maybe we do need a nanny state. Policymaking has always consisted of dreaming up schemes to channel collective behaviour toward certain desired outcomes. And in Canada, the government already uses automatic deductions to fund the Canada Pension Plan and OAS payments are funded from general revenues.

Yet, when it comes to making people save for retirement, there may be a happy medium between paternalists and libertarians: simplifying the way people enrol in a pension scheme. Studies where individuals were served with a simple enrollment form with a few predetermined options for contribution rates and asset allocation showed increases in participation of up to 20 percentage points , says James Choi, an associate professor of finance at Yale University. Admittedly, that’s not quite as much as with auto-enrollment, which can boost registrations by up to 50 percentage points. But simplified enrolment, says Choi, allows people to choose the savings option that best serves their needs and preferences, whereas participants in auto-enrollment systems tend cluster around one default option that can’t possibly serve, say, a young household as well as it does a couple close to retirement. Boris Palameta, senior research associate at the Social Research and Demonstration Corporation adds that automatic enrollment has also been associated with low savings rates: “If the path of least resistance is to stay in a plan at a certain, pre-set, default contribution rate, people will usually do that, and it may not be to their advantage, especially is the default rate is pretty low, which it usually is.”

Moreover, automatic enrollment may not be the best approach in the case of companies with a high employee turnover, notes Choi. In Australia, for example, the Superannuation Guarantee system requires employers to withhold nine per cent of employee earnings to be channeled towards retirement savings, but 20 per cent of individual accounts, each holding an average of $2,000, have become abandoned property because people switched jobs without leaving so much as an email address behind.

Even in the U.S. there are signs that the impact of auto-enrollment on participation rates may be leveling off somewhat, possibly because workers eventually opt out and employers that match employee contributions become concerned about the costs of high enrollment, says Palameta. “The States are a pioneer in this, and I guess they realized some of the shortcomings too,” he notes, adding that “they might have to do some tinkering with the automated nature of the system.”

In Ottawa, meanwhile, automatic enrollment has at least one enthusiastic supporter: financial institutions. Econowatch needn’t tell you why.




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How the government wants to trick us into saving more

  1. To pick a minor wording quibble, libertarians rarely compromise on anything. It’s what makes them libertarians. 

  2. As long as you can opt out or change your rates, this sounds great. The company has to be incredibly clear about what they are rolling out, though.

    • Saskatchewan Pension Plan is the model for the prpp and it has been around for 25+ years; contributions are treated the same as RRSPs.  You don’t have to live in SK to invest in it. 

  3. Phase one….try to win the lottery

    Phase two… think about moving in with the kids

    Phase three…get arrested.

    After marriage, home-buying, car-buying and kid-raising….most people have no choice but to consider those options.

    • THE BEST!…get arrested and live on government(tax payers) money

  4. We should let citizens choose to save/top up the Canada Pension Plan. Why do we keep shepherding  people who are mostly risk averse into fequently underperforming, risky, and fee gobbling money market funds?

  5. This article claims “the government already uses automatic payroll deductions to pay for OAS and the Canada Pension Plan.”  As far as I am aware, there are no payroll deductions for OAS, which is funded out of general revenue.  Makes me nervous about what else in the article is incorrect. 

    • Hi Sunshine_Coaster,

      Thank you for your comment. I’d like to note that, while there isn’t an itemized deduction for OAS (as is the case for CPP), payroll taxes make up a significant chunk of the very general revenue the government uses to pay for, among other things, Old Age Security.

      Erica Alini

      • What payroll taxes would that be?  Do you mean income taxes deducted by employers and forwarded to Canada Revenue? 

        • Yes, the government seems to call them alternatively payroll taxes and income taxes (which, in general, aren’t just payroll taxes). Anyhow, that sentence seems to be confusing, so we’re changing it, to clarify that there is no itemized deduction for OAS.

          Erica

  6. I am one of the 34%.  But I also am one of the I-don’t-know-percentage that still has room in her RRSP.  Somehow, I’ve never managed to put over half of my salary before taxes away for retirement :)

    The thing that bugs me about this plan, although it is otherwise a good start, is that I think I would be better served with it under the umbrella of an RRSP.  In other words, deduct it at source, put it into an RRSP, then send it off to the administrators.  Have an opt in for that.

    • 2Jenn…I am not being critical when I ask for clarification…you say to don’t know if you have room in your RRSP….BUT….doesn’t your tax return every year tell you what room you have left in your RRSP to invest?
      When my husband and I file our tax returns and then get them back, they clearly outline what we can invest in RRSP’s for the future because we get to capitalize on opportunities we missed out on in the past…that is to say that if we did not max out each each year we can buy back those years in the future and we have that information in our tax return.

      • Oh, no, I know EXACTLY how much room I have in my RRSP.  What I don’t know is the percentage of Canadians with room in their RRSP. 

  7. Beware! It is a proven fact that if you save up in a pension fund the Canadian Govt will rob it. This happened with the pension funds of the Canadian Forces and the RCMP. PET used their pension fund to pay off the national debt. Net result was roughly $500.00 less per month for the average member’s pensions. The thieves netted over forty billion dollars.

    • Dave, your correct regarding the legalized theft of 30B from the CF/RCMP pension fund to pay off the deficit; but it was Chretien and not PET. PET was the guy that taught Canadian’s how to abuse a credit card, which Chretien ended up paying off.

      Unfortunately, Harper and his ilk, have maxed the card out again, for no apparent reason or purpose.

  8. I was the proverbial grasshopper, but I’m lucky that I made some good decisions just before retiring, so I do okay, but I’m sure my generation is the last one who will be able to afford to live on public pensions, so anything to ensure that future Canadian seniors can live their last years with any kind of dignity should be welcome. Don’t ask young people, as the seniors!

  9. With respect to the final paragraph in the story, I would elaborate on my comment to say that the percentage of voluntary contribution plans
    in the U.S. offering automatic enrollment appears to have leveled off at about 40%. Of those plans
    that do use automatic enrollment, the majority are with large (5000+ employees) firms.
    The great majority of smaller firms with voluntary contribution plans do not automatically
    enroll their employees.  In other words, the push toward automatic enrollment in
    the U.S. doesn’t seem to be reaching smaller firms.  We should be doing
    more to understand why that is, since it is primarily small-to-medium sized firms
    that are being targeted by the PRPP.


  10. 20 per cent of individual accounts, each holding an average of $2,000, have become abandoned property because people switched jobs without leaving so much as an email address behind”

    Bit of a red herring considering that the people will need to have a social security number and they can be easily tracked down and have their funds repatriated.

  11. So the government is giving financial institutions ~9% of Canadian’s salaries to gamble with on the markets, at no risk to them and all risk to us?

  12. Saving money is impossible…the banks pay little or no interest…gas is sky high…housing costs are sky high…the stock market goes up and down more often than the sun…and our wages are being reduced in the market place by companies that say that they will close if we do not accept less…we are charged for… environment charges and clean air tax and GST and plastic bags…and school taxes…and property taxes…and road usage charges..and sky high cable TV charges….Save Money, you say?….You must be kidding. 

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