Three reasons why the government should care about undersavers

Intervene now, or pay later

by Kevin Milligan

Finance Minister Jim Flaherty returned Canada Pension Plan reform to the shelf on Monday, after meeting with his provincial counterparts. Mr. Flaherty expressed concern about the timing of reform—now isn’t good, in his view. In contrast, John Geddes reports that Prime Minister Harper has since mused that the CPP is not the right fix for the problem. Within the space of a few days the government seems to have gone from ‘not now’ to just ‘no’.

There is fairly broad consensus on the facts about pension income. Those with lower lifetime earnings have their pensions topped up already and so wouldn’t benefit from a CPP reform. For mid to higher incomes, most Canadians with employment-based pension plans are doing alright. It is those without employment-based plans who are at more risk of trouble. According to the Geddes report, the Prime Minister seems to have a firm grasp of these facts.

The fundamental disagreement is found in what action should follow from these facts. Some view retirement savings as a purely individual responsibility in which government should take no further role. The Prime Minister states that the focus should be limited to those without employment-based pensions who are undersaving. Others want government involved more heavily through a large-scale expansion of the CPP or other broadly-based measure. The status quo of taking no action is a powerful incumbent here. Those advocating for either a targeted or a broad-based reform still need to make the case against the status quo by arguing that government intervention is needed and would be productive. Here are three ways to continue to make that case.

First, the current employment-based pension and individual savings system has weaknesses. On the employment-pension side, some see a fairly steady decline in pension coverage, and an erosion in the quality of benefits for those who are covered. On the individual side, saving through RRSPs is expensive for many, and other savers may lack the desire or capacity to make complex financial decisions. Government action to push more of these savings into the efficient and well-performing CPPIB may improve investment outcomes at lower cost.

Second, we need to plan a pension system that accepts us as the imperfect people we are. Humans often have trouble focusing on far-off events that lack current salience and require present sacrifice. Economists have great expertise at fretting over price incentives, but often ignore the power of psychological incentives. In the realm of saving, these psychological levers have proven at least as important. Government has a potential role to help remediate these psychological disincentives. In particular, any voluntary approach will fail if it doesn’t take careful account of how to bring today’s non-savers into a new voluntary system.

The third argument for further government involvement is perhaps the most powerful, as it tugs at the purse-strings of those who like their governments small. Lower income seniors in Canada receive the Guaranteed Income Supplement. Recently published research by a team from the University of Ottawa shows that GIS receipt rises with age, in a fairly sharp way. By age 90, the probability of GIS receipt rises by about 25 percentage points compared to age 65. This happens in part because people outlive their savings. Since GIS is funded out of general revenues, we all pay for these GIS recipients. In this way, undersavers cost us all. The alternative to topping up undersavers with the GIS is to force those undersavers to tuck away more of their own money when they are young. By mandating savings on undersavers, the future tax burden is reduced by forcing people to save for themselves. Even small government advocates might find that attractive.

With CPP reform apparently off the table, the next steps are not clear. The existing Pooled Registered Pension Plan initiative is slowly taking shape, but further developments may not be in place before the next election. Whatever direction the debate takes, the extent of the role of government is sure to be central.




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Three reasons why the government should care about undersavers

  1. The problem is the govt is relying on magic. Most people don’t make that much money in a year, especially when they’re just starting out…..and over their working lifetimes have to buy a house, buy a couple of cars, provide for children and so on. On top of this…at 20… they also have to plan for an event about 50 years down the road.

    None of this takes illness, injury, the starting of a business, the need for further education or anything else that happens in life….like a sudden call to war, or a Depression etc into account.

    In other words work hard every minute, contribute to the govt coffers, never ask anything in return and die quietly before you need anything yourself.

    A long hard slog isn’t much of an incentive for anyone….but this kind of magic human being appears to be what the govt is looking for.

    • But the only effective options on your ballot are for more government and less for the people. Does not mater which party you vote for.

      You make $100, $40 to income/emplyment taxes, $10 to property/utility taxes to buy $50 of gas of $23 in taxes to get $27 of gas that has taxes in wages/machinery we will not account for.

      So in fact you earned $100 to get $27 of gas and paid $73 in taxes to go to work to pay more taxes. And you wonder why you are working poor?

      Isn’t just gasoline, food, cloths and stuff has $40 billion in tariffs and price protectionism in it. You have Mozzarella cheese tariffed at 284% to keep prices propped up so some families can make lots of money and you pay 3 times more than Americans. CRTC, RIV and otehrs do this too, have to have high prices as that is more GST from the tax slaves.

      You are a tax-debt slave of state. Most people are so well brainwashed they question government so little, as we are conditioned to be compliant.

      • Give it a rest Dave….nobody’s agreed with you since you started posting here.

        • To bad you have not learned to think for yourself. Not all of us want to be government chickens and ignore reality.

          • I reached the age of reason eons ago….the key word being ‘reason’.

            Sitting around whining about how hard you’re done by is a waste of time. If you don’t like life in Canada, move somewhere the govt meets with your approval.

  2. At some point someone somewhere will make the connection between
    rising household debt and reduced savings … maybe a lot of people are
    not saving because there’s nothing to save. But, hey, we’re buying iPhones
    because we’re supposed to, right ?

    • Yep, it is about priorities for most, but they have excuses. Is the TV $999 or $1750 with 3 years of carry charges? Most people don’t think net costs and only think with short term greed of want.

      I found it amazing people on average have $28,000 of personal non-mortgage frivolousness debt. As I have zero debt, someone has $56k of it….thats a lot of tax paid money going to interest that makes banks rich.

      I would say this country has a chronic addiction to debt and destined to fail one way or another. Like any addiction, rationality takes a hit and denial sets in, just one more debt fix that ultimately ruins you economically.

      But they will blame others, and makes for good NDP followers as NDP are always about taxing the “rich” and producers….to feed unions and dysfunction. Destined to fail.

  3. Yes, there is a societal concern about individuals that don’t save for retirement, but what then is the appropriate role for governments? Is the question that people can’t save or choose to spend their money on other things (like the woman in front of me at Superstore the other day talking with her husband on the phone wondering which credit card had space still left on it because she had about $400 worth of ‘junk’ that she ‘needed’ to buy for Xmas – more decorations, pillows, knickknacks etc – put the $400 into an RRSP you idiot!!!). Is it to become the government’s job to decide what Canadians should or should not spend the money that they earn? I don’t think so.
    If government has informed people of what CPP/OAS/GIS will provide them in their old age, AND has provided other vehicles to save (including RRSPs, TFSA and just plain old investment accounts), then we have to assume that Canadians are adults who make choices – sometimes good choices, sometimes bad choices.

    • Hi Maureen, certainly there are those who make different expenditure choices than you might, and I understand why you don’t want to subsidize them. That’s exactly my point in argument (3): with CPP you can force Ms. Throwpillow to save more now so that Maureen doesn’t have to pay higher taxes to subsidize the Throwpillows’ GIS when they turn 70 and have no savings on which to draw. Either Ms. Throwpillow pays more now through CPP (or some other mandatory vehicle) or Maureen pays more later.

      • Cleary I fundamentally disagree with you on the role of government – which is not be our mom and dad!! Ms. Throwpillow is an adult and can make good or bad choices. If she values her throwpillows in 2013 they can keep her warm in 2030.
        Your assumption that I will pay later is only true if we confirm and continue to accept government as our parents. That will require more and more and bigger and bigger government – I do not accept that! And there are many dangers in accepting it – what are the limits to such a concept! Is it even a realistic alternative given how ineffective and inefficient any large authoritian body is (the waste in government to deliver any program is huge, and expanding the CPP may seem like an easy route to go, but at some point it become unmanageable – expand it now for a ‘good’ reason, and then what is the next ‘good’ social purpose reason that will be presented in the next 10 years – why just CPP for people who are working? The demands NEVER end to turn something into something else for a social justice purpose).
        The government has done its job by offering a wide range of options to save – I can squeeze $25/$50 bucks out of any workers weekly income to put towards some form of savings – it is not that hard. And I have done it in counselling some of my co-workers (don’t buy a Starbucks, bring your lunch to work etc. etc.) and it works. The only thing problem is that some people feel that they want those throwpillows and are fine with spending the $35 that could have gone into a RRSP and buying pillows. Again their choices as ADULTS

        • Hi Maureen. I’m not disputing your view on responsibility. I’m stating that under today’s GIS system you will be paying for Ms. Throwpillow’s choices. So, I guess you might be in favour of another reform option which is to get rid of GIS in order to ensure that Ms. Throwpillow gets her just desserts.

          The problem there is that it is extraordinarily hard to distinguish between Ms. Throwpillow and someone who had some very bad luck (a disability; poor investment returns; divorce; etc) and would suffer in old age through no fault of their own without the GIS.

          So, most people would want to tread cautiously there.

          • I am disabled, but would have been better off if all of EI, CPP, OAS was scrapped for lower taxes as I would have saved more. Granted, I could work for 35 years before the disability cut my career short but I saved like squirrel in good times as I knew it was coming.

            Disabled are not really the issue. Able people are the issue. Far more able people on one form of social assistance than are disabled, unwilling to move, unwilling to get the skills or give up an addiction. Then you have far too many with huge government salaries not getting much done for Canadians. Between lazy, dysfunctional and other non-contributors and waste, our society is quickly becoming non-sustainable.

            Huge social crunch coming when bums wear new shoes and a senior is taxed to pay for it but can’t afford the same pair of shoes.

        • I really got a kick out of your: “…if we confirm and continue to accept government as our parents.”.

          In essence your are right, but I prefer the term debt-tax slave of state as really, with all parties on the rigged ballot for more government and less for the people, our democratic options presented to us on a rigged statism ballot means we are economic slaves of state.

          Back room powers that be inflence media to always sell nanny state, and toss down anyone or any party professing some economic liberty be left to people. But we are in reality more than half way to a Orwellian state.

        • There are others that take the view that we shouldn’t let seniors die in the street if they run out of savings, which is the policy basis of GIS. But once you take that position, there’s the problem of dealing with freeloaders. The people who buy throwpillows today and let you fund their GIS in retirement rather than taking personal responsibility.

      • Very few people have no choice. No one made them live the way they do. Show me 100 people that say they can’t save and I will show you 99 undisciplined irrational loaded with excuses fools.

        CPP has a pathetic ROI and thus is a tax for most people. It isn’t savings, its a tax. For a career worker, its guaranteed to pay less than 33% of what is put in after inflation and say a modest 1.5% above inflation investment target.

        If governemtn really cared about productive people, producing people then CPP employees and employers part, company pension, EI would all go into a LIRA in your name/account/control when earned. No governemtn MER, no skimming, no lending below inflation…no pooled scam paying other people your money….

        Government doesn’t’ like to talk CPP shortfalls, but it is many hundreds of billions short. Huge social letdown for those that had blind faith in governments.

        • I don’t know where you get your figures, but I think your return estimation is a bit too low.

          CPP, as it is currently, is partially a tax. We’re paying too much for CPP now because our parents and grandparents paid too little. None of that applied to conversations about expanding CPP benefits for new contributions. Hence, doubling benefits over time would require only 60% more contributions. 40% of what is presently contributed is to make up for past undercontribution.

        • So true and is a REALLY bad investment if you a single and self-employed – you pay both the employer and employee share AND your estate gets a whooping $2,500 when you die. One of the main reasons I have NO interest in contributing MORE to CPP.

          I’m not a huge risk taker, but my investments have returned consistently between 5 to 10% (even during the financial crisis) – much better than CPP AND ALL under my control.

      • But you are not forcing just Ms ThrowPillow. You are forcing everyone to pay into the CPP, including those who have no use or need for it. And there is no way in heck that the extra premiums being paid by everyone would be even remotely comparable to whatever money is used to subsidize the Throwpillows today. That suggestion is absurd.

        How does the government know what you need or want in retirement? And if the government wants to force you to save more my taking it away from you, how does the government know you’re not currently spending that money on something better (eg high interest loans, helping out family, mortgage, etc).

        -how much is “enough” when someone says saving “enough”
        -do seniors, who typically have paid off mortgages and student loans, need as much income? Generally I think the answer is no
        -how much do seniors want as income in retirement
        -how much do seniors needs as income
        -how many affluent people might have few liquid investments, aka “savings”, but large amounts of other wealth such as property and real estate (and hence don’t need “savings”, nor do they need “help”)
        -and so on.

        These questions and answers differ for everyone. A one size fits all CPP expansion is the wrong way to go. Because of a few idiots, you want to reduce the wealth and freedom of everyone.

        Your solution is taking a problem and making it worse. Socialism is inefficient and economically counter-productive. Simplistic arguments like yours are just that: simple and wrong.

  4. The vast majority of Canadians make enough money to basically feed and shelter themselves, and
    a.save for a decent retirement, or
    b. prop up the military-industrial-political complex/share/stock prices [so the 1% can retire in luxury]

    Thus, I inquire, when you say “save for retirment” Mr Harper, just whose retirement, do you speak of ?

    • the reality is, we [99%] are so busy doing b. that a. is not a possibility.

    • Harper wants you to work until 67 as the union civil service and politicians demand retirement 55. Have to have more people working longer to prop up a bloated Ottawa government. Its the only effective option on your ballot, who gets more of your wealth via Ottawa.

      If anything, and given we don’t get much out of Ottawa and they don’t work that hard at doing nothing all day, they too should have to work until 67.

      • You are here using the term “work” very loosely.

  5. Hi Kevin did the concept of not paying seniors who make over $60K OAS register in your thinking at all? OAS only starts getting clawed back at over $60K and is not fully clawed back up until about $118K, plus you can withdraw from TFSA without clawback penalty. Sweet deal.

    Is it really necessary to pay seniors earning one hundred thousand dollars a year, the majority of whom own homes largely mortgage free, a hundred plus dollars in OAS payments monthly? Should pension reform not start at this screamingly obvious place?

    • Its why you want a tax free TFSA account NOW. Mine is at $38k and thats $13k tax free. Sure beats the pants off of RRSPs, and thats a secret governemtn and banks don’t want you to know.

      So if you retire, and want 365 days of fair weather in say Mexico to escape Canadian hyper taxation and cold weather, you can move….if in a RRSP you would be tax raped for a lump sum move out of Canada.

      Yes, I over contributed to my RRSP and into hyper tax and claw back penalization for doing things sort of right. But wish I didn’t put so much in the RRSP…..as RRSPs convert gains to 100% taxable income….. But that is the Candian way, punish people for doing it right to reward those that live off of us like parasites.

      • People who think TFSA is really different than RRSPs in terms of tax benefits haven’t thought very hard about it, or are bad at math.

  6. Under savers are really counting on government to steal from those that do it right. Could say many under savers will be loaded with envy, greed and discontentment when they learn how little government is going to pay them if they retire or get disabled.

    Could say many are freeloaders. Lots of able bodied working age freeloaders too. Many are also “tax the rich” crowd. They have more than me so tax’em good….governemtn loves this play as in the end we all pay too much for wasteful government.

    Too much dependency on governemtn has made far too many vulnerable, weak and there is a huge cultural problem a coming, as producers can’t put the whole country on the welfare and bailout programs. But the lazy, envy and greed is going to make it worse.

    • You have not yet suggested what we do with poor old people. Leave them in the cold to die? What do you do with a senior with no savings admitted to the hospital and unable to return home. I’m absolutely Ok with your concept personal responsibility and less taxes (though I appreciate roads schools and hospitals), but if you’re going to rail against government oversight and involvement and get me to buy in, you need to show me how I won’t be paying for those ‘freeloaders’. Boomers are a massive generation with abysmal savings rates.

  7. Sort of like a bee hive or ant hill. Get old, crippled or say no to the statism empire…they will swindle you and cannibalize you for the refuse heap.

    Unless you save your own hoard of the stores and don’t need the crowd of freeloaders looking at you like an expense.

  8. Governments all over the world are currently looting public and private pensions plans with extraordinary monetary measures. i.e. near 0% interest rates, and quantitative easing, which is depressing the returns of pension plan investments. (All to save the banksters and the 1%).

    That is the greatest current threat to pension security around the world.

  9. Gee, let’s assess shall we?
    Firstly, we have governments who refuse to not tax and spend, leaving individuals with as little of their own money as can be humanly possible. Then, if individuals do manage to achieve a level of income that allows them to save a little more aggressively, governments restrict their ability to save by placing artificial limits on the ability of regular savers to defer the taxes on those savings. In the meantime, governments work to ensure that those who choose to work in the non-tax paying public sector, are extremely well taken care of at the direct expense of those whom the government supposedly worries aren’t saving enough for the future. So much so, in fact, that mid-level public employees routinely retire with the kinds of income guarantees that are commensurate with owning a modestly successful small business with several employees and decades of solid bottom lines.
    I don’t see anything wrong with that picture at all.
    Again, take away from all legislatures the powers of borrowing, spending, and taxation without referendum, and you’ll get a start on solving the problem.

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