CIBC CEO calls for voluntary contributions to CPP

Speaking at the National Summit on Pension Reform in Fredericton, McCaughey unveiled new research from CIBC’s economics group, which finds that nearly six million Canadians could see their living standards drop by more than 20% in retirement if current savings rate trends continue.

“Our research found some 8.4 million people will experience a decline of more than five per cent in their standard of living at retirement,” said McCaughey. “Far more troubling is the fact that 5.8 million Canadians are on pace to experience a significant decline — meaning a reduction in living standards of more than 20%.”

Moreover, he noted that its economists estimate that almost 60% of adults in their late 20s or early 30s, “can expect to experience a significant decline in their standard of living when they retire.” Additionally, many of these young Canadians can’t afford to buy a home, which brings forced savings. They will also find workplace pensions increasingly scarce, and he conceded that it’s hard to replace the benefits of these sorts of pensions with private savings.

“While they have access to tax-sheltered investment vehicles – such as RRSPs and TFSAs – many of these Canadians may not earn enough to fully realize the tax benefit these vehicles provide. And, more importantly, these vehicles lack the certainty of outcome that these Canadians so desperately need,” he said.

He noted that these younger Canadians are also saving less than previous generations, and concentrating too much on returns. “Individuals are more focused on how they’re investing their money rather than on how much they’re putting away, and for how long. The need to save seems to have been become secondary,” he said. “The tail is wagging the dog. We’ve become too focused on returns – and not enough on how much we’re setting aside, and how long we’re giving it to grow.”

To combat these issues, McCaughey recommends either leveraging the CPP, or a CPP-like public vehicle to reignite savings by providing an avenue to increased savings that is easy to understand and participate in, has a long time horizon, is locked in, promises a predictable income stream, and takes advantage of scale.

“I believe that a reasonable starting point, benefitting the greatest number of individuals, would be to allow Canadians to increase their contributions to the CPP,” says McCaughey. “We need to provide Canadians with further choice — choice that gives them date certainty and real dollar amount certainty. A choice that will help Canadians as individuals, and Canada as a nation, reignite a culture of savings.”

McCaughey said that financial services firms can’t replicate this, noting that they “do not have the mandate to hold onto the money of Canadians for 40 years with no option for withdrawals, while providing a date certain, real dollar certain, competitive amount at retirement. Nor should they.” And, that a public solution is necessary instead.

He added that the bank’s research shows that such a solution could help close the retirement savings gap for young Canadians by as much as 80%. “Those who do participate fully – or close to it – would retire with nearly the same standard of living they had during their working lives,” he said.