Forced savings work best for retirement

The past few years have seen a healthy debate over reform of the retirement savings system and, in particular, whether mandatory savings schemes such as the Canada Pension Plan (CPP) should be expanded. The issue is in the spotlight even more so as Ontario faces an election, with the incumbent Liberal government’s proposed new provincial pension plan emerging as one of the central issues.

The question of whether governments should be forcing increased retirement saving upon workers is an important one. At current levels, the CPP and old-age security programs provide only meagre income to retirees – not enough, on their own, for most people to live on.

In the past, many workers had defined-benefit workplace pensions to fall back on. But, in recent years, these sorts of benefits plans often have disappeared – or been converted into much less certain defined-contribution schemes. The question now is where greater savings will come from.

It seems that people generally will not save enough by themselves. Tax-subsidized voluntary savings schemes, such as RRSPs and tax-free savings accounts, haven’t done the trick. While a small minority max out these savings vehicles, the huge amount of unused contribution room suggests that most people do not.

The federal government has tried to facilitate more workplace saving through voluntary vehicles such as pooled registered pension plans. But increased mandatory savings, either through an Ontario-style add-on to the CPP or through an expansion of the CPP itself, is the only way to ensure increased savings for retirement. Mass, forced savings insulate people from the behavioural biases that undermine voluntary approaches. This approach also allows for low-cost, efficient investment management.

If the financial services sector looks purely at its self-interest, it may oppose this approach. Greater mandatory savings, particularly if accompanied by matching employer contributions, mean less income for financial advisors. Yet, given everything the sector knows about saving behaviour over the years, it must conclude that expanded public pension schemes are in the best interests of most Canadians and, thus, the economy overall.