As the calendar flipped to 2020, the federal government again made the Canada Pension Plan (CPP) tax more expensive, even though CPP doesn’t help the economy or workers.
The combined employee and employer contribution rate has risen from 10.2 per cent in 2019 to 10.5 per cent this year, while the maximum taxable amount (but not the exemption amount) has also gone up.
This means workers at all incomes will pay more. For example, for those earning $58,700 or more annually, the combined employee and employer CPP tax hike will be $298 in 2020.
It’s the second of five annual planned increases; by 2023, the CPP tax is scheduled to rise to 11.9 per cent. Unfortunately, expanding CPP does no good for the economy and workers – indeed, the entire plan is a bad idea.
The claim from the Liberal government that expanding CPP helps workers save for retirement is false. 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 CPP was a program through which workers saved for their own retirements (instead of paying for somebody else’s), expanding it would still be foolish. 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 retirement age. The federal government forces this worker to put aside 10.5 per cent of their income for retirement – savings that will prove worthless. How does this make sense?
This example proves a more general point: the amount workers should save for their retirements depends on their circumstances and preferences. It’s preposterous to have a one-size-fits-all government approach to retirement savings for a diverse population of millions of workers.
As American economist 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 potential 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 per cent of assets. Many Canadians might prefer a passive investment strategy with much lower costs.
When it comes to how and how much individual workers should save for retirement, the federal government doesn’t know better than Canadians themselves. By expanding CPP, the government is unfairly treating adult workers as if they were children, unable to make their own financial decisions.
Matthew Lau is a research associate with the Frontier Centre for Public Policy.
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