The title paraphrases a study from Stats Canada entitled, “Do Workplace Pensions Crowd Out Other Retirement Savings? Evidence from Canadian Tax Records”. This implies that forcing folks who don’t save for retirement to save for retirement by increasing their Retirement Pension Plan (RPP) contributions works quite well. A better question is, does forced savings work?
The study finds:
For workers who do not save much for retirement on their own, the $1.00 automatic increase in RPP contributions increased net savings by about $0.95. For workers who save regularly for retirement, the $1.00 automatic increase in RPP contributions was largely offset by a similar reduction in RRSP contributions. The study was designed in such a way that these results do not simply reflect program rules, such as contribution limits.
So if you take someone who doesn’t save much, save more, they keep more. If you make someone save more, who already saves, they will save less? Wow
Given this exciting perspective on Money and saving, where does the new Ontario Pension Fund fit in this equation? Food for thought? Forced Savings, an interesting idea.
As much as I love Statscan ( and I do) the past 10 years have shown us that they are not entirely free from outside influence.
We should not be surprised that someone who already saves may choose to reduce their contribution to their RRSP when they view their entire retirement planning which includes RPP. If they think that they are already contributing as much as they need or can afford, then it doesn’t really matter if the money goes into the RPP or the RRSP. It’s all for retirement.
So why do the study? The financial industry has stated so many times to Parliamentary committees that they view the RRSP as their preferred vehicle for retirement savings. They believe that the time of RPP is past.
Now what they don’t say is that the RRSP has nothing to do with your retirement, from the industry’s perspective it’s about telling you that you can get a nice fat tax refund in April if you go fast and send them money so they can invest in a mutual fund. In RRSP season you get the phone call at supper time, you only think of short-term goals and think yeah I could use a tax return.
This is why it’s so important for the industry that the Government of Canada studies anything that could affect Canadians ability to put money in RRSP. RRSP is also about churn.
I suspect that readers of this blog are knowledgeable enough to avoid such pitfalls but for too many they will think nothing else but that tax refund and not of their retirement needs.
Agreed, the whole system seems a little “slanted”, but again, it remains to be seen how this all really works, with the TFSA and such. I hope Ontario does not bring in a Provincial Pension Plan, won’t help me much
You have to remember that if you are maxing out your RRSP then a “forced” increase of “$X” in a company plan automatically obliges you to dimish the RRSP contribution.
Always go to the max on company pension contributions. Nothing like free money!
Also the TFSA has changed the landscape somewhat in calculating which regime is more tax efficient, RRSP or TFSA max contributions, for when you retire. If you are in a higher tax bracket then the TFSA may be more tax efficient for retirement.
I have been lucky. I take full advantage of the company matching RPP as well as maxing (to the extent allowed for my salary) my RRSP and TFSA contributions. As I am not in the higher tax brackets I will not have to worry about how much I will be receiving from the OAS, CPP /QPP, Company plan, RRSP, TFSA (tax free) and non-registered accounts.
The only question is how long the money will last but that depends on my money burn in retirement.
I think that the takeaway from the study is that natural savers will setup their savings to a goal. When additional money is added to the pension, then they adjust their allocation accordingly and this frees up money for other things.
For example, within BNR, the voluntary saving rate was up to 10% of your salary. The company contributed 1 dollar for every 2 dollars up to 6% of your salary. I chose 6% because it maximized my savings with respect to the company contribution even though I could invest more. The missing 4% went to disposable income. After all you have to enjoy life.
I believe that savers naturally employ an active approach to retirement with non-savers chose the passive approach. If more money is added to the pension plan then you do not need to save as much on your own.
Just my thoughts, YMMV. cheers, rob…
Still an interesting view on things, and my guess is most folks would have the same cursory view I took (i.e. read the one paragraph and go #WTF? )