A new study from economic think tank C.D. Howe says the elderly spend less, so there's no need to tie pension contributions to inflation
OTTAWA—A new study says automatically raising workplace pension contributions in tandem with the cost of living is unnecessary because Canadian retirees increasingly tighten their purse strings after they reach 70 years old.
The report by the C.D. Howe Institute think tank also argues that tying up the extra funds in pension contributions is an inefficient use of scarce financial resources for Canadians.
The research says lowering pension contributions for company plans—such as defined-benefit vehicles—would put more money in the pockets of families that are raising kids and paying down mortgages.
The study is released a few days before federal Finance Minister Bill Morneau is scheduled to meet his provincial and territorial counterparts to continue quickly evolving discussions on how to boost the Canada Pension Plan.
The federal Liberals have pledged to work with the provinces and territories to enhance CPP. They argue that expanding CPP across the country will ensure more Canadians have a secure retirement.
The C.D.Howe paper’s recommendations are mainly targeted at private pension plans—not the CPP.
Study author Frederick Vettese writes that CPP contributions should not be subject to any contribution reductions since the public plan is designed to cover basic needs like food and shelter for middle-income workers after they retire.
“Retirees in Canada and other developed countries demonstrate a strong tendency to reduce their out-of-pocket spending in real terms starting at around age 70 and accelerating at later ages,” wrote Vettese, chief actuary for the Morneau Shepell human resources firm, which was founded by Morneau’s father.
“This decline can hardly be attributed to insufficient financial resources because older retirees save more on average than people who are still working.”
Given this, Vettese added that indexing pension contributions to the cost of living could be reeled back without sacrificing consumption later in life.
The study pointed to a 2011 research paper that found the average Canadian household headed by someone aged 77 spent 40 per cent less than one headed by someone who was 54.
A U.S. study, also cited by the C.D. Howe report, said that between the ages of 60 and 80 Americans spent at least 50 per cent less on purchases such as cigarettes, airline tickets and camping equipment. The same study found that between the same ages people spent at least 50 per cent more on items such as hearing aids, prescription drugs and funeral services.
Until the election last fall, Bill Morneau was executive chairman of the company, which describes itself as Canada’s largest provider of pension-administration technology and services.