RRSPs and Savings

My recent post on doubling the CPP -  http://www.progressive-economics.ca/2009/10/26/double-the-canada-pension-plan-benefit/ – prompted some commentary in defence of voluntary as opposed to compulsory savings vehicles.

I guess it is reasonable to debate if we should force people – especially those above very low income levels – to save in their own best long term interests.  That is, of course, exactly what happens when people land a job with a decent workplace pension plan, and I don’t see young people turning them down on the grounds that they don’t want a pension.

What seems indefensible to me is the proposition that people will save anywhere near enough for retirement if left to their own devices. We already know that there are huge amounts of unused RRSP contribution room. The pension satellite accounts data released by StatsCan last week show that Canadians in the aggregate do not save anything at all outside of pension vehicles.  And RRSP saving has fallen quiet sharply  from 5.1% of personal disposable income in 1996 to just 3.8% in 2007 – even as pension plan coverage has declined and as baby boomers head into retirement.


Why did RRSP savings fall? Partly, Statscan guesses, because inflated stock values led people to think they were richer than they were – or are today.  Partly, I’d say,  because of squeezed wages and incomes across a broad part of the income spectrum and rising personal debt incurred to maintain consumption.

In any case, th real choice is squarely between compulsory saving for retirement through workplace pensions and the CPP, or inadequate saving.


  • Perhaps there’s a middle ground here. I read Nudge recently, where they suggest that people often stick with whatever the default option is. You’re right that the default is essentially no compulsory savings, and that people tend to “undersave.” But rather than forcing people to save, maybe we can take a page from Nudge and change the default option (e.g. the government makes payroll deductions of $5,000 per year and deposits them in some kind of tax-free savings account). But let’s at least leave the option open for people to opt out and choose not to save. There are some people who heavily discount the future and would much prefer to live it up today and be poorer in old age. Why not let them?

  • Actually, Andrew, there are more choices than you imply in your last paragraph, assuming for sake of argument that savings are inadequate.

    As David points out, you can “Nudge” people in (what you think is) the right direction. Or you can compel them.

    For example, if inadequate RRSP savings are a problem, it could be made mandatory to contribute a specified percentage of your accumulated RRSP room each year to some savings vehicle. This is close to the approach taken by Singapore’s Central Provident Fund.

    To be clear, I’m not recommending this, but it’s as much of an option as boosting CPP contributions. Both involve an element of compulsion.

    It will be interesting to see what the federal-provincial task force on pension reform comes up with in their report next month.

  • There is no middleground here, the only way on masse to people save responsibility our in times of economic uncertainties. Look at the great depression when all governments were incumbered, savings peaked in almost every country for years. When times appear good, we tend to rely off of government guarantees as we over extend ourselves feeling justified & owed by government. As soon as government creates guarantee’s it alters our savings pattern. Which then to compensate must use compolsury saving accounts.

    As example when you have government insured deposits; as a whole societies individual cares less about his bank, their balance sheet, & their loan portfolio. You need regulation then because of govt action in the marketplace. Too big to fail should be Too big to exist and to seperate consumer banking from capital market activities because these bank are shielded from market forces such as a bank run, you must regulate banks like utility companies and not allow gambling with government insured deposits.

  • However if your the type who thinks separating consumer banking from capital market activities is detrimental or forcing compolsury savings then you must elminate the government involvement because otherwise allowing parties to take on risk with government guarantees is equaly damaging or if not wosre because it enables greed to have no fear in the marketplace which creates imbalances & distorts future investment. We get a lot from our government, because of that little fact, we have to save to help our government from healthcare to education.

    Either A you set the conditions to create economic uncertainties so people save responsibly or you force saving to compensate for creating economic certainties. There is no grey area.

  • Interest rates need to be higher too, artificially low interest rate at 1% doesn’t allow canadians to save at a return. Saving is not just putting away a certain % of your paycheck, its about allowing the interest to accumulate.

    When my grandmother was 19 she had 1000$(alot of money then) saved with 18.8 rate for 10,13 years before she saw a steady decline in rates in her lifetime from 20% rates to 1%. She is 83 and has the savings but if she was 19 again given todays rates she would have to invest in higher yielding stock to have the intrest she erned for retirement, there is a reason einstein said the greatest thing is compounding interest.

    The relatively low rates can easily explain the dismal savings rate compared to our parents and their parents. Also compounding interest is why low rates are inneffective for the long term borrower. We should have higher rates to make it worth saving for ritirement. Our parents, & their parents who saved every penny did that under higher interest rates.

  • Brandon: When did she get 20% and in which security?

  • Shes had few accounts to make up the change in rates over her lifetime but she banked with Scotia where she received 18.8% daily interest for 13 years before rates declined. She started the account with a little over a thousand in savings in 1951, born 31. She has banked with them reinvesting the returns back into the account(s) and didn’t use them once till she was 76, do the math, any Canadian could retire. She never went into RRSPs, Stocks or any investment vehicles, I challenge any canadian to do the same today.

    Why, are not more people saving, government intervention in the market. Simple. So now, we need regulate.

    She grew up in bad times, there were no government solutions & you know what people saved responsibility. She’s lived a FULL life. The underlying fact remains No one will Save with economic certainties and artificially low rates. When people thought that housing wouldn’t stop appreciating were was the saving then. But if the government wants me to retire better start raising rates

  • Saving has always been about accumulating intrest and reinvesting the accumulated intrest for optimal results. With 1% in most of the developed world are essentially forcing capital to chase higher returns. How can the responsible even begin to save with our government against us, giving us no returns forcing capital to seek higher returns arrg. Australia, has had higher intrest rates this past year not to mention decade and they avoided a lot of recent pain.

  • By analyzing the saving rate by generations, we could conclude that while the level of the saving rate in the
    elderly group has exceeded that in other groups at all times mainly I hypothesize because they grew up in economic uncertainties, the saving rate of the elder itself has decreased over recent periods, its very hard to save even if you remember the bad times if you don’t have the interest rates to encourage saving. We are setting ourselves up. Also these low rates are pushing retirement funds into global markets for higher yield, which is a I think a mistake but a understandable mistake, since these funds need to grow for retirement, they cant just sit there, collecting dust, otherwise how would you retire?

  • As we prepare for the federal-provincial pension report later this month, the Liberals are proposing to add a supplementary, voluntary layer to the CPP.

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