CPP or Private Pension Provision: Which is Better?

A new study by the Fraser Institute has found that the near-tripling of the CPP contribution rate over the 1986-2004 period coincided with a near-equivalent drop in Canadian private savings. This finding leads authors Charles Lammam and Ian Herzog to warn “the benefits of mandatory CPP expansion should be weighed against its costs…”. And what kind of costs do the authors have in mind? They mention the lack of flexibility and choice in the CPP. But surprisingly, they ignore the biggest cost factor of all: the actual money cost to Canadians of various retirement finance options.

These expenses can be considerable. For example, an estimated 40% of the $1 trillion in Canadian mutual fund assets is retirement savings-related (e.g., RRSPs, TSFAs, RRIFs). If the holders of this $400 billion pay the reported average mutual fund fee of 2%, their annual expenses amount to $8 billion. This compares with a combined annual cost to run the CPP of about $3 billion (roughly $2 billion for the CPP Investment Board including external fees and $1 billion for the administration of the CPP). So under these assumptions, the CPP runs at about 38% of the expenses incurred by Canadians to have their retirement savings invested and administered by the Canadian mutual fund sector.

What about expenses on a per capita basis? About 5 million Canadian households invest in mutual funds. If we assume that they are also the collective owners of the $400 billion in mutual fund assets held for retirement purposes, their average per household expense for the management and administration of their private retirement plans works out to about

$1,600 per year. About 17 million Canadians participate in the CPP. Their average per capita expenses work out to about $180 per year. So under these assumptions, on a per capita basis, the CPP runs at about 11% of the average out-of-pocket expenses Canadians incur to have their retirement savings invested and administered through the Canadian mutual fund sector.

Does this material difference in the expense structures of the two retirement funding options matter? It does. Monies paid out to intermediaries now, cannot compound into future pension payments decades from now. I agree with authors Mammam and Herzog that the value of mandatory CPP expansion versus the value of private pension provision through alternative approaches should be weighed against their respective costs. But surely the actual expense of CPP expansion versus those of alternative approaches should be one of those considerations.

A final word on the pros and cons of mandatory CPP expansion. I stated my concerns about such an initiative in a recent Globe & Mail article “How not to ramp up the CPP” (March 23). The most important challenge is to ensure that any CPP expansion now will be sustainable tomorrow. We cannot make new pension promises that become cost burdens on future generations of Canadians.

Keith Ambachtsheer

Keith Ambachtsheer is Director Emeritus of the Rotman International Centre for Pension Management at the University of Toronto and President of KPA Advisory Services.

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