Canadian approach to pensions is “wrong headed”

Published By: Insurance Journal

Author: Andrew Rickard 

Date of Publication: July 18, 2016  01:29 p.m.

The Fraser Institute argues that Australia’s system of mandatory individual retirement saving accounts is preferable to the Canada Pension Plan’s (CPP) collective model.

In an article posted to the Fraser Institute web site last week, authors Charles Lammam and Hugh MacIntyre describe the recent agreement to expand the CPP as “wrong-headed” and “largely unnecessary” on the grounds that most Canadians are already adequately prepared for retirement.

The Australian model

Instead of relying on the existing collective CPP model for additional mandatory contributions, the authors say that if politicians really wanted to improve the Canadian retirement system they “should have looked beyond our borders and considered pension models from other countries requiring their citizens to save for retirement”. In particular, Lammam and MacIntyre point to Australia’s retirement scheme which requires employers to contribute 9.5% of an employee’s ordinary earnings to individual retirement accounts.

Transferable to dependents

The article notes that Australian accounts are more flexible in that they have limited rules around asset allocation and investment strategy, and also allow withdrawals prior to retirement for medical emergencies and during times of financial hardship. What’s more, at death Australians may transfer their full account balance to their dependents as a tax-free lump sum.

“These important benefits are unavailable in the collective CPP model. Indeed, the CPP lacks the flexibility and choice that Canadians enjoy from private saving vehicles such as RRSPs, TSFAs, and other investments,” reads the article. “This is particularly relevant in light of the fact that higher mandatory CPP contributions will be offset by lower private savings. Employing the Australian model could at least minimize such drawbacks.”