Robots vs. the Canada Pension Plan

Humans are not robots.  They don’t always make rational decisions.  If you don’t believe this then you probably believe that the federal government’s plan to boost Canada Pension Plan (CPP) contributions and payouts doesn’t make sense.  In a perfectly rational world, Canadians will simply reduce their savings elsewhere to balance out the extra contributions they and their employers will make.

In the real world, there are many Canadians who  have not been saving enough for retirement but will be saving more now because they are forced to do so.  They will have a little more money taken off their pay cheques to pay for this increased saving but they will hardly notice.  I really don’t want to get into the pros and cons of forced savings programs like the CPP because there are actually good arguments on both sides of the debate.

What I’d like to focus on instead is the psychological benefits of knowing that you have a pension waiting for you when you retire and how this can actually make you richer over time.  I will use my own financial situation and my experience teaching CPP to new immigrants as examples to prove my point.

My Experience

As many of you know, I am a teacher and I am obligated to contribute 12.5% of my pay to my pension every year I teach.  In return, I am guaranteed a pension of anywhere from 50-60% of my annual salary, depending on how many years I teach (eg.  25 years of teaching to receive 50% pension).

As a result of knowing this pension is waiting for me and it is being managed by some pretty smart people, I have become more willing to take on more risk with my other investing, have felt confident enough to consume more goods and services than I otherwise would have, and have not panicked and sold my investments in a market downturn.  In fact, I have been a buyer of stocks in every downturn since 2002.  The psychological relief of knowing that my retirement funds are not in jeopardy is huge.

My Teaching Experience

Every year I teach a large group of new immigrants to Canada about CPP and Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).  Almost all my students have low paying jobs and have never heard of any of these programs.  When I ask them what they plan on doing for money when they get older, they have no idea and this causes them stress.  I can see the worry in their eyes because they know how expensive it is to live in a country like Canada (nevertheless, they are so extremely grateful to be here).

Then  I begin explaining each program starting with CPP and ending with GIS with real life calculations that shows what they can expect to earn from these programs starting at age 65.  By the end of the class, there is relief and almost a sense of joy in the class.  They had no idea that by working at even a minimum wage job for 25 or 30 years, they will end up with a decent retirement income.  The knowledge inspires them to go to work and keep working day after day, year after year.  They also understand the value of not working in the underground economy (“for cash”).  That is the value of programs like CPP.

I think boosting CPP payouts will help more people feel less anxiety about growing old.  People cannot stand the unknown.  There are just too many bad things that could happen that can consume our imaginations.  When people are afraid they find ways to reduce their fear like selling stocks in a bear market, keeping more money in cash, and reducing spending on goods and services, etc.  Boosting CPP payments may reduce the urge to make bad investing and spending decisions in times of uncertainty.