The time for pension reform is now
TheStar.com – Opinion/Commentary – The provinces appear ready to tackle the urgent challenge of expanding the Canada Pension Plan, so why is the federal government so reluctant?
Dec 14 2013. By: C. Scott Clark, Peter Devries
At the annual meeting of Canada’s finance ministers, which is taking place today and tomorrow in Ottawa, proposals for major reform of the Canada Pension Plan will be at the top of the agenda. There appears to be growing willingness among the provinces — Ontario and Prince Edward Island foremost among them — to work toward this much-needed update. So why does the federal government appear so reluctant to co-operate?
Recently the Minister of State for Finance, Kevin Sorenson, argued that now is not the time to consider provincial proposals to enhance the CPP, arguing that the economy is still too fragile and higher contribution rates would kill jobs and result in lower disposable income for Canadians. This raises an obvious question: when is the right time to consider long-term structural changes?
It is certainly true that economic growth and job creation have been sluggish for some time, largely due to slow global economic growth and continued restraint by all levels of government. But the government’s current forecasts show economic growth picking up substantially over the next couple of years in both Canada and the United States.
The last significant structural changes to the CPP (and Quebec Pension Plan) were made in the late 1990s. At that time, CPP contribution rates were doubled, an independent investment board was established and the program was put on a sustainable basis. The arguments now being used by the government are not unlike those made by anti-reformers in 1997. Opponents argued that doubling the CPP premium rates would have a major negative impact on economic growth and job creation. This did not happen.
In 1991, the previous Conservative government replaced the federal manufacturer’s sales tax with the GST, thereby levelling the playing field between domestic producers and their foreign competitors and providing the federal government with a much more predictable and stable revenue base. This major structural change was introduced while the economy was actually in a recession. Arguments were made about the timing of such a change, but the Mulroney government felt that action could not be delayed.
Tough fiscal restraint measures introduced in the mid-1990s were also criticized by some as being ill-timed and too large. Opponents argued that the economy was too “fragile” and that large cuts in government spending would lead to lower output and lost jobs. However, here too, the Liberal government felt there was no other option at the time but to take significant and credible fiscal action to address the financial crisis.
Bold structural measures have been introduced in the past to address pressing challenges. In fact, they were introduced when the economic outlook was much more “fragile” than today. Ultimately all of these measures helped strengthen economic growth.
If the government is so concerned about the fragile state of the Canadian economy, why did it implement major restraint measures, which according to the Parliamentary Budget Officer (PBO) have had a negative impact on economic growth and job creation? Perhaps, the Minister of Finance believes in “austerity-driven” growth.
In fact, if increases in CPP premium rates are phased in over the next three years, they can likely be implemented without a significant impact on economic growth, employees’ paycheques or employers’ payrolls. This could be done simply by raising CPP rates as the government implements the scheduled reductions to the employment insurance (EI) premium rates.
While the EI rate reductions are not scheduled until 2016, they could be implemented earlier. According to the current legislation, once the EI operating account achieves a surplus, premium rates are to be reduced accordingly. The latest government forecast suggests EI will be in an operating surplus in 2015-16. The employee premium rate could be reduced in 2015 by as much as 5 cents, with larger reductions thereafter. This would make significant room for CPP expansion.
Of course, reducing EI premiums in 2015 would put the balanced budget target at risk. The PBO recently concluded that the government is using higher-than-required EI premium rates to achieve its goal of balancing the budget in 2015-16 (although the Minister of Finance has denied this). One would hope this is not what’s standing in the way of essential and eminently viable pension reforms.
The future of the CPP, and the question of a decent retirement income for Canadians, will be a key issue in the 2015 election. The government has sought to avoid the discussion by introducing the Tax-Free Savings Account and the Pooled Registered Pension Plan. Although welcome, these measures will not be nearly enough to ensure reasonable retirement income for low- and middle-income Canadians in the future.
The provinces appear ready to tackle the problem. Ottawa should act now.
C. Scott Clark was Federal Deputy Minister of Finance and Peter Devries was Director of Fiscal Policy when CPP was last reformed in 1998.
< http://www.thestar.com/opinion/commentary/2013/12/14/the_time_for_pension_reform_is_now.html >