The Great CPP/ QPP Divergence?
Canada’s public pension system and the changes to it over the years make a fascinating case through which to explore the impact of federalism on public policy.This is an excellent policy comment, one that I had to praise and address as the authors highlight the divergence between CPP and QPP and the factors that will put pressure on Quebec's Liberal government to follow suit and enhance the QPP.
When the Pearson government proposed the Canada Pension Plan (CPP) in the mid-1960s, Quebec opted out and set up a nearly identical pension scheme, the Quebec Pension Plan (QPP). Successive Quebec governments used pension surpluses to feed the newly created Caisse de dépôt et placement du Québec, an institutional asset manager that served as a key tool for provincial economic development in pursuit of the statist project of the Quiet Revolution. Since then, CPP and QPP have mostly developed in parallel, but signs of policy divergence have emerged in recent decades. The unique dynamics of federalism have shaped the evolution of the two programs as they have been adapted to deal with accelerated population aging and a decline in the proportion of Canadians covered by pension plans sponsored by employers, known as registered pension plans (RPPs).
Population aging has created sustainability challenges for CPP and QPP. Reforms enacted in the mid-1990s led to changes in both programs, notably a gradual rise in payroll contributions from 5.85 to 9.9 percent of covered wages. As Bruce Little suggested in his book Fixing the Future, the 1997 CPP reform is an example of collaboration between Ottawa and the provinces, which have veto power in this domain because the consent of seven provinces accounting for two-thirds of the population is needed for the federal government to reform the program. The Quebec government has sole constitutional jurisdiction over its pension plan but, as the mid-1990s reform suggests, preserving parallelism between QPP and CPP has been a priority for Quebec and Ottawa since the start.
In the past decade, however, differences between Quebec’s demographics and the rest of Canada’s have made a fork in the road necessary. Quebec’s population is aging more rapidly, and therefore the decline in its ratio of contributors to beneficiaries is steeper. In 2011 the province had to announce a gradual increase in QPP contribution rates of 0.9 percent, split equally between workers and employers. For the first time since the creation of CPP and QPP, the two programs have different contribution rates. In effect, Quebec workers and employers have to pay higher contributions than their counterparts in the nine other provinces because of a decision made in the mid-1960s to create QPP in the name of provincial economic development.
Simultaneously, the decline of RPP coverage and the shift from defined-benefit to defined-contribution schemes, which do not set in advance how much retirees might receive from them, have led to calls to expand CPP and QPP benefits; these calls became louder and louder in the aftermath of the 2008 financial crisis. The Harper Conservative minority government contemplated the idea of minor CPP benefit increases in mid-2010, but it decided to reject increases later that year, despite pressure from labour unions and the New Democratic Party. As it became clear that the Harper Conservative majority government (2011-15) would not bring in reforms either, the Ontario Liberal government of Kathleen Wynne proposed its own response to the call to strengthen the retirement income system: the Ontario Retirement Pension Plan (ORPP), which would have extended supplemental pension benefits for workers who lacked pension coverage through their employers. After the Trudeau Liberal government took power in November 2015, the Ontario proposal — which would have dramatically increased asymmetry within the Canadian public pension system — created additional pressure for Ottawa and the provinces to reach a deal on CPP expansion, an idea Trudeau’s Liberals had already embraced during the 2015 federal campaign. In June 2016, Ottawa reached an agreement on CPP expansion with most of the provinces, with the exception of Quebec and Manitoba (Manitoba signed the agreement a few weeks later). This agreement will gradually raise the CPP replacement rate from 25 to 33.3 percent, slowly raise the maximum earnings limit and increase the combined payroll contribution rate from 9.9 to 11.9 percent from 2019 to 2023.
Just as the ORPP initiative put pressure on Ottawa to expand CPP and convince a majority of provinces to go along, CPP expansion created strong pressure on the government of Quebec Premier Philippe Couillard to adopt a similar reform for QPP. At first Quebec Finance Minister Carlos Leitão criticized the idea of adopting such reform because it would further increase the payroll contributions of workers and employers in a province where these contributions are already higher than in the rest of Canada. So in its discussion document on QPP reform published in late 2016, ahead of public hearings on QPP reform, the Couillard government discussed three policy options: the status quo, an expansion of benefits modelled on the recently announced CPP reform and a more modest expansion, which the government preferred.
This last proposal has been criticized by powerful actors such as the provincial labour unions, who say that it would not be acceptable for retirees in Quebec to receive lower earnings-related pensions than their counterparts in the nine other provinces. In a province that prides itself on having an especially generous welfare state, a failure to maintain the parallelism in pension benefits between CPP and QPP seems problematic at best, and the Couillard government is reported to have reluctantly accepted the idea that QPP expansion not only will take place but will also mirror the recent CPP changes.
Regardless of what is officially announced later this year, the CPP expansion created strong pressures on Couillard’s right-of-centre Liberal government to do something similar regarding QPP. This reality should not hide the fact that, even if the replacement rates of CPP and QPP were to remain identical, this would not be the case for payroll contributions, as workers and employers in Quebec would still have to pay more for the same benefits because of the demographics of la belle province. Parallelism between CPP and QPP has changed forever in the context of a federal system in which diverging demographic trends have lasting policy consequences.
I've long maintained that we need to enhance the CPP AND QPP. Period. I do not care if it's the Liberals, Parti Québécois or another political party in power, they will need to enhance the QPP or Quebec will forever be left far behind the rest of Canada.
Anyone who argues against expanding the QPP or CPP, including these small business groups, are out to lunch. They don't get it and they certainly don't understand how population aging, especially in Quebec, will have a profound impact on our economy.
I understand, Quebec is different, "vive la différence!", but when it comes to pension policy, il faut pas agir comme un imbécile. Quebec most certainly can't act like an imbecile when it comes to pension policy or other policies that benefit its population. We need to get on with expanding the QPP for every Quebecker or we risk doing great harm to la belle province.
I've lived in Quebec all my life and I know its strengths and weaknesses all too well. Quebec is a great place to live and the Liberals here have done a much better job than the ones in Ontario to prudently manage our province's finances. Moreover, job growth in Quebec has surpassed that of other provinces as a new generation of tech entrepreneurs set up shop here.
But Quebec has major problems too, and the number one problem I see is the lack of diversity and inclusion at major public and private organizations. I talk to many ethnic students who are finding it hard to find jobs after graduating and their parents who all tell me their kids are leaving to go live in Toronto or the states because of the blatant racism in this province.
I'm not going to mince my words here, Quebec has a serious diversity problem and leaders aren't doing enough to address it. CalPERS just issued a diversity report to 504 companies, a communication that outlines evidence that having diversity on a board of directors its good for the bottom line. If we did the same thing in Quebec, we would be shocked with the results across public and private organizations.
The lack of diversity across all levels of pubic and private organizations in Quebec is truly appalling, and while the situation at public ad private organizations in the rest of Canada is better, they too need to do a lot more to improve diversity at all levels of their organization.
And mark my words, lack of diversity will come back to haunt Quebec in a huge way down the road. People don't want to live in a province where they think their children's future is limited because of their ethnicity or other factors.
We Quebeckers really need to ask ourselves why Vancouver, Toronto and Calgary all made the list of the world's ten most livable cities but Montreal was shunned (even though the cost of living is much cheaper here and it is by far the best big city in terms of quality of life).
Anyway, enough on diversity, every time I discuss this topic, including the appalling way people with disabilities are routinely treated, it makes my blood boil and raises my blood pressure. And my endocrinologist told me not to stress as hyperthyroidism raises my blood pressure and heart rate naturally so I need to relax, take my medication and wait for the treatment to work (it will take a month or two before my thyroid levels get back to normal but the good news is my blood pressure and heart rate are much lower after a week of taking two little Tapazole pills in the morning).
There is another big divergence between CPP and QPP which came to my attention this morning. The Canadian Press reports, CPP reform to help lift plan's assets above $15 trillion by 2090:
The upcoming enrichment of the Canada Pension Plan will help fuel a 48-fold boost to the public fund's assets over the long haul — to more than $15.8 trillion by 2090, according to federal calculations.When I first read this article, I thought the figures were grossly exaggerated but they are based on projections from the Chief Actuary which means they aren't hyperbole.
In comparison, the public plan's investment manager reported $326.5 billion in net assets at the end of the first quarter of 2017-18.
Long-term projections on the evolution of the CPP's post-reform assets were included in an internal briefing note prepared for federal Finance Minister Bill Morneau earlier this year. The memo referred to numbers published last October by the Office of the Chief Actuary.
The figures accounted for the impact of a CPP deal reached last year between the federal government and the provinces. They agreed to changes that will increase Canadians' retirement benefits through the public plan by raising contributions as of 2019.
CPP reform was a key goal for Ottawa and provinces like Ontario as a way to provide more financial security for future generations of retirees.
But it has also faced significant criticism. For example, advocates for small businesses have warned it will be devastating for employers and drive up costs in what they have described as a "payroll tax."
The increase also means the Canada Pension Plan Investment Board, which manages the CPP contributions, will be responsible for far more money over the coming decades.
Without the enhancement, the total CPP assets would have totalled $6.7 trillion in 2090, the projections said.
"Additional CPP assets are projected to grow rapidly in the early years as a result of the high level of contributions compared to benefits paid, reaching $70 billion by 2025 and almost $1 trillion by 2045," said the January briefing memo prepared for Morneau ahead of a scheduled meeting with CPPIB president and CEO Mark Machin.
The projections predicted the assets in the enhanced CPP portion to surpass those collected under base CPP program by 2055.
Machin has acknowledged CPPIB will have to adjust to its additional obligation of managing a much-larger envelope. The organization invests CPP assets not currently needed to pay pension, disability and survivor benefits.
"With or without reform, the CPP fund is projected to grow significantly in the future, and we're well-prepared to manage a larger fund," Machin told MPs during his appearance at a parliamentary committee last November.
"When we evaluate investment programs, new processes, and supporting technology, we always want to ensure that they can be scaled to take into account increased size. We are very confident that we'll be ready to manage the additional funds."
Machin has also stressed the importance of the arms-length CPPIB's independence from government influence when it comes to its decisions around investments. He's called that separation from potential political pressure one of the secrets to its success.
The briefing note to Morneau outlined several expected areas of focus for his meeting with Machin, including discussion about the Liberal government's proposed infrastructure bank.
The government's $35-billion infrastructure bank will seek to use public funds as leverage to attract billions more in private investment for major projects, such as new bridges, transit systems and rail lines. Ottawa has said it hopes the Canada Infrastructure Bank will entice institutional investors, such as pension plans, to participate.
The partially redacted memo to Morneau noted that Machin has emphasized the importance of CPPIB's independence when it comes to infrastructure investments.
The document's suggested speaking notes also featured an overview of the government's infrastructure bank and a reference to CPPIB's investment record when it came to infrastructure.
The document, obtained by The Canadian Press under the Access to Information Act, said CPPIB's infrastructure assets accounted for 7.6 per cent of its global portfolio at the time and that it held only one infrastructure asset in Canada: a stake in the Toronto region's 407 Express Toll Route.
In fact, if you account for inflows and returns, and the new enhanced CPP, there is little doubt CPPIB will become a multi-trillion behemoth by 2090.
It seems crazy when you think of it but you should keep in mind by that time, world GDP will have grown significantly, increasing CPPIB's opportunity set across global public and private markets.
Also, keep in mind there are a few global pensions (Norway and Japan) that are already managing over a trillion each, and they aren't as well diversified across global public and private markets as CPPIB.
Moreover, some Canadian insurance companies manage over a trillion now, so CPPIB isn't the only large Canadian fund that will grow to become a behemoth by 2090.
How will CPPIB manage this explosive growth over the decades? The exact same way it's managed it over the last ten years, carefully and diligently diversifying across global public and private markets.
Let's hope la Caisse does the exact same thing for Quebeckers, which is why I seriously recommend we get on with enhancing the QPP as soon as possible. The longer we wait, the dumber we look, and the more we jeopardize the long-term economic future of this province.
To understand the differences between CPP and QPP go here. I note the following:
The contribution rates for QPP are higher than those for CPP. Although the year's maximum pensionable earnings ($54,900 for 2016) and annual basic exemption ($3,500) for both plans are the same, an employee paying into the QPP will pay contributions at a higher rate (5.325% for 2016) compared to the rate for an employee who pays into the CPP (4.95% for 2016).The higher QPP contribution rate is explained by demographic and other factors but it's not enough, we need to enhance the QPP to keep up with changes in the rest of Canada. Pensions matter a lot to working people and Quebec will have a hard time attracting people if it's not competitive in terms of its pension policy.
Below, an interesting panel discussion on reforming the CPP and QPP, featuring Bob Baldwin, an Ottawa-based consultant who has worked on pension issues for more than 30 years and former board of director at PSP Investments. This panel discussion took place last year in Montreal and I highly recommend you take the time to listen to all the panelists, they raise excellent points.
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