The Grinches Who Stole CPP's Christmas?
Canada’s finance ministers have announced a “way forward” on expanding the Canada Pension Plan, but put off any decisions until June to make sure the economy survives a potentially rocky few months.I agree with Susan Eng of CARP and the Canadian Labour Congress, the finance ministers resorted to "lame excuses," failing to produce a long overdue agreement on expanding the Canada Pension Plan.
With uncertainty over the so-called fiscal-cliff negotiations in the United States and the unstable economic picture in Europe, finance ministers emerged from two days of meetings saying they need a little bit more time on pension reform.
Federal Finance Minister Jim Flaherty said officials will spend the next six months working on what a modest CPP increase would look like and proposing potential triggers or signs that the economy is strong enough. The markers could include increased economic growth and reduced unemployment.
“We reviewed the work done on the CPP and agreed on a way forward,” he said on Monday after a day of meetings at Meech Lake with his provincial and territorial colleagues, which was preceded by a dinner in Ottawa the night before.
Positive comments from the other ministers on Monday mean that a major national policy move that had largely disappeared from public debate is now very much on the agenda and could be approved by the end of 2013.
Ontario Finance Minister Dwight Duncan, a leading advocate of enhancing CPP benefits, who had been critical of Mr. Flaherty’s previous reluctance, praised Monday’s development.
“This is an important step forward. I didn’t think we’d come out with this,” he said. “I think what’s important is that we’ll have a report back in six months and this moves the yardsticks considerably.”
Quebec Finance Minister Nicolas Marceau predicted a deal would be in place to enhance the CPP by the end of 2013.
“There is political appetite,” he said, adding that two pension-related reports expected in 2013 will help Quebec shape its position.
“I think there’s enough support for this enhancement to see the light of day,” he said.
Alberta Finance Minister Doug Horner, who represents a province that is seen as the most resistant to CPP changes, said he would wait and see what the proposals look like in June before taking a position.
“At this point, I’m not saying we are or we are not [supportive of expanding CPP,]” he said.
Dan Kelly, president of the Canadian Federation of Independent Business, said his group is disappointed that Mr. Flaherty was not more clear that hiking CPP premiums is off the table. The CFIB has been one of the main critics of a CPP increase, arguing it is unaffordable to employers and will cost jobs.
In contrast, the pro-CPP increase CARP – a national lobby group for seniors – said it is good news that CPP reform is back on the agenda. However CARP vice-president Susan Eng said the ministers’ reasons for delay amounted to “lame excuses.”
“The excuse that the economy is too fragile now to support a CPP change does not make any sense,” she said, noting that CPP changes likely would not start for three years and would be introduced gradually.
Another main advocate for CPP enhancements – the Canadian Labour Congress – called the meeting a failure because it did not produce a definitive action plan.
It’s not clear whether Ottawa will continue to insist that all provinces and territories must be on board before it would approve CPP enhancement. Mr. Flaherty appeared to soften his position on that issue on Monday, noting that the rule for changing the CPP requires the support of two-thirds of the provinces representing two-thirds of the Canadian population.
“I think the rule is two-thirds, two-thirds. That can be accomplished,” he said. “We’ll have to wait and see.”
Jonathan Rhys Kesselman, a professor at the School of Public Policy, Simon Fraser University in Vancouver, wrote an op-ed in the Globe and Mail, No reason for further delay: Expand the Canada Pension Plan. He notes the following:
...the expressed concern over impacts of increasing premium rates — like many objections to CPP expansion raised over the years — lacks empirical foundation. Between 1997 and 2003 CPP premium rates were increased by nearly 70 per cent (without any associated benefit hikes), while the national employment rate rose steadily and strongly with only a small slip in recessionary 2001.I agree with professor Kesselman, there is no reason to delay the expansion of CPP and the longer politicians wait, the worst it will be for many middle-income earners trying to retire with a decent standard of living.
A further hike in CPP premium rates would similarly be spread over six or more years, and the first small installment would undoubtedly be delayed at least until 2014 due to the requisite legislative and regulatory changes. The total rate hike would be smaller than in the earlier episode, and the linkage of increased premiums to increased benefits this time would blunt any adverse economic incentives.
Increasing CPP retirement benefits is supported by a multitude of public policy considerations, and studies suggest that it would be superior to the institution of PRPPs. Those plans, endorsed at the 2010 finance ministers’ meeting in preference to CPP expansion, offer few advantages beyond existing RRSPs and defined-contribution pension plans. They are also inferior to the Canada Pension Plan in their voluntary nature, retirement date risk, lesser pooling of various risks, and lack of indexation.
Instituting PRPPs with voluntary participation by both employers and employees is unlikely to redress much of the problems faced by the 60 per cent of Canadians who do not currently have access to a workplace pension plan. While initially supportive of the PRPP concept, the provinces have been slow to adopt enabling legislation.
Enlargement of CPP benefits has emerged as the best pension reform option in many independent expert analyses. Notable supporters of CPP expansion include former Bank of Canada and Canada Finance luminary David Dodge, former CPP chief actuary Bernard Dussault, former CPP Investment Board chief executive David Denison, and former Statistics Canada chief assistant statistician Michael Wolfson.
The format and scale of CPP benefit expansion advocated in the studies vary, but most would go well beyond the mooted “three 10 plan” now being considered by the Finance Ministers. Rather than hiking benefits from the current 25 per cent of insured earnings by 10 percentage points, an increase to the 40 to 50 per cent range is commonly endorsed. And rather than raising the insured earning maximum from the current $50,000 by a suggested $10,000, a hike on the order of 50 per cent is widely recommended.
Without changes of these magnitudes, the retirement prospects for middle-earning Canadian workers will continue to be at risk. A study by Mr. Wolfson projects that, without CPP expansion, about half of those now earning $35,000 to $80,000 annually can expect a substantial drop in their living standards after age 65.
The temptation for cautious policy makers — and politicians — is to dawdle in choosing options that carry near-term uncertainties but substantial albeit more-distant gains. CPP enlargement will take some 40 years to mature fully, as the reform raises benefits to individuals only in proportion to their higher contributions.
This long gestation period is all the more reason for the Finance Ministers to proceed quickly and boldly with plans to increase CPP retirement benefits. While the provinces have steadily shifted to support CPP expansion, the financial industry has been constant in its opposition ever since 1979. That remaining obstruction and economic misconceptions can hardly justify any failure to act effectively on the income security of future retirees.
Moreover, it's high time we shelve PRPPs for good. These pooled pensions are pipedreams that will do absolutely nothing but enrich banks and insurance companies at the expense of savers. When it comes to pensions and fees paid to the investment industry, Canadians need a reality check.
Of course, there will always be critics. Bill Tufts, founder of Fair Pensions For All, wrote an op-ed for the Financial Post, Pension shakeup needed. He starts the article off like this:
Some politicians and unions in Canada are on an ideological mission to increase the Canada Pension Plan without understanding the key drivers and policy implications behind the move. Business is solidly against the move, seeing it as another payroll tax that our struggling economy can’t support.
Some key facts must be understood. An enhancement of the CPP will be a significant drain on investment capital, at a time when the public sector unions, and even the Bank of Canada, are calling for business to come off the sidelines and kick start our economy. Expanding the CPP now will have the opposite effect.Will let you read the rest of Bill's article but needless to say, he's completely out to lunch, engaging in classical scaremongering which has no factual basis whatsoever.
Increases in CPP will be a redirection of money from the private sector that creates capital investment. The CPP investment fund invests in mature companies and government bonds, not the innovative small business sector that is the driver of our economy.
It is important to examine how much capital is hoarded by the CPP.
Apart from making several wrong assumptions on CPP's funded status (CPP is a partially funded plan, not a fully funded plan!), he fails to see how bolstering retirement security will improve Canadian productivity and lower future social welfare costs by lowering pension poverty. In other words, expanding CPP makes good economic sense.
Bill has his own ideological agenda and his criticism on public pensions has been thoroughly discredited by Jim Leech, President and CEO of the Ontario Teachers' Pension Plan. "Tinkering with the CPP is not the type of revolutionary change that is needed to save the system," he says but we're not talking about revolutionary change, only change that makes good economic sense.
As far as the finance ministers worried about the Canadian economy, they're right. As I recently commented, Canada's housing bubble is imploding, and when it does, it will wreak havoc on our economy for a long period. But that's not a reason for delaying expansion of CPP. In fact, it's more of a reason for implementing reforms as soon as possible.
Below, CBC reports that talks between Canada's finance ministers have wrapped up with "no consensus" on an expansion of the Canada Pension Plan. Ontario Finance Minister Dwight Duncan discusses why we need to expand the CPP.
Duncan understands what's at stake for Canada, which is why he has taken the lead on pooling pension assets in Ontario. Looks like New Brunswick is following Ontario and other provinces, pooling their pension assets. No word yet on what Quebec plans on doing with its municipal pension plans, most of which are severely underfunded.