Job loss scare tactics aren’t helping the Canada Pension Plan debate

How the Conservatives are fudging the numbers

Adrian Wyld/CP

As debate heats up over whether or not it would be a good idea to expand the Canada Pension Plan, lots of different ideas are being kicked around. But here’s one absolutely nobody is proposing: abruptly and dramatically hiking the premiums that companies and their employees must contribute to the CPP, all in one year and without any advance notice.

You might wonder why I bother to mention a crazy idea that isn’t even being discussed. After all, the most recent increase in CPP premiums—a doubling of the contribution rate—was sensibly phased in over six years from 1997 to 2003. That reform was widely touted a big policy success that put the CPP back on a sound footing. You would think any future expansion would be modeled on it. And you would be right.

Yet that’s not the scenario the Department of Finance has been working with as it projects job losses if the CPP was expanded. Kevin Sorenson, the minister of state for finance, and the government’s designated spokesman on the issue, has recently said a CPP proposal floated by Prince Edward Island would “kill between 17,000 and 50,000 jobs,” while the NDP’s plan to eventually double the benefits paid out would “stunt our economic growth and kill up to 70,000 jobs.”

The finance department hasn’t released all the details of the economic modeling it did to generate the numbers Sorenson uses to heap scorn on the PEI and NDP proposals. But, in answer to my questions, the department did provide this telling detail: “In both cases, the increase in contribution rates is assumed to be fully implemented in one year, without prior notification.”

I asked some experts what they thought about the usefulness of modeling a big, jarring hike in CPP premiums, inexplicably imposed without warning. Craig Alexander, TD Bank Group’s chief economist, and the author of an important 2010 report on pension reform, stated the obvious: “I can tell you that if you boosted the CPP contribution rates all in one year, it would probably have a significant impact [on jobs]; if you spread it over five years, the impact is going to be much more incremental.”

Rhys Kesselman, a public finance professor at Simon Fraser University and a prominent advocate of CPP expansion, scoffed and then sketched how a responsibly implemented premium increase might work. The CPP contribution rate is now 9.9 per cent, split equally between employer and employee, on earnings up to $51,100. PEI’s proposal would raise that by about three percentage points. Kesselman said a reasonable plan might phase that in over six years.

“Just thinking of the employer’s side—and that’s where a lot of the expressed concern focuses—that’s a quarter of a percentage point per year, a fraction of the typical annual wage increase, which is around two per cent, sometimes three per cent when the economy is doing better,” he said, adding: “To think that this is going to have a significant impact on employment is total fantasy.”

Still, even a CPP premium increase phased in over several years would have some impact on hiring. What might the yearly hit on jobs really amount to? And how would that change if the period of fractional, annual premium hikes was three years, or five, or seven? How would the overall health of the economy factor in?  It would be helpful if the federal government would use its capacity for sophisticated forecasting to give a comparative sense of the realistic options, rather than just tossing out lines about tens of thousands of lost jobs.

Why the government has shifted lately to Sorenson’s hard line is something of a mystery. As recently as the spring of 2010, Finance Minister Jim Flaherty was solidly in favour of expanding the CPP. He only backed off late that year when Alberta wouldn’t come on side. (Changes to the CPP requires the approval of two-thirds of the provinces with two-thirds of the Canadian population plus the federal government.) And Flaherty recently confirmed that he still thinks CPP expansion might eventually make sense, just not so long as the economy remains too “fragile” to risk increasing a “payroll tax.”

Flaherty will have to make that case to provincial finance ministers when they meet at Meech Lake, near Ottawa in Quebec’s Gatineau Hills, on Monday. Pressure won’t just be coming from little PEI. Charles Sousa, Ontario’s finance minister, will arrive fresh from tabling a motion in the provincial legislature warning that Ontario might go it alone with pension reform if Ottawa keeps dragging its feet.

The need for something to be done seems beyond dispute, although a bigger CPP isn’t necessarily the only attractive solution. “We have a fundamental problem,” says TD Bank Group’s Alexander. “Many Canadians are unlikely to replace their working income adequately when they reach retirement age.” Fewer middle-class Canadians have company pensions than in the past, and many of them don’t save enough on their own. “Canadians are carrying more debt, saving less, starting saving later in life, retiring earlier. The whole life-cycle has gotten compressed,” he says.

Alexander sees a range of possible reforms. His own proposal is for a supplementary public pension plan for any worker whose employer doesn’t provide one. The key, Alexander says, would be making this new supplementary pension “voluntary opt-out,” which means individuals would automatically be enrolled and have to make a decision if they wanted to exit. “At the end of the day, you shouldn’t force people to do things,” Alexander says. “They should have the ability to opt out if they don’t want to participate. But we also know that inertia is an incredible thing. If the default is that you’re in the program, you’ll find very high participation rates.”

Kesselman makes the case for expanding the CPP. He points to the CPP investment board’s impressive record over the past decade for getting a good return on the many billions it invests on behalf of Canadians, even during a rough stretch on financial markets. He also says the plan is now run on a responsible basis when it comes to making sure future generations don’t pay extra to cover the pensions of those who came before them—a problem in the past for the CPP.

He means, for example, that if an expansion was agreed to by Ottawa and the provinces, and premium rates started rising in, for instance, 2015, older workers who made those increased contributions for only a few years before retiring would get only very modestly higher  benefits, whereas younger workers who paid the higher premiums for most of their working lives would gain significantly more when they finally retire.

Unlike Kesselman, Alexander isn’t convinced that a big CPP is the best answer. He leans towards a more targeted approach. But they share a sense of urgency that making policy choices should not be pushed off until some mythical future time when economic growth looks so robust and sustained that everything seems possible.“Progress could be an expanded CPP, it could be a modestly expanded CPP with pooled pension plans, it could be a supplemental CPP for workers who don’t have a pension,” Alexander says. “There are a number of routes. I just want to see progress.”

When Flaherty faces off with his provincial counterparts on Monday, we’ll see if progress is in the cards or not. A good starting point would be an agreement to produce, and very soon, some useful, detailed economic projections based on reasonable assumptions about a range of CPP options that might be seriously considered.

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