Finance Committee on Nov. 14th, 2016

[Steven MacKinnon, Liberal, Gatineau, QC]

we'll have one meeting day.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Yes.

[The Chair, Liberal, Wayne Easter]

Mr. Caron, sometimes the parties may not fill all their slots. If you want to put in more than one, we will look at it.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Great.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

So we're sticking to the usual structure and having one meeting day.

On that subject, before I wrap up, I see that the meeting is scheduled for November 22, from 3:30 p.m. to 6:30 p.m. We are supposed to hear from two times six witnesses, are we not? That means 12 witnesses.

[The Chair, Liberal, Wayne Easter]

Guy, the clerk has suggested something to me. Are you talking about a meeting with just technical witnesses, or are you talking about witnesses on Bill C-29 and the regular witness process?

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I was under the impression that there was no desire for having witnesses, by and large, under the regular process, which is why I suggested bringing technical witnesses. However, if the intent is to actually fill by the regular process, then that answers my question.

We are talking about 12 witnesses, then.

[Steven MacKinnon, Liberal, Gatineau, QC]

We had agreed on eight.

[The Chair, Liberal, Wayne Easter]

We had agreed, as a subcommittee, on 10 witnesses on Bill C-29.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

It's the usual breakdown, then.

[The Chair, Liberal, Wayne Easter]

Give us your proposed witnesses by the deadline tomorrow.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Very good. Thank you kindly.

[The Chair, Liberal, Wayne Easter]

Is there anything else?

We will then suspend for a few minutes and start early with the witnesses on Bill C-26.

[The Chair, Liberal, Wayne Easter]

Could we come to order, please?

Pursuant to Standing Order 108(2), our subject matter today is Bill C-26, an act to amend the Canada Pension Plan, the Canada Pension Plan Investment Board Act, and the Income Tax Act. We have with us witnesses from the Department of Finance, the Canada Revenue Agency, the Department of Employment and Social Development, and the Office of the Superintendent of Financial Institutions.

I think at the steering committee we had asked that there be separate hearings, but we agreed to just put everybody in the mix. If we can get done a little earlier, we will.

The floor is yours, Mr. Purves.

[Glenn Purves, General Director, Federal-Provincial Relations and Social Policy Branch, Department of Finance]

Thank you very much, Chairman.

Good afternoon to all committee members.

As noted, my name is Glenn Purves, General Director of the Federal-Provincial Relations and Social Policy Franch at Finance Canada. I'm joined today by officials from Finance Canada, Employment and Social Development Canada, and the Canada Revenue Agency, as well as from the office of the chief actuary.

Today we're pleased to answer your questions on Bill C-26 or any questions that you may have on the Canada Pension Plan enhancement. I brought copies of the backgrounder that was posted on the Finance Canada website for those of you who want a copy. In addition, I believe our parliamentary secretary circulated for your benefit an additional supplementary document that just gives context on the contribution rate and on the earnings replacement. I was going to suggest just walking through that at the end of my opening remarks so we can position ourselves appropriately on that.

The Canada Pension Plan is a complex program involving three ministers and departments. To situate you, Finance Canada is responsible for leading discussions with provincial officials on possible changes to benefits and contributions. In addition, my department is responsible for the development of policy and legislation on the Canada Pension Plan Investment Board and the Income Tax Act. The Canada Revenue Agency is responsible for the collection and administration of contributions, while Employment and Social Development Canada has significant responsibility for the calculation and payment of benefits to Canadians and for the overall administration of the plan.

You'll also be hearing from the Office of the Superintendent of Financial Institutions, from my colleague Monsieur Montambeault. Their officials provide expert actuarial projections on the financial position of the plan. These projections are most recently contained in the 28th actuarial report tabled in Parliament on October 28, 2016.

I'd like to provide you with a quick walk-through of Bill C-26. The bill proposes amendments to the Canada Pension Plan, the Canada Pension Plan Investment Board Act, and the Income Tax Act consistent with the agreement reached by Canada's ministers of finance on June 20, 2016, to enhance the Canada Pension Plan.

The bill consists of two parts. Part 1 amends the Canada Pension Plan, notably: to increase the amounts of the retirement pensions from one quarter to one third of pensionable earnings, as well as the survivors' and disability pensions and the post-retirement benefits, subject to the amount of additional contributions made and the number of years over which those contributions are made; to increase the maximum level of pensionable earnings by 14%; and to provide for the making of additional contributions, beginning in 2019 and phased in gradually over seven years.

The focus of the enhancement is very much on income replacement. To this extent, it resembles very much a registered pension plan that you would see in the workplace.

Part 1 also amends the Canada Pension Plan Investment Board Act to provide for the transfer of funds between the investment board and a newly created government account for the additional contributions, and to provide for the preparation of financial statements in relation to amounts managed by the investment board involving the additional contributions and increased benefits.

Part 2 makes related amendments to the Income Tax Act to increase the working income tax benefit in an effort to offset the incremental CPP contributions for eligible low-income workers and to provide a deduction for additional employee contributions so that Canadians are not subject to higher costs associated with the after-tax savings plan.

With that, I'll just walk everyone briefly through this backgrounder that has been circulated. This is the document that has the red and the blue attached in it just so everyone is on the same page.

Let's talk about this in steps. The first step I'm going to walk through is the red and then I'll follow with the blue. In step one, just to configure everyone, figure 1 talks about the contribution rate. Figure 2 talks about the earnings replacement. Contribution rate is the amount that's paid in terms of contributing to the CPP, and the earnings replacement is the amount that is received on the income replacement side. In step one, the first additional contribution rate and the first additional replacement rate would gradually be phased in over the base or existing CPP earnings range from the year 2019 to the year 2023. This is the red. This is the phase that goes from 2019 to 2023 for both the contribution rate and the replacement rate.

[The Chair, Liberal, Wayne Easter]

I have to interrupt for a second, because I'm not sure myself. So the red covers the period from 2019 to 2023?

[Glenn Purves]

That's right. It's a gradual phase-in. By 2023 it hits a maturity. For 2024 and 2025 we're talking about the blue section.

So in 2016, for example, the base earnings range maxes out at $54,900. That is the year's maximum pensionable earnings that you see at the top right corner. The YMPE is indexed to wages, so that YMPE will gradually grow over time, but for now it's $54,900.

The first additional contribution rate, the very top figure we're talking about right now, combined employee and employer, would be gradually increased to 2%, and the first additional replacement rate, which is the red box on figure 2, would be gradually increased by 8.3%, thereby increasing the total earnings replacement from the CPP from 25% to 33.3%. If you see in figure 2, that's why, when we speak about it, it's going from one quarter to one third, the replacement rate. So for 2%, increasing by 2%, it covers going from one quarter to one third.

Now in step two, I'll just speak briefly about the blue section here. In step two, a new earnings threshold would be introduced, what we call, for the sake of this discussion, the year's additional maximum pensionable earnings. This is up and beyond what is permissible right now in terms of coverage. So in this case, if you see the blue, the year's additional maximum pensionable earning starts in 2024 and reaches 114% of YMPE in 2025.

The second additional contribution rate, which is figure 1, would only apply to earnings between YMPE and YAMPE, so just between the 100% and the 114%, which in 2016 terms would be earnings between $54,900 and $62,600. So that $62,600 is the $54,900 plus the 14%.

The second additional contribution rate would be 8%. Combined employee and employer, the second additional replacement rate would be 33.33%, as shown. So it would have the equivalent earnings replacement as what is seen on the base side. So we're going from nothing in this case—there's no coverage right now—to one third.

I think we'll leave it there. If there are any further questions on it, I can certainly answer these, or my colleagues can answer these. At the very back there are two tables. I'll start with table 2. Table 2 speaks to the indicative employee contributions to the enhanced portion of CPP—biweekly, nominal, after-tax. So this is every two weeks what the contribution would be. The top table speaks to the additional income or additional earnings that would be achieved at maturity, but in 2016 dollars. So we're not talking 40 years down the line indexed to inflation and so forth. We're bringing it back. It's in 2016 dollars. That is effectively what you're getting in terms of the additional earnings with the contribution that you make.

At any rate, this was passed around to help members in terms of navigating this.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Purves.

I think members also have the Library of Parliament research paper that also explains it out in another way and in another chart, but equals the same thing.

I believe you're speaking on behalf of Canada Revenue Agency and the Department of Employment and Social Development as well, and those folks are here for questions.

We'll turn then to the office of the chief actuary, Mr. Montambeault.

The floor is yours.

[Michel Montambeault, Director, Canadian Pension Plan, Old Age Security, Office of the Chief Actuary, Office of the Superintendent of Financial Institutions]

Thank you, Mr. Chair.

I will start my remarks in French and move on to English.

Mr. Chair and honourable members of the committee, thank you for the opportunity to appear before you today. I am Michel Montambeault, Director of the Canada Pension Plan, known as CPP, and Old Age Security, or OAS, Actuarial Valuations at the Office of the Chief Actuary.

I have here with me my colleague Michel Millette, Managing Director. Michel is involved in the CPP Actuarial Valuations and liaises with the Canada Pension Plan Investment Board, or CPPIB. Michel is also responsible for the actuarial evaluations of the employment insurance, or EI, premium rate-setting and the Canada student loans, CSL, program.

The Office of the Chief Actuary, or OCA, is an independent unit within the Office of the Superintendent of Financial Institutions, or OSFI, that provides a range of actuarial valuation and advisory services to the Government of Canada. While the chief actuary reports to the superintendent of financial institutions, he is solely responsible for the content and actuarial opinions reflected in the reports prepared by the office.

The OCA plays an important role in helping decision-makers’, parliamentarians’, and the public’s understanding of some of the risks associated with the public pension arrangements by providing checks and balances on the future costs of the different pension plans under its responsibility. As part of its mandate, the OCA conducts statutory periodic actuarial valuations of the Canada pension plan, old age security program, federal public sector employee pension and insurance plans, and the Canada student loans program.

Since 2012, the OCA has also been responsible for preparing the statutory actuarial report on the employment insurance premium rate. In addition, for the CPP, whenever any bill is introduced in the House of Commons to amend the plan in a manner that would materially affect the estimates contained in the most recent actuarial report, a supplementary actuarial report must be prepared reflecting the change in those estimates. A similar requirement also applies for other plans and programs. The purpose of all the actuarial valuations is to determine the financial status of the plans and to assist the stakeholders in making informed decisions regarding the financing of the plans.

Bill C-26 provides for the enhancement of the CPP as agreed to in principle by the provincial and federal finance ministers on June 20th. The enhancement increases the replacement level from one quarter to one third of pensionable earnings and increases the upper eligible earnings limit, the year's maximum pensionable earnings, by 14% by 2025. The additional contribution rates required are set at 2% below the year's maximum pensionable earnings and 8% above it, with the rates split evenly between employers and employees. There is a scheduled seven-year phase-in of the enhancement between 2019 and 2025. Under the enhancement, the new benefits will accrue gradually over time, with full accrual occurring by about 2065. Individuals with less than 40 years of contributions will receive partial benefits.

As required by the CPP statute, a supplemental actuarial report, the 28th, on the CPP was prepared to show the effect of Bill C-26 on the long-term financial state of the plan. The 28th CPP report was prepared on the basis of the last regular triennial report, the 27th CPP actuarial report as at December 31, 2015. This report pertains to the current or base plan. The 27th and 28th CPP reports were tabled on September 27 and October 28 respectively.

The findings of the 27th report confirm that the legislated combined employer-employee contribution rate of 9.9% is sufficient to financially sustain the base plan over the long term. The legislated rate of 9.9% is higher than the minimum rate to sustain the base plan of 9.79%, as stated in the 27th report. For the enhanced or additional CPP, the 28th report confirms that projected contributions under the proposed legislated first and second additional contribution rate of 2% and 8%, together with projected investment income, are sufficient to fully pay projected expenditures over the long term. The legislated rates are higher than the minimum required first and second additional rates of 1.93% and 7.72% respectively, as stated in the 28th report.

It is important to note that the financing approaches of the base and additional CPP differ. The base plan is partially funded such that contributions are and will continue to be the main source of revenue. In contrast, for the additional plan it is required that projected contributions and investment income be sufficient to fully pay projected expenditures over the long term in order to minimize intergenerational transfers. As such, investment income is the main source of revenue for the additional plan. This means that the minimum required contribution rates for the additional plan are far more sensitive to the rates of return earned on its assets compared to the base CPP.

As shown in the 28th report, for the additional CPP, if the projected real rate of return is reduced by 100 basis points, so that the average real return falls from 3.55% to 2.55%, the minimum additional rates would increase by 32%, exceeding the legislated rates of 2% and 8%—from 1.93% to 2.55% and from 7.72% to 10.2%. In comparison, for the base CPP the same 100 basis-point drop in the projected return for the base CPP, from 3.98% to 2.98%, would result in a projected increase of 8% in the minimum rate, from 9.79% to 10.53%. Although the base minimum rate would also exceed the legislated rate of 9.9%, the relative impact of lower investment returns is much higher for the additional plan, about four times higher than the impact for the base plan.

Thank you for the opportunity to appear before this committee. We would be pleased to answer any questions you might have.

[The Chair, Liberal, Wayne Easter]

Thank you for your presentations, and thanks to all of you for coming.

Turning to the first round, Mr. MacKinnon, you have seven minutes.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you, Mr. Chair.

Thank you to all the witnesses for joining us today and helping us with our study of this very important bill.

I'm going to start with the finance officials.

Since Mr. Purves didn't spend a lot of time talking about the compensatory measures for low-income individuals, would you mind describing the tax benefit and the enhanced benefit to help those who will have to make larger contributions?

[The Chair, Liberal, Wayne Easter]

Mr. LeBlanc.

[Pierre LeBlanc, Director, Personal Income Tax Division, Tax Policy Branch, Department of Finance]

I appreciate the question.

The working income tax benefit will be enhanced beginning in 2019, meaning that the maximum benefit will increase, both for single individuals and families. In addition, an inclusion rate will be applied to the enhanced benefit so that low-income workers can access the maximum benefit more quickly. The rate will be lowered so that people can qualify for the benefit across a wider income range.

In short, the purpose is to roughly offset the additional contributions made by low-income workers during their working lives.

[Steven MacKinnon, Liberal, Gatineau, QC]

Very well. Thank you. That's very important information, and we must keep it in mind during our study of the bill.

Mr. Montambeault, thank you very much. Your analysis was very informative.

I have two questions for you. I'll fire them off one after the other, and then you can take the time you need to answer.

Mr. Machin, from the Canada Pension Plan Investment Board, spoke briefly about the language and provisions in the bill. I think many people are wondering why the office will now have two accounts, one for the current plan and one for the additional plan.

In terms that the people following our proceedings can understand, I would like you to explain why the second account is more dependent on investment returns.