Debates of Oct. 6th, 1997
House of Commons Hansard #11 of the 36th Parliament, 1st Session. (The original version is on Parliament's site.) The word of the day was cpp.
- Canada Pension Plan Investment Board
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Canada Pension Plan Investment Board
Alfonso Gagliano for the Minister of Finance
moved that Bill C-2, an act to establish the Canada Pension Plan Investment Board and to amend the Canada Pension Plan and the Old Age Security Act and to make consequential amendments to other acts, be read the second time and referred to a committee.
Canada Pension Plan Investment Board
Tony Valeri Parliamentary Secretary to Minister of Finance
Mr. Speaker, today it is my privilege to begin debate on Bill C-2, legislation that will secure the Canada pension plan for Canadians now and in the future.
This legislation will enact the joint federal-provincial agreement reached last February. It reflects a consensus for change and a shared commitment to ensure that the CPP is there, that it is sustainable and affordable for today's working Canadians and for our children.
As joint stewards of the Canada pension plan, the federal government and the provinces are squarely facing up to our collective responsibilities to deal now with an issue facing us down the road when the baby boom generation starts to retire.
In his February 1995 report, the chief actuary clearly showed that without modifications to the Canada pension plan, the CPP fund would be exhausted by 2015 and that contribution rates would have to soar to over 14 percent to cover the rapid growth in cost.
In public consultations held in every province and territory across this country last year, Canadians told their governments they want to be able to count on their CPP pensions. They told us they want the CPP fixed now and they want it fixed right. They did not want it privatized and they certainly did not want it scrapped. They told us to do this in a way that does not pass on an insupportable cost burden to younger generations.
A full report on the consultations was made public last year and Canadians were clear. They told their governments to preserve the CPP by strengthening its financing, by improving its investment practices and by moderating the growing costs of benefits.
The changes reflect just that. This legislation demonstrates that we are acting decisively to fulfil our commitment to secure this pillar of Canada's retirement income system.
What have we done to strengthen the plan's financing? When CPP was introduced in 1966 it was financed essentially on a pay as you go basis.
At that time, the prospects of rapid growth and real wages and labour force participation promised that the CPP could be sustained and remain affordable.
With low interest rates there was little value to be gained from building up large reserve funds. The pay as you go system made sense given these circumstances. Since then, the slowdown in wage and workforce growth and higher real interest rates have completely changed the circumstances in which the CPP must be financed.
The pay as you go financing is no longer fair and no longer appropriate. Building up a larger fund, or what has been recently called and referred to as fuller funding, and earning a higher rate of return through investment in the market are now necessary to help pay for the rapidly growing costs that will occur once the baby boomers begin to retire.
Accordingly, we have made a fundamental change in the financing of the Canada pension plan. The CPP will move from pay as you go financing with a small contingency reserve to fuller funding to build a substantially larger reserve fund.
The fund will grow in value from about two years of benefits currently to about four to five years of benefits. To do this beginning this year we will start accelerating the pace of contribution rate increases beyond what is currently legislated so that people begin to cover the cost of their own benefits and stop passing increasing shortfalls on to the next generation.
CPP contribution rates will increase in steps over the next six years until 2003, from the current legislated rate of 5.85 percent to 9.9 percent of contributory earnings, and then will remain there steady.
This 9.9 percent rate is projected to be sufficient to sustain the CPP with no further rate increases. It will pay for an individual's own benefits plus the unfunded liability. It is the fairest way to honour our commitments. The costs of pensions will be spread evenly and fairly across generations.
In 1997 the combined contribution rate for employees will increase from 5.85 percent of covered earnings to 6 percent. The increase for a worker at the average range will total no more than $24.
We have all read the papers and watched the news so let me take this opportunity to address some of these erroneous headlines and some erroneous statements by some hon. members, some that I heard a few moments ago.
They claim that this is the biggest tax grab in history and that CPP rates will jump by 73 percent. We hear it here and I would ask that the hon. members would come very soon to provide the accurate information Canadians are asking for.
This is not a tax grab. Contributions to the Canada pension plan are a component of Canadians savings toward pensions.
I know it is difficult for members of the opposition to understand that. They go into a separate fund, not government revenues, and because of recent changes the Canadian people have suggested will now be invested like other pension plans.
Let us get the facts straight. Contributions will rise 73 percent over the next six years to 9.9 percent but they will not rise to the 14.2 percent that the chief actuary indicated would be necessary if we did not fix the Canada pension plan.
This 9.9 percent rate is also substantially lower than the Reform Party proposal to replace the CPP by a system of mandatory RRSPs. Under the Reform proposal, the next generation or two of Canadians would have to pay twice, once for their own pensions and again for pensions of those who are already retired.
Yes, 9.9 percent is a real cost and no one denies it. By paying that cost now we will save ourselves and our children from larger, more expensive hikes in the future. By moving now, premiums will not have to exceed 9.9 percent.
Under the existing legislation CPP contribution rates are already slated to go beyond 9.9 percent. They are scheduled to reach 10.1 percent in 2016.
The chief actuary has shown that if we do not move fast the CPP will be bankrupt in 2015 and the rates will have to soar to 14.2 percent by 2030. That is a 240 percent increase. Only if we act responsibly now can we avoid bankruptcy and truly intolerable CPP rates later; a 73 percent increase now when a number of generations are sharing the burden or a 240 percent increase for our children's generation. I submit that we have made the right choice. Let us start paying our way. We owe it to our children and we owe it to our grandchildren.
Let me point out that the problems we are facing with our pension system are not unique to Canada. Many OECD countries are also making changes so that their pension systems are more sustainable. Some international organizations have recommended moving toward the increased funding of public plans and that is exactly what we are doing.
With this new fuller funding approach the CPP fund will grow substantially over the next two decades. A new investment policy therefore was necessary to improve the way CPP funds are invested and to secure the best possible return for plan members.
Up until now CPP contributions not needed to pay for benefits have been loaned mainly to the provinces at the federal government's interest rate on long term bonds. In this legislation, CPP funds will now be invested in a diversified portfolio of securities, prudently and at arm's length from government. This means that CPP funds could be invested in stocks, in bonds, including provincial bonds, and also in mortgages. Instead of being loaned in their entirety to the provinces, we are now in a position with the passing of this legislation to take our investment philosophy of the CPP and make it more market oriented. It is consistent with investment policies in most public and private pension plans in Canada.
Based on prudent assumptions the CPP can secure an average long run return of almost 4 percent a year above the rate of inflation. That compares with only 2.5 per cent assumed under the current policy by the chief actuary. These higher returns will be an important plus since members on this side of the House and on the other side clearly acknowledge that every dollar that is not earned in investment requires a contribution from Canadians. The higher returns will be an important plus since we know that working Canadians want to ensure that they contribute to a plan that provides an effective and efficient rate of return and is sustainable in the long run.
During the cross-Canada consultations Canadians told us they wanted the Canada pension plan to run like a private pension plan. Accordingly, the fund will be managed independently from government by a 12 member investment board. This investment board is accountable to Canadians and their governments through regular reports.
The board will be subject to investment rules similar to other public and private funds in Canada. Therefore the transparency for Canada pension plan of the future is that same transparency that is in private plans throughout the rest of Canada.
The foreign property limit for pension funds will strictly apply to the Canada pension plan, but there are some transitional issues that need to be addressed. To ensure the fund's smooth entry into the market, all of the board's domestic equity investments will be selected passively, mirroring broad market indices. This passive approach will be re-evaluated at the next Canada pension plan review scheduled to begin in 1999.
From now on—I am sure the members of the opposition will agree with this—whenever provincial governments borrow from the Canada pension plan they will pay the same rate of interest as they do on their market borrowings.
As a transitional measure reflecting historical arrangements, provinces will have the option of rolling over their existing CPP borrowings at maturity, and at market rates, for another 20-year term. For the first three years provinces will also have access to 50 percent of the new CPP funds that the board chooses to invest in bonds. But after this initial period new Canada pension plan funds offered to provinces at market rates will be in line with the proportion of provincial bonds held by pension funds in general. This will ensure that the funds invested in provincial securities is consistent with market practice.
In order to moderate rising CPP costs we have tightened the administration of benefits and changed the way some benefits are calculated. First, let me tell you what remains the same.
Anyone currently receiving Canada pension plan benefits, be it retirement pensions, disability benefits, or survivor benefits, can rest assured that they will not see these benefits affected in any way. All benefits, now and in the future, will remain fully indexed to inflation. The ages of early retirement, normal retirement, or late retirement all remain unchanged.
What has changed? Let me describe them.
Effective January 1, 1998 retirement pensions will be based on the average of the year's maximum pensionable earnings in the last five years prior to starting the pension. In the past they were based on a three-year average. The amount of the pension will continue to be dependent on how much and for how long a person contributes to the plan.
The administration of disability benefits will be further improved. The appeal process will be streamlined and the legislation will be applied more consistently.
The administration of disability benefits and the changes I have just proposed address concerns that have been raised about the rapidly escalating costs of the disability benefits.
To be eligible for disability benefits workers must show a greater attachment to the labour force. They must have made CPP contributions in four of the last six years prior to becoming disabled. At present a person needs to make as little as two CPP contributions during the course of the three years prior to applying and qualifying for disability benefits.
During the consultation there was discussion—and Canadians have provided guidance to the government—that disability benefits should be removed from the Canada pension plan. That is not what Canadians have told their governments over the consultation period. They have said the government must keep disability as a part of the Canada pension plan, but they did call for consistency across the board in the administration of disability benefits and that in fact is what this legislation is proposing.
When disability benefits are converted into retirement pensions at age 65 in the future, they will be based on the year's maximum pensionable earnings at the time of disablement with subsequent price indexing rather than on the YMPE at age 65. This measure is consistent with how other CPP benefits are calculated and will apply only to people not yet age 65.
The rules for combining the survivor and disability benefits and the survivor and retirement benefits will be largely the same as those in existence before 1987. Changes will limit the extent to which these benefits can be added together.
As part of the CPP consultations and review there were discussions about eliminating the death benefit. The death benefit will continue to be equal to six months of retirement benefits, but up to a maximum of $2,500 rather than the current $3,580. The option to eliminate the death benefit was rejected by the federal and provincial governments. There are those who would purport to eliminate that benefit.
We listened to Canadians, we ensured fairness and balance in the review of the Canada pension plan and the legislation that is being put forward. I submit that the changes I have outlined propose moderate and balanced changes. We have minimized the impact of these changes on vulnerable Canadians. There is no one group that has been singled out or forced to shoulder an undue burden.
During the national consultations on the CPP, Canadians told their governments to go easy on changes to the benefits. There are those who would gut the benefits. That is not what Canadians have told us.
We have reduced the contribution rate to 9.9 percent from 14.2 percent. There are those in the House who would argue that 9.9 percent is too high. They are arguing in a vacuum. The chief actuary who has the responsibility of reviewing the Canada pension plan has clearly stated that we need to act now to ensure that the plan remains sustainable and affordable for future generations. We could sit back and do nothing and watch the premiums escalate as per the legislative timetable until we get to a point where we would experience a 240 percent increase. That is not tolerable. That is certainly not what the government is prepared to do for future generations.
We will ensure that the Canada pension plan is there for future generations, that it is there at an affordable premium and that the benefits are guaranteed for those future generations. The result is that some 75 percent of the reduction has been made on the financing side and only 25 percent is on the benefit side.
I am quite positive the members in this House are very aware that consultation on the Canada pension plan has been ongoing for well over a year. Canadians have had input. They have given guidance to the government on this legislation. They have said very clearly to fix the Canada pension plan, ensure that it is sustainable and ensure that you do not gut the benefits at all costs.
What has been done? We have reflected on what Canadians have said. We have put forward legislation which breaks down like this: 75 percent is on the financing side and 25 percent is on the benefit side.
We are also acting to improve the stewardship of the Canada pension plan and to enhance public accountability. Once again Canadians have been consulted and Canadians have spoken.
Members across the way always talk about the transparency and the accountability that is required in legislation. I look forward to the interventions of the official opposition and other parties. I hope they will point to the fact that this legislation had input from Canadians. This legislation speaks to public accountability and transparency. It is what Canadians have asked for and it is what Canadians are getting. Let me make it perfectly clear that members of the government are determined that the Canada pension plan will not be put at risk again.
The changes in the legislation have been put forward so that Canadians do not have to suffer the uncertainty which has been purported by opposition members. Canadians will not have to ask the question “Will the Canada pension plan be there for me?” The Canada pension plan will be there for members of the House, for young people, for young workers, for my children, for my children's children.
The changes reflect what Canadians have asked for. We have not made those changes for the sake of making changes. We have made them to sustain the plan to ensure it will be there for future generations.
Let us talk about the accountability and transparency which will be part of the new legislation.
Canadians will start to receive regular statements on the pensions they are earning. We intend to provide annual statements to all contributors as soon as it is feasible. Canadians will receive an annual statement which will show how the Canada pension plan is progressing.
Federal-provincial reviews will take place every three years, instead of every five. In fact, 1999 will be the beginning of the next set of consultations and review. The point of this change is to ensure that the Canada pension plan will be closely scrutinized. Canadians will have an opportunity to continue to monitor what is going on with their Canada pension plan.
The Canada pension plan investment board will provide quarterly financial statements and annual reports on the performance of the fund. I am sure that when the members of the official opposition speak they will point to this change and note that it is reflective of what Canadians have said and that it is a positive change.
Let me say this slowly. It is what Canadians have said. The CPP investment board will provide quarterly financial statements. It will hold public meetings at least every two years in each participating province: transparency and accountability. Members of the opposition, members of Parliament and Canadians at large will have opportunity to speak at those public meetings.
Annual reports will provide a more complete information package and will explain how administrative problems are being addressed. As with all plans, public and private plans, there are always administrative challenges. The annual report will list the challenge and state how the challenge is being dealt with: again transparency and accountability.
Canadians told us quite frankly to treat them like members of the pension plan. There is no denying that in the past Canadians have not been part of the changes to the Canada pension plan the way they will be in the future. We are doing exactly that. We are treating Canadians like members of the pension plan. The stewardship of the plan will be improved and public accountability will be strengthened.
There is no doubt Bill C-2 provides a strong and balanced package of changes that will restore the sustainability of the Canada pension plan and make it fairer and more affordable for future generations of Canadians. It will make it more affordable, sustainable and fairer not just for workers when they retire but equally for working Canadians and their families.
Without diminishing what we have achieved with the legislation I would like to point out some other ideas the federal and provincial governments will look at to ensure the structure of the Canada pension plan keeps up with changing times. It will evolve the way our society evolves. These particular issues were either beyond the scope of the latest CPP statutory review, or they may have been raised too late or after consultations were complete. It is our intention to examine these issues over the course of the next two years.
What are the issues? It is important to get them on record so that Canadians know the consultation with respect to the CPP is just beginning and will be ongoing. As issues come forward and develop the consultation and the input of Canadians will be reflected in future legislation.
Some issues are reviewing survivor benefits to make sure they reflect changing realities in the needs of today's families and considering the mandatory splitting of pension credits between spouses during marriage. This is very interesting. It looks at the work to retirement transition including the possibility of providing partial CPP pensions to Canadians wanting to make a gradual transition to retirement. These issues are coming from Canadians, issues they want dealt with in the Canadian pension plan.
We will continue to examine the way in which people are receiving retirement income and employment insurance benefits. I am sure members of the official opposition will appreciate, given the fact that most of them are from the beautiful province of British Columbia, the review of the British Columbia proposal, which was actually made after the CPP consultations were complete. The proposal is to extend CPP coverage up the income scale by raising the limit on pensionable earnings.
I emphasize and hope for concurrence from the official opposition that any change to the Canada pension plan that needs to be considered will only be considered so that an increase in the steady rate of 9.9 percent will not be required.
Let me go further than that and state that any future benefit improvements to the Canada pension plan will be fully funded. I will repeat this very slowly. They will be fully funded. It is what Canadians asked for and it is what we will do.
Last February in the House of Commons the Minister of Finance tabled the first draft of the CPP legislation. In response to the comments received, further refinements were made to the legislation and revised draft legislation was released in July for further comment.
The measures proposed in the bill today will become law once the legislation is passed by parliament and supporting orders in council are received from the provinces that are party to last February's agreement. This will permit the changes to take effect on January 1, 1998.
It is an important milestone for Canadians. The changes to the plan will allow every Canadian to feel confident about the Canada pension plan once again. I continue to repeat that because it is important for Canadians in the galleries, for Canadians watching on TV and for Canadians in our constituencies. I encourage members of the House to communicate the message that the Canada pension plan is here and will be here when Canadians need it.
Let me assure hon. members the changes contained in Bill C-2 tackle the problems facing the Canada pension plan. In order to accomplish this, federal and provincial governments consulted extensively with Canadians from coast to coast to coast. It is legislation that reflects what Canadians said during the consultations and it is legislation that will ensure the continuity of the Canada pension plan.
I would also like to add that the federal government is currently engaged in broad based dialogue with a number of groups on other aspects of Canada's retirement income system. Not only are we listening to Canadians but we are also acting to ensure that our policy reflects their concerns.
With respect to the broad based dialogue, as I have been out talking with constituents in my riding and with Canadians right across the country the one message that continues to come back as a result of their experience with the broad based consultation on the Canada pension plan is that they want a broad based dialogue on the pillars of the retirement income system.
They no longer want to see government reacting. They want to see government engaging Canadians with respect to the retirement income system. They want to see governments reflecting in their legislation what Canadians are saying through a consultation process. The first example is the Canada pension plan changes in Bill C-2 which is at second reading and will go to the Standing Committee on Finance.
Securing Canada's retirement income system is a priority. It is a priority for Canadians. It is a priority for all members of the House. It is a priority for members of the official opposition, members of other opposition parties and members of government.
Our approach was different. It was one where we consulted Canadians. We are taking a very balanced approach to ensure we are not just gutting the benefits for the sake of trying to achieve some objective out there that is sometimes reflected in the House. It is a priority of the government.
Let me say clearly to members of the opposition, to Canadians in the galleries and to Canadians watching TV that Canada's retirement income system remains at the top of the government's agenda.
Canada Pension Plan Investment Board
Preston Manning Leader of the Opposition
Mr. Speaker, it is a privilege to participate in the debate on Bill C-2, an act to establish the Canada pension plan investment board and to amend the Canada pension plan, the Old Age Security Act and other related acts.
I begin by commending the parliamentary secretary on his speech and the finance department on the enormous amount of background information it provided to members on this subject. It is a complex one and we appreciate the information.
I am also pleased to hear the parliamentary secretary attach great value to public consultations, certainly something that we on this side of the House value. To see a shift from pay as you go to a more fully funded plan is better late than never.
I heard the parliamentary secretary raise a number of straw men that he proceeded to knock down, which is not that difficult to do. He talked about people who wanted to gut the benefits to the plan. We heard no one advocate gutting the benefits of the Canada pension plan or other pillars of the Canadian pension system.
However I suggest this setting up of straw men is simply a way of disguising or trying to mask some of the more real defects of the bill. Those are the defects I would like to get into. Indeed it is the duty of the official opposition to point out these defects.
I want to point out a fundamental defect in the bill which characterizes most of the legislation brought by the government to the House, that is the absence of an appropriate preamble and a declaration of the intent of the bill.
The absence of a declaration of intent, precisely what is the intent of parliament in passing such a bill if it does so, concerns me for two reasons. The first is a legal reason. Every time parliament passes any statute which does not within itself make crystal clear the intent of parliament, we surrender power from the legislation arm to the judicial arm. This is something we ought not to do as a matter of principle.
The second reason for stating our intent is much more profound and down to earth. The bureaucrats who designed the bill, and perhaps the minister and parliamentary secretary themselves, will say that its principal intent is to establish and fund the Canada pension plan investment board. However that is only the narrow, technical, bureaucratic intent.
The real intent is or ought to be to care for Canadians in their retirement years, to provide adequate income for seniors as well as income for disabled persons. The ultimate intent of the bill therefore is not fiscal or technical. The ultimate intent is social and humane.
I remind other hon. members, as we get into the technical details of investment boards fiduciary responsibilities, rates of return, contribution rates and pensionable earnings, to keep upper most in their minds the people for whom CPP is intended. To help me do this I have written on my pad—and I urge other members to do it—a few names of people whose lives will be profoundly affected by how the pension system is organized and to keep them in front of us as we debate the bill.
I know of people, for example, among my own relatives and certainly in my own riding which has a higher percentage of seniors than any other riding in Calgary for whom CPP and the old age security is their principal source of income.
When I look at the bill I am reminded that we are dealing with the principal source of income of people who are no longer in a position to add to their income. All of us know of middle aged and elderly women who invested most of their lives in raising children in the home and who entered the so-called official workplace, as if the home were not a workplace, late in life or not at all and therefore qualify for little or no CPP benefits.
I know the government says it addresses their needs through the seniors benefit but we all know this is often too little too late. We should keep the needs of these women uppermost as we consider pension reform.
Most of us have young people in our family—I have five children—who are working if they are fortunate enough to find work. Often they are working as hard as they possibly can. We know the skepticism with which young people view the Canada pension plan. They do not believe the minister's assurance that the contribution rates will be kept below 10 percent. They do not believe there will be a meaningful government pension for them at the end of the day.
A recent book entitled Youthquake by an up and coming young Canadian, Ezra Levant, cites a survey that shows over 30 percent of Canadians under 39 years of age do not believe they will receive a Canada pension plan pension at all despite the assurances from the government and from politicians.
In addition these young people do not consider $8,800 a year a meaningful pension when investment of the same contributions in an RRSP over the same period of time would give them a pension of $24,000 a year. They fear that the reform of the CPP is just another huge intergenerational transfer of wealth.
I suggest we write down on our pads the names of some of those young people and keep their concerns in mind when we analyse and review this bill. Let each of us also write down the names of several disabled persons in our families and constituencies who are absolutely dependent in many cases on the disability income provisions of CPP. Let us keep those people in mind as we debate the bill.
I think I have made my point that the ultimate intent of the bill before us though regrettably not stated is to care for people and to provide income to allow people to care for themselves. The technical parts of the bill, essential as they are, are simply a means to that end.
Let me turn to another aspect of the bill, one of the most important ones and one of the ones completely neglected by the parliamentary secretary in his presentation. I am surprised that the finance department let the parliamentary secretary get away with this omission.
If this bill is adopted and if we accept even half of the minister's glowing predictions of its effects, there is no question it will distribute substantial benefits to Canadians. Those benefits and the impact of this bill upon them are listed in the CPP legislation briefing book issued on September 25, 1997 and I need not enumerate them here.
As the official opposition it is our duty to hold the government accountable for effects of its legislation which it may wish to ignore, or which it may wish the public to ignore because those effects are negative.
Frankly I find it astounding that a government which has said that its number one priority is jobs is putting forward a bill that affects the paycheques of most employees in this country and affects the payrolls of most employers in this country and has not offered a single substantive word on the real employment effects of the payroll tax hike required to fund the CPP investment board established by this bill.
We know the government's view on this subject has changed since it was in opposition. It has been repeated in the briefing book and was repeated by the parliamentary secretary this morning. I want to read it because it is amusing, that “CPP contributions are savings toward pensions. They are not a tax. They do not go into the government's revenues to be spent”. The official opposition and most important most Canadians reject this view on three principal grounds.
First it is completely inconsistent with the previously stated position of the Liberal Party itself. When the Tory government raised CPP premiums six times from 3.6 percent to 5 percent over the period 1987 to 1993, the Liberals then in opposition labelled these increases as tax hikes. It cannot be said that CPP premium increases are a tax increase when Tories do it but not when Liberals do it. This is politically motivated nonsense.
Second the government's position that CPP contributions are not payroll taxes is completely inconsistent with the views of the employers and employees who make the CPP contributions. Unions, business organizations like the CFIB, in their discussions and representations to governments, finance committees and to members of the House, routinely refer to CPP contributions as payroll taxes. If the people who are making these payments feel it is a tax, then it is a tax and should be regarded by this House as a tax, regardless of what government officials or its press officials now choose to call it.
Third the government's view that the 77 percent hike in CPP premiums proposed to fund the CPP investment fund is not a tax is flatly contradicted by previously published reports of the government itself, including the finance department and its advisers. Let me just read into the record some statements by government officials talking about what the CPP premium contributions are:
Joe Italiano of the economic analysis and forecasting division of the Department of Finance in a paper dated April 25, 1995: “Employer's contributions to CPP/QPP are part of compulsory payroll taxes. The share of all such taxes in voluntary labour income, a term which can be interpreted as an effective payroll tax rate” and he goes on and on.
In 1996 a study was done by Lin, Picot and Beach. Beach is a professor of economics at Queen's University; Picot and Lin are with the business and labour market analysis division of Statistics Canada. The study states: “Payroll taxes have four major components: UI premiums; workers compensation premiums; the provincial health and post-secondary education tax; and CPP/QPP premiums”. Statistics Canada provides all the background information.
Another study by Department of Finance officials Lori Marchildon, Tim Sargent and Joe Ruggeri in March 1996 classified CPP premiums as payroll taxes and found that employer payroll taxes invariably lead to a rise in the employer's labour costs in the short run and a reduction in employment.
There is an article by Jack Mintz, chairman of the government's own technical committee on business taxation, Clifford Clark, visiting economist at the Department of Finance, and Mr. Chen of the University of Toronto, another economist. They write that the federal unemployment insurance and Canada pension plan payroll taxes are applied on businesses and individuals.
Jonathan Kesselman, professor of Economics at the University of British Columbia, in the Canadian Tax Journal in 1996, a journal which is often quoted by the Minister of Finance in the House writes that “the distinguishing trait of all payroll taxes is that they apply to a base of labour earnings only”. Kesselman goes on to write that “Canada has perhaps the most diverse range of payroll taxes of any country. At the national level there are benefit linked contributions to social security in programs of unemployment insurance and the Canada pension plan”.
In other words, in the opinion of people who advise the Department of Finance, this is a tax hike.
The increase in CPP premiums from 5.6 percent in 1996 to 9.9 percent in the year 2003 is not only a tax hike, it is a tax hike of monumental proportions, the biggest single tax hike in Canada's history. The maximum employee contribution will rise from $893.20 in 1996 to $1,635 in the year 2003, an increase of $741.80 a year or 83 per cent. A person who started working and contributing to CPP in 1996 at age 20 and continues to work until age 65 earning the average industrial wage which we assume to grow at 2 percent per year before inflation, will pay out $119,193 in CPP premiums over their lifetime.
Moreover in its own documents the government admits that there can never be absolute guarantees that the 9.9 percent rate is the highest the rate will ever go. Members will recall back in the 1960s and 1970s when this plan was put together, Liberal politicians stood in front of public audiences and swore that the contribution rates would never go over 5 percent. Of what value were those commitments? They were not worth the powder to blow them up.
The CPP increase represents a tax hike, to put it in other terms, of $400 million in 1997, $900 million in 1998, $1.8 billion in 1999, $5 billion in 2001, and as much as $10 billion by the year 2005, all in constant 1997 dollars. The CPP premium increases are unquestionably a payroll tax hike.
That is not all the bad news. What is the principal negative effect of payroll tax increases? They kill jobs. This is not simply the view of the Reform Party. This is not simply the view of business people and workers, although that should be sufficient for the government to take heed. This is also the view of the Department of Finance and its advisers. Let me read into the record some of the evidence of that.
After discussing increases in CPP contribution rates, Joe Italiano whom I quoted a few moments ago wrote these words: “These increases have had and will continue to have a negative impact on the labour force. By 1993”—he was writing just before that period—“the rise in contributions by employers and employees had reduced employment and the participation rate in the economy by nearly 26,000 jobs and .12 percentage points respectively”.
The 1996 Department of Finance study by Marchildon, Sargent and Ruggeri classified CPP premiums as payroll taxes and found that “employer payroll taxes invariably lead to a rise in employer's labour costs in the short run and a reduction in employment”. The authors go on to state that employers will bear from 50 percent to as much as 100 percent of the tax, which implies a direct reduction in employment as a result of the payroll tax.
There is the Department of Finance paper entitled “Explaining the Jobless Recovery” by Cozier and Mang which was produced within the economic studies and policy analysis division. The authors found that the main cause of the jobless recovery has been excessively high wage growth. They continued by saying that large increases in payroll taxes, like UI premiums, CPP and QPP contributed to escalating labour costs over this period. Cozier and Mang wrote that payroll tax increases would therefore have lowered cumulative employment growth over the recovery by just under one percentage point. This represents just over 100,000 jobs that would have been created if payroll taxes had not been increased.
I do not want to bore the House but let me quote one more Department of Finance economist. F. Weldon from the economic studies and policy analysis division of the department wrote this in “The Rising Burden of Payroll Taxes in Canada” in 1993: “The long run effect of a one percentage point increase in the effective rate of payroll taxes is estimated to be a decline of nearly 1 percent in employment”. A 1 percent decline in employment represents 140,000 jobs. Weldon wrote “These payroll tax increases can have a sizeable and permanent negative impact on the level of employment in the Canadian economy”.
I do not know how much evidence the Department of Finance needs from its own officials to establish the connection that payroll taxes kill jobs and they kill them by the thousands. If this finance department official has found that a one percentage point increase in payroll taxes reduces employment by 1 percent which in current terms is about 140,000 jobs, how many jobs will be killed when total premiums are increased 4.1 percentage points?
The Department of Finance has access to econometric models of the Canadian economy that enable it to predict the employment effects of bills like this one and payroll tax increases. We insist that the finance department conduct those computer runs if it has not done so and that the minister table those results in the House so that members will know how many jobs are being killed by the payroll tax hike required to finance the provisions of this bill.
I turn to another fundamental question raised by the bill before us, one I do not believe the government has answered correctly. It has to do with the subject of ultimate accountability. I do not know where the parliamentary secretary gets the nerve to think he could get away with this. Perhaps he could get away with it in this House but certainly not in front of any financial audience or any audience of pensioners.
He lists off the things that are supposed to prove the accountability of the Canada pension plan investment board. What does he list? They are going to make regular reports. They are going to issue quarterly financial statements. They are going to issue annual statements.
These are simple things that are taken for granted by anyone who is part of a private pension plan. A pension plan cannot be operated without meeting these minimal requirements.
The parliamentary secretary is trying to make a silk purse out of a sow's ear if he thinks these things illustrate some profound level of accountability.
What does Bill C-2 do? It establishes a corporation to be known as the CPP investment board. The shares of the corporation are to be issued to the Minister of Finance, to be held on behalf of the crown by the Minister of Finance. The corporation is to be managed by a board of 12 directors to be appointed by the federal government on the recommendation of the Minister of Finance, who in turn is to be advised on these appointments by a committee of representatives to be designated by provincial finance ministers, whose primary interest in this whole scheme is not pensions but access to the capital to be managed by the board.
With respect to the characteristics and qualifications of these directors, the bill only specifies that they be representatives of various regions of Canada and have proven financial ability or experience.
We have a crown corporation, the shares of which are held by the government, run by directors appointed by the federal government and acceptable to provincial governments, which will be managing up to $130 billion of investment capital within 10 years.
The question which needs to be asked, which was not answered by the parliamentary secretary, is to whom does the money invested and managed by this corporation really belong. It does not belong to the governments, although in the past they acted like it did. The federal government was lending the funds in the CPP back to the provinces at less than market rates. That is one of the reasons the fund is in trouble.
The money to be managed by the corporation established by the bill belongs to the workers and future pensioners of Canada who are putting up the money. If it belongs to the working people of Canada, who will also be the recipients of the CPP when they retire, we want to know what provision the minister intends to make to ensure that employee interest, employer interest and seniors interest are adequately represented on the board. How is the corporation to be accountable? By what mechanisms? What criteria are taken into account in the appointment of its directors?
It is their money. The bill should make it clear, which it does not, that the funds to be received and managed by the corporation are to be held and managed in trust for the workers and pensioners of this country.
My last point concerns an alternative framework for pension reform. We have numerous points to make with respect to the defects of the bill. We also have a number of proposals to make for improving the retirement income prospects of Canadians beyond reliance on the CPP. These proposals also come from extensive consultation, long before the government even recognized that this was an issue. We trust that the government will be open to these ideas, as it says it is open to ideas, particularly if they bear the stamp of extensive public consultation.
Many of these points will be made by my colleagues, in particular the hon. member for Calgary—Nose Hill. However, allow me to conclude by providing a framework for pension reform which is broader, deeper and more future oriented than what we find in this bill.
The government refers in its briefing notes, as did the parliamentary secretary this morning, to the three pillar retirement income system which it seeks to preserve and enhance. The three pillars which the government sees are the Canada pension plan, the old age security and guaranteed income supplement, which will be replaced by the seniors benefit, and the registered retirement savings plan provision for tax assisted private savings. The government claims to be strengthening these three pillars by this and upcoming legislation.
What many Canadians see is the following. First, they see an erosion, not a strengthening, of the OAS/GIS senior benefit system by government tax policies that claw back an increasing proportion of seniors income.
To illustrate, the seniors benefit will go into effect on January 1, 2001. Current pensioners could have $2,000 per year less in after tax income due to the elimination of the age and retirement income credits. Pension experts at William Mercer Ltd. estimate that the seniors benefit will raise the average tax bill of a retiree by $3,000 to $7,000 a year and increase their tax rates.
What the government proposes with respect to the seniors benefit is not a strengthening of that pillar. It is a chipping away at the bottom by tax increases.
Second, the public sees an erosion of the RRSP system by recent changes in government tax policy that restrict rather than expand the RRSP system. In the 1995 budget it reduced the RRSP limits. It reduced the RRSP over contribution allowances. It phased out retirement allowance rollovers and, incidentally, collected about $160 million from seniors.
In the 1996 budget it froze the RRSP contribution levels. It eliminated the seven year limit on carrying forward unused RRSP room. It reduced the age limit for maturing RPPs, RRSPs and BPSPs. It eliminated the deductions of RRSP and RRIF admidistration fees.
This is not strengthening the RRSP pillar of retirement income. This is chipping away at the bottom, again by the insatiable appetite for tax revenue.
Last, the public sees the government attempting to shore up the Canada pension plan, not by pension reform that better distributes the burden of retirement income across these three pillars but by the simple expedient of a massive increase in CPP premiums.
What Reform would like to propose to the House is the following. I submit this is a better, broader and a more far sighted framework for pension reform than anything we heard this morning. What we propose, first of all, is to add a fourth pillar to the retirement income system and a better distribution of the burden of retirement income across those four pillars. The fourth pillar we propose is broad based tax relief such as proposed in our 1997 federal election fresh start platform.
Through a combination of personal income tax relief measures, increases in personal and spousal exemptions, changes to the child care tax benefits, reductions in EI premiums, surtaxes and capital gains taxes, we can take about 1.3 million Canadians off the federal tax rolls altogether, including 300,000 seniors.
It is a very simple idea that we can help people's retirement income by simply leaving more money in their pockets when they retire. We propose tax relief, in particular tax relief for low income seniors, as the fourth pillar of retirement income.
We further propose the achievement of a better balance for the provision of retirement income between the Canada pension plan, RRSPs and the seniors benefit by means of the following pension and tax reforms. There are five of them.
First, a fairer targeting of the proposed seniors benefit to those most in need, with more generous RRSP provisions for middle and higher income pensioners.
Second, a guarantee to existing seniors with respect to CPP that every Canadian currently age 60 or above receives all the benefits to which he or she is entitled under the Canada pension plan. Surely the government cannot disagree with that, as it is moving in the same direction as what it proposed today.
Third, an improved survivor benefit. Currently the CPP provides only a small pension for surviving spouses of CPP contributors. The maximum pension entitlement of a surviving spouse is 60 percent of the pension entitlement of the deceased spouse. The maximum monthly payment in 1996 was $436.25. To lessen poverty among surviving spouses, particularly elderly widows, 100 percent of the funds in the deceased individual's RRSP should be transferable to a surviving spouse tax free.
Fourth, the government claims to be looking at international experience with respect to moving toward more funded pension plans. Let it look at some of the more far reaching international experience and start looking at super RRSPs.
Reform proposes shifting younger and middle aged workers on to an expanded RRSP program with compulsory contributions like CPP which will provide higher benefits at lower cost than the Canada pension plan while maintaining intergenerational fairness. These super RRSPs would be mandatory. Individual RRSPs would be funded by means of employee and employer payroll deductions. Super RRSPs would supplement rather than replace the existing system of optional RRSPs. The savings in each Canadian super RRSP would be individually invested, managed by government approved financial institutions and would be the property of that Canadian.
This is an idea that is being explored elsewhere. Why the government is blind to it we cannot understand.
Fifth, transition mechanisms are required to ensure that working age Canadians receive pension benefits at par with those promised by the CPP. This can be done by a combination of existing CPP entitlements and new super RRSP benefits, the exact mechanisms to be determined by actuarial professionals and consultations with stakeholders.
If members opposite and the Department of Finance misses everything we have said today, get this one point. It is our intention that the combination of these four pillars, a reformed Canada pension plan, a targeted seniors benefit, an expanded RRSP system and tax relief, will deliver more retirement income for Canadians per dollar invested than the three pillar system proposed by the government, of which this bill is a part.
If our real concern is to care for Canadians in their retirement, or more correctly to provide the income to permit more Canadians to care for themselves in their retirement, I urge hon. members to consider these alternatives to the government's approach.
In particular, I urge non. members to support the following reasoned amendment: I move:
That all the words after the word “that” be deleted and the following substituted therefor:
this House declines to give second reading to Bill C-2, an act to establish the Canada pension plan investment board and to amend the Canada pension plan and the Old Age Security Act and to make consequential amendments to other acts since the principle of the bill, while attempting to address the failures of the Canada pension plan, is particularly unfair to young Canadians and fails to recognize the employment impacts of the CPP premium increases.
Canada Pension Plan Investment Board
The Deputy Speaker
The Chair is satisfied that the amendment by the hon. Leader of the Opposition is in order.
Canada Pension Plan Investment Board
Paul Szabo Mississauga South, ON
Mr. Speaker, for my clarification, could the Speaker advise the House whether a motion which says “to decline” or a motion not to do something is in order. That would be the vote, would it not? I ask the Chair to clarify whether this is a negative motion and technically if it is in order.
Canada Pension Plan Investment Board
The Deputy Speaker
The Chair has ruled that the amendment is in order. It appears to be a reasoned amendment. It is giving reasons why the House would not proceed with the Bill. Accordingly, the Chair is satisfied that the amendment is in order.
Canada Pension Plan Investment Board
Pierre De Savoye Portneuf, QC
Mr. Speaker, what we are debating here this morning is the reform of the Canada Pension Plan. On September 25, the Minister of Finance tabled Bill C-2 dealing with the Canada Pension Plan reform, among other things.
This reform has three main components. First, fuller funding. As you know, this is the amount that must remain available to meet commitments to those who are entitled to benefits. At present, there is enough money in the fund for two years. The minister's proposal is to increase this period to five years.
The minister also proposed the establishment of the Canada Pension Plan Investment Board to increase the plan's rate of return.
Finally, the minister proposed stricter eligibility criteria, particularly in the case of disability benefits.
I must point out right now that, on the whole, the Bloc Quebecois agrees with the general principles of this reform. However, we have a number of concerns that I will address shortly.
Looking back, we will remember that a draft bill was presented in February 1997. This bill was followed by a revised bill, which was presented last July.
In addition, the changes put forward by the federal government have been well received by at least two thirds of the provinces representing two thirds of the Canadian population. All in all, eight provinces, including Quebec, have endorsed the proposed changes. To date, only British Columbia and Saskatchewan have not given their approval.
At any rate, these changes, this new set of measures will not take effect, first, until Parliament passes the legislation, and second, until the necessary orders are approved by two thirds of the provinces representing two thirds of the Canadian population. We understand that the government plans for the new measures to be in place by January 1998, if everything goes well.
Let me give you a brief overview of the current status of the Canada Pension Plan. As we know, it was absolutely necessary to review some aspects of the plan, since it had become unsustainable. At the rate things were going, there would have been no money left in the fund by the year 2015, at which time contribution rates to the Canada Pension Plan would have had to be raised from 6 percent to 14 percent.
It is to be noted that Quebec, which has had its own plan for a few decades, would also have had to increase its rate from 6 percent to 13 percent. Indeed, the Quebec Pension Plan is also under review for the same reasons, even though it is in better financial shape than the CPP.
Therefore, the reform we are talking about today in this House concern Quebeckers only in an indirect way. However, the Quebec and Canadian governments have always harmonized the main elements of the two plans, primarily because of a common desire to accommodate those who have contributed to both plans.
Over the years, some 1.73 million people have contributed to both plans during their career. By harmonizing their contribution rates, the two governments are also acting responsibly from an economic point of view.
I would like to take a moment and explain, for the benefit of those Quebeckers who are listening to us, what is going on in Quebec and show how it relates to what we are discussing here today.
To ensure that the Quebec Pension Plan would fulfil its role, which is to pay benefits, the Quebec government tabled Bill 149 dealing with the Quebec Pension Plan and amending various legislative provisions. The bill went through second reading in June and should pass third reading soon after the National Assembly reconvenes for a new session.
The fact is that the CPP reform concerns Canadians more than Quebeckers. In fact, less than half of 1 percent of residents of Quebec receive CPP benefits. Last August, the number was 12,882 people. Those Quebeckers receiving CPP benefits are individuals residing in Quebec who have worked all their lives in another province and who, accordingly, have contributed only to the CPP. An example would be a resident of Hull who had worked all his or her life here in Ottawa.
Another example would be members of the Canadian Armed Forces and of the RCMP who live in Quebec but must still contribute to the CPP. To the extent that these people have contributed only to the CPP, they receive CPP benefits, even though they live in Quebec. Finally, there are those people receiving CPP benefits who then move to Quebec.
It is obvious, therefore, that the CPP must be able to meet its obligations to the Canadian public. I would take this opportunity to point out, however, that more than a new bill is required.
A plan, once in place, relies on the tools at its disposal, and nowadays the tools take the form of computers and, more broadly speaking, computer systems. It is known that the CPP falls short in certain areas that have been criticized by the Auditor General and that we hope will soon be corrected, because it is a very large drain on the system not to be able to operate at peak efficiency.
I would also point out that the plan itself seems to be having trouble changing over to more efficient computer systems: $350 billion has already been spent on this and there is still a problem.
I also want to point out that the Auditor General found a certain lack of rigour in the administration of the disability plan. The fact is that at the present time, the Canada Pension Plan does not do regular evaluations to ensure that people receiving disability benefits are still entitled to them, so that costs have spiralled dramatically in recent years.
I would like to consider another aspect of the bill put before us by the minister. This legislation would establish the Canada Pension Plan Investment Board. As you may have noticed, and I suppose everybody in this House has, it was largely inspired by the Caisse de dépôt et placement du Québec. However, unlike the Caisse, the federal board will have no economic mandate, only a mandate to obtain the best possible rate of return.
I would like to expand somewhat on this difference, because it intrigues and almost worries me.
We know that in Quebec the Caisse has been an unqualified success as an economic development tool for Quebeckers. To a certain extent, I can only congratulate the Minister of Finance for taking his inspiration from a tried and true Quebec formula.
I think we all agree that sometimes it is nice to see others trying to emulate our own success, but I also understand why the Minister of Finance did not want to go beyond a simple mandate of getting the best possible rate of return.
After all, across this country, there are regions that sometimes feel neglected when they do not get the same investments or attention given other regions. I think the Canada Pension Plan Investment Board could be in trouble if some of its investments went to certain regions rather than others. The problem would become a political football in no time.
Fortunately, Quebec does not have to worry because it has set up its own system for contributing effectively toward its economic development.
I would like to say a few words about the government's reform objectives. Briefly, the government wants to make the system viable, affordable and equitable. First of all, the system's viability must be ensured for future generations. In fact, the objective is to guarantee that seniors and future generations will continue to enjoy their retirement benefits.
We must also strike a balance between contributing generations by quickly establishing a stable long term contribution rate.
Finally, levels of contribution must parallel the growth of the economy, because we certainly need that.
For the benefit of those watching in Quebec, I would like to make a few cursory comparisons between the proposed reform of the Canada Pension Plan and that of the Quebec Pension Plan. There are similarities and there are differences. Let us look first at the similarities.
Contribution rates will rise rapidly. They will rise over the next six years, peaking at 9.9 percent in 2003. They will then remain stable. This is exactly what Quebec intends to do. In both cases, plan viability is what counts.
Another point is the new policy on Canada Pension Plan investments. As I mentioned a few moments ago, certain features of the investment board were taken from the Caisse de dépôt et placement du Québec. I repeat: Quebec is happy to have provided the example for Canada.
The plan is also periodically reviewed. The federal-provincial examination will be conducted every three years rather than every five. That is a good thing. It will mean no loss of control over changes to the plan and permit adjustments should problems or unforeseen circumstances arise.
We should also note the basic exemption under which no premiums will be collected on the first $3,500 in earnings. This will remain unchanged in both Canada and Quebec.
Starting in 1998, the pensions of the newly retired will be calculated on the average of five years' rather than three years' maximum pensionable income. This represents a slight reduction for new recipients, because the average over five years, generally speaking, will be slightly less than that calculated over three years. It must be said, however, that Quebec too is intending to do likewise for the same reasons of good management.
It is to be noted that neither current beneficiaries—that is those who are collecting a survivor's pension, a disability pension or combined benefits—nor those people aged 65 or more on December 31, 1997, will be affected by the proposed changes. These changes will only come into effect on January 1, 1998. Benefits will not change for those who are currently collecting a pension and those who will start doing so before the end of this year.
All CPP benefits will remain fully indexed, as will QPP benefits. Retirement age, which is normally 65 but can be earlier at 60 or later at 70, will remain unchanged under the Canada Pension Plan and the Quebec Pension Plan.
The CPP fund, which currently has the equivalent of two years of contributions, will now have a reserve equivalent to five years of contributions. Quebec will make the same change to ensure the sustainability of its plan.
New rules of calculation will apply to combined benefits for those who are collecting both a disability and a survivor's pension, or retirement benefits and a survivor's pension. When these rules are tabled, a thorough review will have to be made to avoid any injustices. I can assure you that the Bloc Quebecois will pay close attention to this all important consideration for those affected.
Not everything is the same between what is being proposed by the finance minister and what the Quebec government intends to do: there are differences too, which I will now discuss. First, let us take a look at the death benefit. What is a death benefit? It is a lump sum payment to help the close ones of a deceased contributor to pay for part of the funeral costs. The benefit is payable for any worker who contributed for at least one third of his or her contributory period, the minimum being three years.
In Quebec, the current system provides a death benefit equivalent to six times the monthly retirement benefit, up to a maximum of $3,540 in 1996. The federal plan is currently identical to the QPP in that respect. The new program which Quebec intends to implement as of next year will provide for a standard amount of $2,500, regardless of the contributor. This amount will be indexed. In the system proposed by the Minister of Finance, under the Canada Pension Plan, the death benefit will be equal to six times the monthly retirement benefit, with the maximum being set at $2,500 a year instead of $3,540.
As we can see, there is a difference. First, the Quebec Pension Plan will be more generous than the Canada Pension Plan because the fact is that funeral benefits are the same for all workers, regardless of how long they have lived. The Quebec Pension Plan recognizes this reality.
The second difference concerns disability benefits. The federal government is experiencing many difficulties in implementing its disability benefit. Last year, the auditor general sharply criticized the federal government for the uncalled for—and I would say exorbitant—increase in the cost of disability benefits, an increase caused mainly by regulations that are too lax and a follow-up, let us face it, that is non-existent. Indeed, as I like to say, when the auditor testified before the committee, he mentioned the Quebec Pension Plan as an example to follow.
At present, the federal disability benefit system is overspending. This is due to lax administration, whereby the federal government considers more people eligible for a longer period because there is no periodical reassessment of the need for these benefits to be maintained.
Through the proposed changes to the disability pension under the plan laid before this House by the finance minister, the federal government intends to repeal the federal directive providing for any person to be declared disabled if unable to perform his or her own job even if he or she could perform another job, thereby making the administration of the plan much stricter.
There is another difference. Current federal requirements for disability benefits limit eligibility to those who have contributed to the plan for two of the past three years or for five of the past ten past years. The federal government, according to what the Minister of Finance proposes, intends to limit eligibility to those who have contributed for four out of the last six years, which should reduce eligibility considerably. In Quebec, those who have contributed for two out of the last three years, or five out of the last ten years, or for half of the contribution period, are eligible for disability benefits. This makes allowance for progressive diseases, which is very important. The Government of Quebec will therefore recognize, and quite rightly, a proportionately higher number of disabled people.
There is another rather complicated difference. It has to do with the way in which the Canada and Quebec pension plans are calculated. The difference is complex, as is the calculation. The Bloc Quebecois intends to keep an eye on this issue to ensure that every citizen is treated fairly.
In conclusion, the Bloc Quebecois is in agreement with the general objective of the reform, which is to preserve the viability of a public pension plan. This reform will ensure that future generations will also have access to a public pension plan. However, the Bloc Quebecois demands—I repeat, demands—that administration of the CPP be rapidly modernized in order to meet the harsh criticism recently formulated by the auditor general with respect to this plan.
The Bloc Quebecois will also ensure that the government's proposed reform does not depart from the principles of social justice so dear to all Canadians and all Quebeckers.
Canada Pension Plan Investment Board
Lorne Nystrom Qu'Appelle, SK
Mr. Speaker, I want to say a few words on the bill before the House.
We are beginning a debate on our pension policies and where we should be going. Bill C-2 is the first of two bills to come before the House. Bill C-2 deals with the increase in premiums to the Canada pension plan and the reduction in benefits to the plan.
The second bill that will come before the House very shortly will be on seniors benefits. This bill will abolish the current old age security pension, the guaranteed income supplement, the tax credit for pensioners and the age benefit. When the government abolishes that it will instead introduce a seniors benefit. I believe that will be very controversial legislation which will create a lot of interest right across the country. Part of the major debate that will go on in part two will be public pensions versus private pensions.
I want to begin today be giving a bit of the history of the Canada pension plan as we know it today. It was passed into law in 1966. Nine provinces are part of the Canada pension plan, while in Quebec has the Quebec pension plan which is very similar to the CPP. It is the Caisse de dépôt et placement du Québec.
The Canada pension plan is a pay as you go plan. It is a defined benefit plan and pays out around $17 billion per year in benefits to Canadians, including the pension benefits, survivors benefits and disability benefits. The plan has reserves of about two years of funds which is around $40 billion. That $40 billion is, in large part, lent to the provinces at interest rates that are lower than they can achieve elsewhere for infrastructure, such as the building of schools, hospitals and universities.
The plan pays out a fully indexed pension to people 65 years and older. It provides survivor benefits, death benefits and disability benefits to people who are unable to work. It has also been a highly successful plan in meeting the objectives of 1966. If we look at seniors poverty in this country we will find that there are a lot fewer people living in poverty today than there were 30 years ago. In 1960 some 33.6 percent of seniors were living below the poverty line. In 1995 some 10.9 percent of seniors were living below the poverty line. When one compares that to any other category of Canadians, that is a very significant accomplishment over the last 30 years.
We do not have figures for poverty for the Canadian population in general or of child poverty or for other categories, but for seniors that has been a remarkable accomplishment over the last 30 years.
The whole philosophy behind the Canada pension plan is that it is a social program. Its purpose is to divert a share of the national economic output toward retired people each and every year so people can retire with dignity. At the inception of the plan in 1966 and even today there are many people who do not have adequate private pension plans through an RRSP that they build up for themselves. Their sole means of income, outside of the old age security pension or the GIS is the Canada pension plan. Therefore, the main philosophy behind the CPP is to divert part of today's national economic output into a decent retirement fund for people when they retire.
It is very similar to diverting a share of our national income to fund medical care in Canada, to make sure that regardless of one's financial means, we have universal accessibility to decent health care. It is similar to diverting a share of our national income toward education to ensure that we have an educated people.
To summarize this, it is diverting a share of our output toward the common good, to try to equalize the opportunities of condition in Canada, to try to have a more equal society where people do not have to worry about such fundamental needs as food, clothing, shelter and medical care. That is basically the philosophy behind the plan. That is why our party over the years has been a very strong supporter of the Canada pension plan, the Quebec pension plan and public pension plans in general.
We are now into a debate on private pension plans versus public pension plans. We are very much in favour of public pension plans as is the NDP government in Saskatchewan and British Columbia, the trade union movement and progressive people right across the country.
On the other side are the supporters of private pension plans. Here we find the old allies, the Fraser Institute, the C.D. Howe Institute, the Canadian Taxpayers Association and of course their mouthpiece in Parliament, the Reform Party. These are people who would like to abolish altogether the Canada pension plan and replace it with sort of a super RRSP plan which would be a defined contribution plan.
The ultimate end of this would be to widen the gap between the rich and the poor, much of which would be done through tax funded support. RRSPs as tax write-off are a tremendous tax expenditure for the government. RRSPs cost Canadian taxpayers about $17 billion in tax expenditures and the CPP benefits also cost about $17 billion. There is equilibrium.
But under a totally private plan or the Reform Party private plan or the Fraser Institute plan the tax expenditures would escalate. People who are wealthy could take the greatest advantage of this. It would be sort of a Robin Hood in reverse where the poor are giving to the rich so that the rich can retire in comfort in condos in Florida and elsewhere around the world.
Bill C-2 moves us partially toward a private plan. It is really a transition toward a partially vested plan. It also has in it the privatization of the administration of the plan. I want to look at a few details of that this morning.
First, one of the major concerns I have about the changes to the Canada pension plan is the whole issue of premiums. Premiums will increase 73 percent over the next six years. The combined employer-employee premiums will increase from today's 5.85 percent of insurable earnings up to 9.9 percent, an increase of some 73 percent in six years. The maximum contribution will go from $975 to about $1,635.
I am really concerned about the rapid escalation of the premiums for a number of reasons. First, the burden of refinancing of CPP will fall mainly on low income people and women, because a disproportionate number of women receive low incomes. It will fall mainly on people who are least able to afford it. That is a very regressive way to try to salvage the Canadian pension plan.
Much of the burden will fall on small business. An increase of 73 percent for small business is a burden that many of them cannot afford. It is a burden that will drive some of them underground in how they conduct their business and whom they hire. That is a concern to us as well.
Finally, the major increase will be a particular burden for young people as much of what we are going to have in the CPP is going to be an intergenerational transfer of wealth or income from younger people to their parents or their grandparents. That is something we have to take a serious look at when this bill goes before the committee.
The other part about the premiums that worries me in terms of regressivity is that year's basic exemption which is now about $3,500 a year under this bill will stop being indexed. As time goes on, without indexing the basic exemption, more and more of the burden will fall on low income people as the funding of CPP becomes less and less progressive. Again, that deviates from the original principle of the Canada pension plan which has tried to provide a pension for people when they retire but to do so on premiums that are progressive and affordable by low income people.
This brings me to another point. It is the whole question of the affordability of the Canada pension plan. If we listen to the Reform Party and its friends at the C.D. Howe Institute or the Fraser Institute, we would think that the CPP is going to be flat broke and that we cannot afford it, that it has to be abolished. I say that is rubbish.
Even the actuarial report that the government used in order to craft its changes shows that the CPP is affordable. The actuarial report in 1995 that the government used was based on some pretty low common denominator indicators. The figures used were based on a flat wage increase and a very high unemployment rate. The government tried to project this in a linear way for 30-odd years. It has now come up with all the figures for changing the Canada pension plan. It was a very pessimistic snapshot of what our country will look like economically in 30 years. Despite that, the plan is still affordable.
We do not pay more than other OECD countries for our public pension plans. In fact if old age security, the OAS and the CPP are combined, in 1995 about 5.3 percent of the national income went into those two plans. This will rise to about 8 percent by the year 2030.
The World Bank said just recently that some 9.2 percent of the GDP of the OECD countries was spent on public pension plans. In 30 or 35 years Canada will be spending about the same or even less than what many OECD countries are spending today. I do not think there is any debate that Canadians cannot afford a public pension plan.
In addition to the rapid rise in premiums and how regressive the burden of these are going to be, we are also concerned about the reduction in benefits. Under the new plan benefits will be decreased by around 10 percent. People, particularly young people, will be paying more in premiums and then seeing a reduction in benefits. I am concerned about that and the political support a public pension plan will receive. You can only go on so long increasing premiums and reducing benefits before the political will is not there any longer to support the idea of the Canada pension plan. That should be of concern to us as parliamentarians as well.
Disability pensions will become more difficult to obtain. This is one of the better parts of CPP and it is one, I suppose, of the cases we get as members of Parliament most often. We hear about the problems people have applying for CPP disability benefits.
Under the current legislation a person has to be working for at least four of the last six years to qualify for CPP disability. Under the changes in the bill, that person must work for two of the last three years or five of the last ten years before qualifying for CPP disability allowances. It will be more difficult for some people who now qualify and will not qualify under changes to the legislation.
Another point is the whole question of survivors and death benefits. The maximum today is $3,580 for someone collecting survivors' benefits. It will now be reduced to some $2,500, again making it more difficult, particularly for women who are, more often than not, the recipient of those benefits.
These are some of the concerns we have as this bill goes on to the committee stage. Basically, the burden of the funding changes in CPP will fall most unfairly on low income people, on women. It will hurt disabled people. It will hurt getting young people to support the Canada pension plan.
At committee we have to come up with some amendments that will try to make this bill more progressive, that will lessen the burden for young people, lessen the burden for low income people and reinstate the death benefit and the disability benefit to where they are presently in the Canada pension plan.
I want to comment, very briefly, on the increase of the size of the reserve fund for CPP. Currently the reserve fund would cover CPP payments for over two years, about $40 billion. Under the bill, there is a plan to increase this to 3.8 years which would be about $126 billion.
Under this new idea, which also includes an investment board appointed by the government from the private sector, we see the idea of a very serious transition in the philosophy of the CPP from a pay as you go plan to a partially vested plan. Under the partially vested plan, the provinces will no longer be able to borrow money at the same rate at which they borrow it now to invest in their infrastructure for schools, universities and hospitals.
That is a negative because the provinces, being able to borrow money at a lower rate, have built the country into a stronger place and have made investments for all of us across the board and helped strengthen the economy. That will be gone. That might not greatly affect provinces like British Columbia, Alberta or Ontario that have borrowing rates that are lower because their bond ratings are higher than the average. It will really hurt the four Atlantic provinces because their borrowing rates are more expensive. When that happens it will be more difficult for them to build schools and hospitals. It will create more inequity in the country once again.
This is a part of the bill that might not seem to be that important to the ordinary person on the street but it will really affect Newfoundland and the other Atlantic provinces and to a lesser degree places like Saskatchewan and Manitoba which from time to time do not have the same bond rating as an Alberta or British Columbia.
The other point that concerns me is that in the Quebec pension plan under the Caisse de dépôt et placement there is a regulation that says it has to invest in the domestic economy, to try to improve the economy of the province of Quebec in order to give that province a break. Again, in this bill there is no reference to trying to look at the economic priorities of the country and investing in the domestic economy in this new fund.
Eighty percent of the fund must be invested in Canada but again there are no guidelines. We should be looking at maximizing the creation of jobs or minimizing unemployment. It does not talk about what kinds of investments should be made but leaves that to the private board.
Another concern is that the Minister of Finance publicly indicated the 80 percent rule where 80 percent of pension moneys must be invested in the country is likely to be increased. My guess is that it will be increased in the next budget or the budget after that. That will also be a concern. What is being created here is a huge pension fund that will be $126 billion in six years and up to over $300 billion after nine or ten years. That will be a huge fund. That money should be invested in the main in this country.
Another thing to be noted is that while the premiums are more difficult for people to pay and the payouts will be less, there will be some job creation in this new bill. That will be basically for the banks, the stockbrokers and the bond dealers that will be investing this new fund of $126 billion. The premiums are estimated by some to be around $500 million for that work.
These are some of the concerns we have at second reading. They are concerns we would like to explore at the committee stage.
I am really concerned about the line the Reform Party is taking on totally privatizing the Canada pension plan and turning it into a system of super RRSPs. Reformers are talking about a mandatory plan—
Canada Pension Plan Investment Board
Jack Ramsay Crowfoot, AB
There would be a better return. It would come closer to your MP pension plan. Are you against that?
Canada Pension Plan Investment Board
Lorne Nystrom Qu'Appelle, SK
A Reform Party member is now starting to intervene by saying that it would be a better return. It would certainly be a better return for wealthy people but what about the ordinary citizens?
Canada Pension Plan Investment Board
Jack Ramsay Crowfoot, AB
Everyone would pay into it.
Canada Pension Plan Investment Board
Lorne Nystrom Qu'Appelle, SK
What about the ordinary citizens? Now everybody may pay into this plan but a low income person might not pay very much. I represent the inner city in Regina and people in the inner city in Regina cannot afford to put much into RRSPs. If we had the Reform Party plan, which would be a private open ended plan subsidized by the taxpayer through RRSPs and tax breaks, we would see wealthy people earning an awful lot more money. The gap between the rich and the poor would widen as we privatized the Canada pension plan. That is exactly what would happen.
That is the whole philosophy of the Reform Party. That is why in the House of Commons on Thursday Reform's official critic for revenue agreed that Conrad Black paid too much tax, that wealthy people in this country pay too much tax. That is the whole philosophy of the Reform Party. I oppose that and our party opposes that. Thank goodness the majority of the Canadian people oppose going off in that direction. It is the law of the jungle. That right wing extreme conservatism has done this country an awful lot of harm over the years and now the Reform Party wants to carry it even further by totally privatizing the Canada pension plan. I say we have to fight against that and we have to make sure that the Reform Party gets nowhere near the levers of power in Canada.
The Reform Party is very much against government programs that help ordinary people, but it is certainly in favour of spending billions and billions of dollars to subsidize the wealthy. Reformers are calling for a super RRSP plan where billions of dollars will be spent to subsidize the rich as they fatten their bankbooks with a very healthy pension plan. We have to fight against that. That is one reason I am concerned that this plan is moving in that direction.
Canada Pension Plan Investment Board
Paul Szabo Mississauga South, ON
Mr. Speaker, I listened to the member's comments and I certainly appreciate the way he laid out the issues. It is clear there are some important issues.
I agree wholeheartedly with his comments about the Reform proposals. The opposition leader in his speech said that we have to make the survivor benefits fairer and that there should be a fairer distribution to middle and high income Canadians. It is absolutely outrageous that he should be fighting for high and middle income Canadians when we have people living in poverty. The Reform Party has no social conscience.
During the public consultation forums one of my constituents, Mr. Phil Connell, appeared before the panel. He wanted to share his numbers with us. He has been retired for seven years.
During his employment he contributed $18,607. He computed the interest and found that his share was about $9,300. In the seven years of receiving the Canada pension plan his total receipts to date are $54,287. My constituent, a senior who is getting very generous benefits, $5 out for every $1 that he put in, said that this is scandalous and must be changed.
The hon. member for Qu'Appelle laid out comments about each of the initiatives the government is proposing to deal with the need to get the cost of the CPP down. He said we should have retained the disability benefits and the survivor benefits. He said we should not shift the burden of the price to the youth coming along in the future. He suggested there should be absolutely no change.
We cannot have it both ways. Can the member please advise the House, if he is going to protect everything that is there already, how does he propose to save the Canada pension plan?
Canada Pension Plan Investment Board
Lorne Nystrom Qu'Appelle, SK
Mr. Speaker, I did make a brief comment in answer to that question earlier. Perhaps the member missed it.
The actuarial report on which the changes are based, in the opinion of some economists, which I happen to share, contains very pessimistic projections. They are based on high unemployment rates and the very flat wage increases we have seen over the past few years. They have taken these forward for 30 years, in a linear way, and made projections which are very pessimistic.
I believe the economy will be in better shape than that, as do many economists. We do not have to have a decrease in disability benefits or in survivor benefits. As a matter of fact, those are a very small part of the payout of the CPP right now. The biggest payout is in the pension plan.
I do not believe we should penalize disabled people. We do not have to do that based on the present economy.
Canada Pension Plan Investment Board
Marlene Catterall Ottawa West—Nepean, ON
Mr. Speaker, the member spoke about things he is concerned about in the plan. He spoke about making it more progressive. I am sure he is aware that any changes in the plan, as contained in the legislation or changes which will be made due to subsequent consideration, require the approval of the provinces. I would like to ask him how he intends to proceed on that with the NDP Government of Saskatchewan.
He spoke as well about the relatively low retirement income of Canadian women and their much higher rate of poverty in retirement.
He may be aware that during the negotiations between the federal and provincial governments there was a proposal on the table from the Manitoba government, supported by our government, which would have seen mandatory credit splitting between spouses as CPP income is earned. That would have gone a long way toward ensuring that future generations of retired women will not be penalized as they are today.
The NDP Government of Saskatchewan chose not to support that proposal. It is one provincial government which allows women to sign away their entitlement to CPP benefits.
I wonder if the member agrees that those income credits earned during the working life belong equally to both partners in a marriage or common law union and what measures he is prepared to take to ensure that the NDP supports that and will do its best to persuade the NDP governments in B.C. and Saskatchewan that they should also support it.