Mr. Speaker, I am pleased to be able to join in the debate on the Canada pension plan.
In February of this year the Liberal government acting with the provinces took the lead to place the Canada pension plan on a solid financial footing. The recent changes to the Canada pension plan will do two important things. It will secure its sustainability and will stabilize the contribution rates.
We should not forget that the plan is jointly managed by the federal and provincial governments, and changes can only be made to it if approved by two-thirds of the provinces representing two-thirds of the population. All provinces, with the exception of British Columbia and Saskatchewan, support the reforms. Yes, let us look at it. The reforms are supported by Newfoundland, Nova Scotia, New Brunswick, Prince Edward Island, Quebec, Ontario, Manitoba and Alberta.
The consultation process was very extensive. During the 33 sessions held in 18 cities throughout the country, more than 270 formal presentations were held to find out what Canadians thought should happen to their plan. Canadians had no hesitation. They asked to have the plan preserved, its finances strengthened and its investment practices improved.
Those who advocate scrapping the CPP and moving to a privatized system with mandatory retirement savings plans do not understand two things. First, Canadians want the CPP to remain. Second, the CPP provides protection not available through private RRSPs, such as disability benefits, provision for women of childbearing age and survivor and death benefits.
The CPP premiums are insurance premiums paid by working Canadians into a public pension plan from which they draw benefits when they retire. To insinuate otherwise by calling the rate increase in contributions a tax grab is misleading and confusing. The CPP revenues are not revenues of the Government of Canada. The fund is jointly administered by the federal and provincial governments for the benefit of citizens, not for the benefit of governments.
Critics who maintain that the CPP is an insufficient public pension plan conveniently forget that it is only one of three pillars of our retirement system. The old age security and guaranteed income supplement system and private retirement savings plans such as RRSPs are the other two pillars. Action has already been taken by this government to consolidate the OAS and GIS into what we call the proposed seniors benefit which is designed to help those most in need. Taken together, these systems provide a good balance of government and individual responsibility for retirement income security.
These changes in the CPP reflect the long held Liberal values of providing stability for and protecting those in need. It is a balanced approach.
Today the 5.85% legislated CPP contribution rate is shared equally between employees and employers. Contributions are levied on earnings between $3,500 and $35,800. Under the existing legislation, rates were to rise to 10.1% by the year 2016. Yes they were to rise to 10.1%, although people forget that. However the chief actuary of the CPP indicated that without these changes the CPP fund would be depleted by the year 2015 and contribution rates would have to increase to 14.2% by the year 2030 to cover escalating costs. Clearly the CPP was not sustainable and something had to be done.
The federal and provincial ministers agreed on a three part approach to restore the financial sustainability of the CPP and make it fair and affordable for future generations. They did this by moving to fuller funding by accelerating contribution rate increases now so they will not have to exceed 10% for future generations. We have come in at 9.9% They are improving the rate of return for the CPP fund by investing it prudently and by having a diversified portfolio of securities at an arm's length from the government. They are slowing the growth in costs by tightening the administration of benefits and changing the way some are calculated.
Speaking about fuller funding, when the CPP was introduced in 1966 it was financed as a pay as you go system. The prospects of rapid growth in real wages and labour force participation promised that the CPP could be sustained and remain affordable. As well, building up large reserves in a world of real low interest rates would not have been much help. The pay as you go CPP system made sense given those circumstances.
Since then however the slowdown in wages 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, appropriate and possible. Building up a larger fund, fuller funding, and earning a higher rate of return through investment in the market will help pay for the rapidly growing cost that will occur once baby boomers begin to retire. Accordingly the CPP will move from a pay as you go financing system to fuller funding to build up substantially larger reserve of funds. The fund will grow in value from about two years of benefits currently to about four or five years of benefits.
Indeed contribution rates will rise in steps over the next six years from the current rate of 5.85% to 9.9% of contributory earnings and then remain steady, instead of rising to 14.2% by the year 2030 as projected by the chief actuary. In dollar terms an employee earning $35,800 a year now pays about $945 in annual contributions. In 2003 that employee will contribute about $1,635. This is $450 more than what is currently legislated for that year. However by 2030 an employee would be paying $565 less a year than if we had not acted now.
Increasing rates more rapidly now will cover the cost of each contributor's own benefits plus a uniform share of the unfunded burden that has built up. These costs will not be passed on to future generations.
At present the CPP has a fund equal to about two years of benefits. Funds not required immediately to pay benefits are invested in non-marketable provincial government securities. Provinces pay interest at the federal long term bond rate when the bonds are purchased.
Fuller funding of the CPP means that the fund will grow substantially from about two years of benefits to about four or five over the next two decades. A new investment policy is required to secure the best possible return for contributors. A higher investment return on the fund will keep contribution rates down.
Thus our ministers have agreed that the CPP funds will be invested in a diversified portfolio of securities in the best interests of contributors and beneficiaries, much like private sector plans. The fund will be managed professionally at arm's length from government by an investment board accountable to both the public and government through regular reports. The board will be subject to investment rules similar to other pension plan funds in Canada. The foreign property limits of the pension funds will also apply to the CPP fund.
When the provinces now borrow from the CPP, they will pay the same rate of interest that they do on their market borrowings. This is a very welcome step.
Let us review some of the changes to the benefits and their administration I indicated earlier. The formula for adjusting previous earnings in calculating retirement benefits will be based on the average of the year's maximum pensionable earnings over the last five years instead of the three currently, prior to starting the pension. The amount of the pension will continue to depend on how much and for how long a person contributes to that plan.
To be eligible for disability benefits, workers must show greater attachment to the labour force. They must have made CPP contributions on earnings over $3,500 in four of the last six years prior to becoming disabled. Prior to 1987 disabled coverage was available to those who had contributed for at least five of the last 10 years.
Retirement pensions for disability beneficiaries will be based on the maximum pensionable earnings at the time of disability and then fully price indexed to age 65. This measure is consistent with how other CPP benefits are calculated and will apply only to the people not yet over the age of 65.
The death benefit will be equal to six months of retirement benefits, up to a maximum of $2,500. Currently the maximum is set at 10%, $3,508 in 1997. The option of eliminating the benefit was rejected.
Stewardship and accountability was a concern that has been responded to. To improve stewardship for the CPP and provide for more accountability so that the sustainability of the CPP will no longer be at risk has been accomplished as follows. Federal-provincial reviews will be required every three years instead of every five. Any future improvements will be fully funded.
There have been criticisms to which I would like to respond. Some say these payroll taxes are job killers and why are we planning on increasing the CPP contributions by almost 70% over the next six years.
Governing is about making choices and sometimes these choices are difficult. If the CPP is going to be there for young generations, we have no choice but to start paying our way for the CPP now rather than passing on an insupportable burden to our children. As I pointed out, if we did nothing, CPP contributions would rise to 14.2% by the year 2030. We have held them to 9.9%. The increase in the contribution rate is being phased in over six years to minimize the impact on the labour market.
Unlike the CPP contributions that are a savings toward pensions, EI premiums are an additional payroll tax that finance current expenditures. We have also said that we will bring down the EI premiums as soon as and as fast as it makes sense, and we are doing that as well.
This legislation represents a significant step forward to fulfilling our commitment to a secure Canadian retirement income system. These changes will strengthen our pension system so it will continue to give Canadians the opportunity to build sufficient incomes for their retirement.