Mr. Speaker, I will be sharing my time with my hon. colleague from Scarborough East.
We have before the House third reading of Bill C-78, an act to amend the Public Service Superannuation Act, the Canadian Forces Superannuation Act and the Royal Canadian Mounted Police Superannuation Act.
The proposed amendments touch the full range of pension operations, benefits, contributions and plan administration. The underlying thrust of all these proposed amendments is to ensure the long term sustainability and stability of the Canadian public service pension plans.
I propose in my comments to direct my remarks to one particular aspect of these amendments, and that is the proposed changes to employee contribution rates. Before I discuss the proposed changes it is important for me to give a brief overview of the existing contribution rate provisions.
A review of the existing legislative provisions will provide a rationale and context for the proposed amendments. Under the existing legislative provisions employee contributions to the Canada pension plan, the CPP, and the public service pension plans are now integrated. What does the integration mean? It means the existing integration feature is such that the total contribution rate for an employee is 7.5% of pay composed of both the contributions to the CPP and the public service pension plans.
For an employee earning the average wage the contribution of the public service plans would be 7.5% minus the CPP contribution rate, currently 3.5% of pay, which then equals 4.0% of the pay. To the extent that the CPP contribution rates increase there is an equivalent decline in public service pension plan contribution rates to preserve the constraint that the maximum pension contributions equal 7.5% of pay. In the past with periods of relative stability in contribution rates this integrated formula has served the public service pension plans well.
However, under the integrated contribution rate structure the increase in CPP contribution rates beginning in 1987 has distorted the distribution of employee contributions going to the CPP and the public service pension plans. Under the integrated structure the impact of increases in CPP rates has been such that for employees earning the average wage contributions to the public service pension plans have declined from 5.7% of pay in 1986 to 4.0% of pay in 1999.
To reiterate, over the past decade individual employee contribution rates for the CPP have gone up while those for the public service pension plans have declined. What are the implications of this shift in the distribution of employee contributions between the CPP and the public service pension plans?
To this point I have discussed only employee contribution rates. On the other side of the coin I will discuss a little about employer contributions, that is the contribution of the federal government in its role as employer.
Existing legislation for the public service pension plans is such that the employer must ensure that the various accounts for the public service pension plans are credited with an amount equal to the total cost of entitlements accrued by employees in that year. In other words, the federal government is responsible for the total costs of the plan in a given year less the employee contributions, and as a consequence the declining employee contribution rates. The federal government and by extension all taxpayers have had to shoulder an ever increasing share of the cost of employee pension plans.
I will use the pension plan under the Public Service Superannuation Act as an example. Over the last three decades the financing of that plan has averaged approximately 60% employer funding and 40% employee funding. More recently that distribution has shifted rather dramatically.
For 1999 the distribution is approximately 70% employer and 30% employee. Next year in the absence of any changes to the legislation it is projected that the distribution of the financing of the PSSA plan will shift to approximately 75:25, and by the year 2003 it will be an 80:20 split.
The ongoing shift in the cost of the pension plan to the employer is simply not sustainable. It clearly puts the sustainability of the existing plan at risk unless changes are made. It is our intention to introduce the necessary changes to the contribution rate structure to preserve the long term sustainability of the public service pension plans. With the amendments proposed in the bill contribution rates for the public service pension plans and the Canada pension plan will no longer be integrated. In other words, the public service contribution rates will henceforth be set independently and there will be no overall maximum contribution rate.
In addition there will be a two tier contribution rate structured to more directly match contribution rates with different benefit accruals below and above the average wage as defined by the CPP. The government recognizes that there will be a financial impact on employees as a result of these changes.
In order to facilitate the movement to a long term sustainable pension plan environment, the government is proposing to freeze employee contribution rates to public service pension plans over the period 2000 to 2003 inclusive. Over this period employee contributions on earnings below the average wage as defined by the CPP will continue at the present 1999 rate of 4%. Contributions on earnings above that average will continue at the present rate of 7.5%.
It must be understood however that even though federal employees will thus be spared any increases in contribution rates for their public service pensions from 2000 to 2003, they will nevertheless be subject to the Canada pension plan rate increases schedule for that period, the same CPP rate hike and increases to which all Canadians alike will be subject. Through integration of contributions federal employees in effect have been sheltered from such increases in the past. Now they will have to pay them like all the rest of us.
Fortunately the CPP rate is scheduled to stabilize in the year 2004 as a result of good government planning. What will be the public service plan rates then? They will rise in 2004 after being frozen for four years. Maybe not. Maybe possibly but not necessarily. That is important to note.
For the year 2004 and beyond the Treasury Board will set the contribution rate structure with the intention of returning the cost sharing ratio gradually to the historic average of approximately 60:40 between employer and employees. The employer would continue to assume the larger share.
Employee contribution rate increases may or may not be necessary from 2004 on depending on a number of variables. However, any necessary increases would be gradual. For example, members of the pension plan under the Public Service Superannuation Act can rest assured that no increases in their public service pension contribution rate will be greater than an additional 0.4% per year after 2003. If an increase proves necessary in 2004, the contribution rate will still not be more than 7.9% of the employee's salary. That is the previous rate of 7.5% plus the maximum possible increase of 0.4%.
PSSA plan members can rest assured under the amended legislation that their employee's share of current service costs for their pension plan would never exceed 40%. In other words their contribution rates will not be increased beyond the point where they are paying their historic average cost share of 40%. The historical average therefore will also be limited under the amended legislation.
As for members of the other two public service plans under the Canadian Forces Superannuation Act and the Royal Canadian Mounted Police Superannuation Act, it has to be noted that the cost share between employer and employee is not the same and that the employer is paying the larger percentage of the cost. However, the legislation will provide that the contribution rates of participating members to these plans will not exceed those of PSSA members.
Amendments to the contribution rate structure are one component of the package of changes required to ensure the long term sustainability of the public service pension plans. The bill provides as part of the comprehensive package of amendments the required changes in the contribution rate structure to ensure that the public service pension plans will be sustained over a long period of time. I think that is important to note and I would ask all members to vote accordingly on this very important bill.