(SNIP)
THE CANADI AN CHAMBER OF COMMERCE
LA CHAMBRE DE COMMERCE DU CANADA
2002 Policy Resolutions
Social Policy
Canada Pension Plan Reform
In Canada, we live in a world where you have no direct property right to your most
important financial asset, probably worth more than your house, where the value of that
asset bears no direct relationship to what you had put into it, and where that asset, and the
return on it, is assigned to you arbitrarily and unfairly. The Canada Pension Plan, where
the average taxpayer at 65 years of age has contributed about $200,000, has no legal
enforceable claim to ownership. When we die, our surviving spouse receives only a
small portion of our pension plan and when the surviving spouse dies, the surviving
family receives nothing. This system prevents one of the most fundamental aspects and
the very fabric of pride of ownership of our culture to happen - transfer of assets to future
generations. For most Canadians, our Canada Pension Plan contributions represent the
most significant asset we have created. However, we are unable to transfer this asset to a
surviving generation due to the flaws in the design of the Canada Pension Plan. Even in
our current RRSP and company pension plans we can name a beneficiary in order to
transfer this asset, upon death, to the next generation. A Private Pension would be an
asset owned by the individual and the funds kept within the family. The social aspect of
ownership and wealth building is very important as it enhances the value and quality of
life. Currently, CPP contributors see their contributions as a tax and not as a personal
savings plan. Canadians view employment and their savings and wealth building as a
direct benefit, which may cause higher employment as Canadians see as a sense of worth
to their employment.
Reforming the current pension system will take time, courage, and wisdom--all of this
resting on the shoulders of the Government of Canada. The pension plan can be thought
of as a form of insurance, for which you pay premiums while you are working, against
the predictable risk of a period of your life without earnings later in your life. Such a
system would convert contributions, together with the investment income earned, into
pension benefits in an actuarially fair way. Upon retirement, the pension would reflect
the contributions made, plus investment income, and the length of time one would likely
spend in retirement, except for a small amount deducted to provide a minimum-income
guarantee for those who, through illness or misfortune, had been unable to build up
enough contributions of their own. The current Canada Pension Plan does not achieve a
reasonable trade-off between actuarial fairness and protection against poverty in old age.
Currently the Canada Pension Plan redistributes income from the young (who may be
poor) to the old (who may be rich), often in an inequitable way. Canada and other
countries, like Japan, are no longer pyramid-shaped as they used to be, with a big base of
younger people and few pensioners at the top. Canada's 2001 census shows that the rate
of growth in Canada’s population actually decreased. The Canadian demographics are
becoming top-heavy, with many more older people both in the workforce and in
retirement. The Canadian Pension Plan design magnifies the effect of population aging
by creating incentives for people to retire ever earlier. There are now more people
retiring at the age of 60 than ever before, straining the already over-burdened system.
Today's problems arise largely from increases in pension benefits through earlier
retirement and longer life (enhanced health care system), pushing contribution rates
higher. Take the American contribution rate at 12.4% of pay and compare that to the
Germans who have to pay out 19.1 %. Germany's pension plan is still not self-financing.
For it to be self-financing, the contribution rate would have to be 25%. In Italy the
contribution rate is already a high of 33% of eligible pay. There would be two likely
benefits from privately funded pensions:
1. Extra savings - This would lead to extra growth in investment, which will lead to
higher GDPS. A healthier national economy will ease the distribution struggle between
old and young. Some of the extra savings would go abroad as foreign investments
which would benefit smaller economies, thus enhancing the global perspective and
reducing foreign loans and/or subsidies. Sweden for example, in the first year, was able
to put their public-pension money into private funds, investing half overseas.
2. The Labour Market - One of the best solutions to the economic problems of
population aging is for people to work longer. If retirement incomes depend to a
greater extent on personal savings in pension accounts, then most of the current
incentives to retire early will disappear.
Present pension structures no longer work, as they currently exist. They were originally
established in a more youthful era with relatively few older people who were often poor
and ill, and typically spent only a short time in retirement. In Canada today, older people
are often financially in a better position and in better health, compared to their
predecessors, and are spending around 20 years in retirement. The existing program was
established based on a family of four children. Today, this component is seriously
flawed. We need to reform the Canada Pension Plan.
Canadians need more private funding and actuarially fairer pensions. These changes
would create incentives for individuals to take charge of their own retirement needs
rather than leaving the complete task to the Government of Canada. This, in turn, will
make the provision of public pensions more affordable. The Federal Government would
still play a leading part in pensions. At a minimum, the Federal Government must offer a
safety net, financed via a defined benefit plan through taxation, for those who, for
whatever reason, have not been able to provide for themselves and who would otherwise
be destitute in old age. The Federal Government has to create a suitable framework for
effective private pensions. Administrative costs have to be tightly controlled, and
appropriate tax incentives have to be offered to encourage voluntary pension saving.
The arguments in favor of something like the Chilean model are twofold. First, although
the evidence about higher savings is disputed, private pensions certainly stimulate the
development of financial markets, which in turn appears to spur faster growth. Pension
plans investing in developing economies can also take advantage of opportunities to
invest in financial assets outside of Canada, thus diversifying risk (increasing the foreign
content in RRSPS). Second, it is very clear that Canada and it's pay-as-you-go system is
easy to continue, but difficult to change. However, change is what is most needed, now.
Although the current Government of Canada has promised not to "dip" into the El
program, and as the Canada Pension Plan grows, (as a result of contribution increases and
investment income - estimated to be at approximately $100 billion by 2007) and that as
the debt of Canada increases, we worry that political interference will jeopardize the wise
investment decisions needed to facilitate future Pension Plan provisions, where the
Canada Pension Plan invests large amounts in domestic equities and bonds (again
increasing the national debt through Government of Canada bonds). The risk of political
interference remains because it is possible that a government minister will have the final
say in the overall investment policy.
The CPP Investment Board may be forced to invest into government social Programs,
through which there may be no immediate financial returns to enhance the market value
of the Canada Pension Plan. Bad loans to government programs of municipal, provincial
and federal levels may provide serious negative returns to the portfolio from which it may
never recover. The reasons for Canada to change the Pension Plan are becoming clearer
with encouraging results of other countries. Germany's landmark reform establishes the
principle of private funding in Europe's largest economy. The arrival of the Euro has
intensified the pressure for change (even now there are discussions about a unified North
American dollar).
There will be transitional trouble from the Canada Pension to a combination Canada
Pension Plan/Private Pension Plan, if not done correctly and in a timely manner. The
longer a PAYG pension plan system has been going, and the more generous its
provisions, the bigger the build-up of implicit debt in the system. Because of this heavy
transitional burden, Canada cannot make a rapid switch to a new system.
This would impose most of the double burden on the current working generation , who
have to build up their own funded pensions as well as financing today's pensions for
yesterday's workers. The only practical way to proceed would be to spread the transition
over a long period of time. Five to ten years would be a realistic goal. However, this
would mean that the Government of Canada has to act now in order to ensure that there is
enough transitional time to provide a path to success.
Much needs to be done. The Government of Canada needs to act now-- not only when
the pensions system is heading for a crisis. With the crunch still more than a decade
away, the Government of Canada cannot procrastinate any longer. Patching up an
overburdened PAYG system by cutting benefits or raising contribution rates is no longer
sufficient. Japan's two most recent pension reforms have tried to do this, but have failed
to give people the incentive to provide more for themselves through private retirement
accounts. In Canada, this may explain the drop in the amount of RRSP contributions for
2001-2002. This has contributed to Japan's current economic problems. As the Canadian
public feels uncertain about their future Government pensions, they try and save more
because of this lack of confidence and could encourage weaker consumer spending,
leading to a weaker Canadian economy. As the Canadian public debt is amassed
unnecessarily and surpluses smaller, this will make it even more difficult for the
Canadian government to honor their pension promises of the 2020s and 2030s when the
demographic pressures will become overwhelming. We recognize that the Government
of Canada wants to avoid pension reform because they know it will be deeply unpopular.
However, if the Government of Canada continues to procrastinate, they will be guilty of
failing to fend off one of the most predictable economic and social crisis in history.
The Canada Pension Plan as a pay-as-you-go plan works satisfactorily in youthful
populations - albeit by creating a big debt to future generations whereas privately funded
systems are better suited to aging populations. They help boost investment within
Canada and allow diversification overseas. They would create strong financial and
structural incentives for people to work either longer or smarter and help make capital
work harder - an increasingly important component of the Canadian economy.
Recommendations
That the federal government:
1. Proceed with urgency to consult with those countries and organizations that have
been instrumental in pension reform internationally.
2. Prioritize this issue by forming a task force, reporting back to Parliament and the
Canadian people on the design of an alternative system to the existing CPP which
embodies principles of property ownership, money purchase assumptions, and
investment choice.
3. Provide Canadians with a formal mechanism for input into the task force.
4. Provide Canadians with a mechanism to debate, then choose, which system they
wish for the future, by way of referendum or other formal vote.
5. Proceed on these matters on an expedited basis.(SNIP)
Source: above linked document
Interesting points from this document:
-The Canada Pension Plan, where the average taxpayer at 65 years of age has contributed about $200,000,
-as a result of contribution increases and investment income - estimated to be at approximately $100 billion by 2007
(SNIP)
-Over 82 per cent of Canada’s 22.3 million tax filers earn $50,000 or less and 97 per cent make less than $100,000.
(SNIP)
Source:
http://www.taxpayer.com/pdf/2005-06_Federal_Pre-Budget_Submission.pdf
If we apply some simple math to these figures multiply $200,000 times 22.3 million taxpayers we get $4,460,000,000,000
That is nearly four and one half Trillion
Even given basic interest from that sum say 4 percent is $178,400,000,000
That is one hundred and seventy eight billion a year intrest that figure is half of the total taxation dollars
that are currently brough in by our federal government per year.
Intersting to say the least.
