FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 18, 1997

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call this meeting to order and welcome everyone.

This is meeting 53 of the finance committee. We're studying Bill C-2, an act to establish the Canada Pension Plan Investment Board and to amend the Canada Pension Plan and Old Age Security and to make consequential amendments to other acts.

The members of our round table include, from Queen's University, Professor Tom Courchene, economist, School of Policy Studies; and from the Ontario Municipal Employees Retirement Board, Dale Richmond, president and CEO.

Welcome. The way this round table will work, you will each make a 10-minute to 15-minute presentation. Then we will proceed to a question and answer session.

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We will begin with Professor Courchene.

Mr. Tom Courchene (School of Policy Studies, Queen's University): Thank you very much. It's a pleasure to be in this committee room again. It's been a fair time since I've been here. I see some faces still around, though. It's certainly complimentary to anybody from my home province of Saskatchewan.

I'm going to dump cold water on aspects of the Canada Pension Plan proposal today. I like some of the pre-funding and I like the funded component, but I'm going to focus on the intergenerational equity issue. My paper is called “Generation X vs. Generation XS”. Generation X is the new generation and Generation XS is us, and we're dumping on the young. It will be within the ten minutes.

Now that we appear on the verge of reducing the debt burden on future generations, at least in terms of the ratio of debt to GDP, Canadians appear to be well launched in the direction of saddling the young with inordinate tax rates and user fees. While the focus today is on CPP premiums, the issue transcends public pensions. Post-secondary tuition fees are escalating rapidly and are poised to surge further ahead if income-contingent repayment plans are introduced for tuition.

Moreover, in terms of the three federal income tax rates of 17%, 26% and 29%, the middle income bracket is not only far too high, but it kicks in at far too low a marginal rate, namely around $30,000. If one factors in the average provincial tax rate of roughly 50%, then the marginal rate for a graduating student making $30,000 is somewhere in the neighbourhood of 40%. If you add in the federal and provincial surcharges and the various payroll taxes, we're probably talking about a marginal tax rate of over 50%.

We tenured and older Canadians, or generation XS, are revealing ourselves to be a very selfish lot by turning the tables on generation X, a cohort with nowhere near the employment and income prospects we enjoyed when we were young. Apart from the intergenerational equity issue in all of this, the result will be very costly to Canada, since I believe the highly skilled people among the young will migrate to apply and employ their human capital in a more attractive economic clime. If they return it will be to take advantage of our generous package of benefits for the elderly.

All of this comes to a head in terms of the proposed premium increases for the CPP. It seems to me there's a much better way, on social and economic grounds, to approach CPP reform than what Ottawa and the provinces have conjured up. I recognize the ability to change this bill is very limited simply because it's a signed fait accompli. Nonetheless, I'd like to register on the record my views about all of this.

First, while it's correct to note that the unfunded liability is running somewhere in the $500 billion to $600 billion range, it's also the case that there's a set of already accumulated funded assets of RPPs and RRSPs that is even larger—probably $700 billion. Both of these will come into play as the population ages. What we need information on, and what the finance department has never supplied but ought to supply, is a forward-looking tenure accounting in terms of the resulting overall revenue implications for the soon-to-be golden agers.

Specifically, what are the revenue implications of the $700-billion-plus pool of RPPs and RRSPs? Surely they must be enormous. Why not earmark a portion of these future taxes to deposit in the proposed arm's length CPP investment funds in order to take some pressure off the premiums required for generation X and beyond? After all, the decision to underfund the CPP was a conscious societal decision at the inception of the program.

It is true that the intervening combination of faulty forecasts and program enrichment exacerbated the originally predicted degree of underfunding, but the principal beneficiaries of all of this are those of us in generation XS, not those in the next generation. In effect, the CP underfunding is from an economist's point of view a sunk cost, and therefore it's a generalized tax transfer issue and certainly not an argument for saddling the young and future generations with a negative return on their CPP premiums—negative in the sense they will have less than they would get at market-invested rates. That's the first point.

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The second point is we are still allowing those of generation XS to accumulate funds tax-free in their pension funds beyond the age of 65. This makes no social policy sense, given that these funds are retirement savings vehicles, not tax-assisted investment vehicles. Why not reduce the tax-free limits from 69 now to 65, and dedicate the resulting revenues back into the fund, to again help with the premium reductions for the young?

Third, given the incredible size of these accumulated assets, we need to ensure that they are eventually subject to taxation, especially since they were generously tax-assisted. This would argue for some version of an inheritance tax or succession duties, the revenues from which could again be an ideal candidate to turn over to the CPP pool. Even if this is a modest tax, along the lines of what other jurisdictions have in place, it would be an important intergenerational symbolic commitment to the future of the CPP.

Fourth—and here is the most intriguing point—once the new seniors benefit is in place, every dollar of CPP benefits will probably give the federal government a savings of 50¢, because they are offset against the super-GIS component of the new seniors benefit. Note that under the current system, prior to the seniors benefit, the provinces also receive some of the taxes on CPP benefits, because they weren't offset against the seniors benefit. Under the new system, Ottawa will collect it all.

We keep referring to a $500-billion or $600-billion unfunded liability, when Ottawa in effect will stand to pocket 40% or 45% of this. Why are we asking the young to pay a $600-billion pre-tax unfunded liability so the federal government can pocket about $250 billion? I don't think that's fair to the young, and I don't think this aspect of the CPP has been looked into closely enough.

Once again it makes sense for Ottawa to take some of these revenues it's going to collect on existing CPP benefits, transfer them back into the fund, have the fund grow, and ameliorate the future premium increases.

Nonetheless, it's my view that the next generation should pay their fair share in terms of the CPP, but no more. This would imply, under some rough calculations that I've seen, and after sorting out some of the internal problems in the CPP, something like 7.5% or 8% at market rates, and not the higher premium rates that are now contemplated. Depending on the implications of the previous points I made, it may well be that we could even lower the rates below this, because I think the CPP is what economists would call a societal “merit good”, and I remain strongly in favour of the intergenerational equity aspects of the CPP.

The sixth point is politically unpalatable, as maybe all of my points are, but this one even more so. If the premiums are to be phased in for the younger generations—generation X—the full premiums, in principle, should immediately apply to those of us in my age category, because this is the last chance you're going to be able to get us before we retire, and we're going to get huge benefits from the CPP.

Now I recognize that politicians would never implement anything like this age-related premium, but it's an interesting point to raise, because analytically it drives home the point that there is an underlying intergenerational issue here. We are saddling the young with costs, and many of the benefits are going to be going to the current elderly or soon-to-be elderly.

Seventh, and this is a point you must have heard a lot, the roughly $7 billion that Ottawa is collecting in EI premiums is unconscionable, both from the program standpoint and in terms of the actual EI legislation. At the very least one can reduce EI premiums along with the CPP increases until this fund is exhausted. I'm sure that we'll see some action along these lines.

Eighth, as part of tax reform, RPPs and RRSPs remained as deductions in the mid-1980s, but CPP was made a contribution at the lowest tax rate. This resulted in a direct transfer from the CPP contributors to federal and provincial coffers. Why? Ottawa should return contributions to the status of a deduction, which would in turn relieve some of the pressures arising from the premium increases.

Ninth, beyond these CPP-related measures, the fiscal dividend when it arises should in part be geared to reducing the 26% middle income tax bracket, say to 24%, and also increasing the threshold to which it begins to apply. Recall that this was the intention of the Conservative government in the mid-1980s. The new federal tax rates were then introduced as part of the first round of tax reform. The intention was to use some of the proceeds from the second round, the GST round, to lower the middle tax rate. This did not materialize.

The time has now come for such an initiative. It is part and parcel of the general argument in favour of accommodating the CPP challenge in ways that do not provide incentives for young educated Canadians to take their tax-subsidized human capital elsewhere. In this increasing information age, this is the capital that counts most, and under the proposed CPP changes, it will become highly mobile.

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The tenth point is not in your handout, but I commend the following calculation to the members of the committee. I remember that about five years ago, when I was doing my work on CPP, it turned out that an Ontarian who contributed to CPP at half-pension for all of his or her life—the pension equivalent was half of CPP, or between half and three-quarters—the value of that at retirement was zero, because half of it was taken off from GIS and the other half was taken off from gains. This is not necessarily a CPP problem, but it does emphasize the point I'm trying to make.

If you put the CPP in the larger overall context, you're eventually forcing the lower incomes to pay 9.9% premiums. It will all go to the lower income, because it will be shifted to them eventually, and for what at the end? For some people, it's nothing at the end. This is a tax on jobs and a tax on current income, and I think it's highly unfair.

By way of summary, Ottawa and the provinces are making an enormous mistake by attempting to solve the CPP problem solely in terms of the CPP parameters. The unfunded liability transcends the CPP in the sense that it is a sunk societal cost that must be addressed in terms of larger and more appropriate tax transfer framework. To attempt to solve the societal problem by saddling generation X with the unfunding burden is a bad social policy, and I think it's an even worse intergenerational policy. Moreover, it has the potential for becoming disastrous economic policy.

Generation X will not renege on CPP per se. They will renege on Canada, and will take with them our investment in their human capital, which will in turn seriously diminish Canada's economic prospects, not to mention those of the CPP.

I ask myself why we are doing this to young Canadians. We don't do this to the seniors. We changed their seniors plan, we gave a seniors benefit compared to the existing benefit. We give them the choice to choose either one so that nobody is going to be worse off. But we don't do this for the young. When their interests vest, they're not going to vest with the CPP.

As I said earlier, I think I know my chances of influencing the committee are zero. I knew that before I came here, but I nonetheless think it's appropriate to take a look at the CPP in the larger intergenerational context. Recognize that what's going to make Canada great in the future is the human capital of our young, who we're forcing outside the country by these high rates.

Thank you very much, Mr. Chair.

The Chairman: Thank you very much, Professor Courchene.

We'll move now to Mr. Dale Richmond.

Mr. Dale Richmond (President and Chief Executive Officer, Ontario Municipal Employees Retirement Board): Thank you, Mr. Chairman and members of the committee.

I want to make a few general comments, and then talk about OMERS's position with respect to the Canada Pension Plan. Finally, I'll make reference to the amendments, and I'll do that in a fairly brief way.

I'm going to be actually speaking in support of all of the recommendations that are being proposed in Bill C-2. I particularly commend the consultation process that went on, and what I think was the timely response of the minister in tabling these changes.

As part of the pension plan system in Canada, the Ontario Municipal Employees Retirement System dealt with the consultations from two perspectives. The board itself, which of course administers a very big pension plan in its own right, debated all of the consultation papers and did submit a set of recommendations to the consultation secretariat. In addition to that, Mr. Chairman, the board facilitated the distribution of the material to the 260,000 members that we have. We didn't tell them what to say, but if they had something to say, we asked them to please get it in. We understand that many of the OMERS members did make contact with the secretariat.

Just so members of the committee know exactly where I'm coming from and what my biases are, OMERS is a fully funded pension plan. It's a defined benefit pension plan, and it's integrated with the Canada Pension Plan—and I'll come back to discuss what that integration means. It's financed with equal contributions from employers and employees. We have 260,000 members, as I mentioned, about $30 billion in investments, and we've been established and operating for 35 years as a pension fund, since 1963.

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When the OMERS board looked at the consultation papers and deliberated on the position the Canada Pension Plan was in, it drew a number of conclusions. The first one, of course, was that it supported the continuation of the Canada Pension Plan as a universal, earnings-related, defined benefit plan. They concluded that it should be preserved in its essentials. In the discussions, they really also rejected the need for radical change to the system, while supporting the need for change.

The OMERS board, of course, because of its own experience of being a fully funded plan, supported putting the Canada Pension Plan on a sounder financial basis. But it dealt with a number of principles that it thought should apply, and these were communicated to the secretariat: the changes should be incremental and reasonable to handle; they should not shift costs unduly—and we've just had a little discussion about the intergenerational costs; there should not be a magnitude of increase in contributions that crowds out the willingness of people to contribute to other parts of the pension system—and I'll come back and talk a little bit about that; and finally, it shouldn't harm the competitiveness of Canadian business.

Speaking to the actual amendment of Bill C-2, in terms of the funding, certainly OMERS provides unqualified support for the establishment of the CPP investment board. We've had a long history of experience with an investment board, and of course, as you know, in a lot of cases pensions are paid for either by the contributions or investment returns. Current taxation is not an option for us.

We knew the premiums had to rise, but we wanted to make sure as well that if they rose, they would be at a steady state below the 10% level. That's because we were concerned about what I call the crowding out possibility of people having to contribute more to the Canada Pension Plan and then, in turn, not wanting to contribute as much to their employment pension plans or to their own personal savings.

In terms of freezing the year's basic exemption at $3,500, we think that is going to be gradual in impact; but as the calculations showed, it is important in the funding equation itself. So the board does support that.

To go back to the premium rise, as I said, we were concerned about the possibility of it impacting the contribution rate in our plan.

In terms of the benefit changes, the formula that averages over five years instead of three years can be argued or looked at in two ways. Certainly it's less expensive under that type of scheme, and I think it's more in keeping with the norms of defined benefit plans in terms of their calculations. The five-year averaging is the more common, mainly because it is slightly less expensive.

But because we have an integrated plan at OMERS that takes the Canada Pension Plan into account, both its contributions required but also the payments and the benefits that come out of it under that particular provision we're going to have, as Tom Courchene said, the younger generation and future taxpayers will be paying a little bit more and getting a little bit less. If they're getting less, who do they turn to if they want to maintain the same level of benefit? Do they turn to the employment pension plans like OMERS, or do they turn to their own personal savings? If they turn to OMERS, then we will have a lot of pressure on our plan to increase our benefit structure as the pay-outs from the Canada Pension Plan are diminished somewhat.

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The disability benefits were of great concern as we were talking about pensions, because if disability benefits end up causing the pension benefits to be in question, then the two should be separated. But the types of changes being talked about in the legislative amendments certainly can prevail for a period of time before they have to be looked at in great depth again.

Finally, the stewardship and accountability measures that are addressed in the plan all make a lot of sense, and they move the system towards best practices, which were really needed in the way the plan was administered and the way the funds were invested.

So, Mr. Chairman and members of the committee, all in all, we view this as quite a reasonable, timely, and responsive outcome, and we really do hope the bill will get quick passage and the changes will be made.

The Chairman: Thank you very much, Mr. Richmond.

We'll now hear from Mr. David Stark from the Employment and Staffing Services Association of Canada.

Mr. David Stark (Public Affairs Manager, Employment and Staffing Services Association of Canada): Thank you.

It's a pleasure to be here and it's a pleasure to sit next to Professor Courchene. I'm an alumnus of Queen's University, and the professor is very well known at Queen's and throughout Canada. It is a pleasure to make this presentation to you today.

We are here representing employment and staffing service firms. I am the public affairs manager of the Employment and Staffing Services Association of Canada. We have over 100 members, who collectively have 500 offices across Canada, and the services provided by our members include temporary help, facilities management, long-term staffing, payrolling, and placement services.

We are a major employer organization. We estimate that in 1996 total payroll paid to temporary employees in Canada was somewhere in the neighbourhood of $1.8 billion. We make a positive and strong contribution to the smooth functioning of the Canadian economy.

On the whole, we support the Government of Canada's intention to address the changes that need to be made to the Canada Pension Plan. We support the proposed changes largely. Although the increases in contribution rates will rise steadily over the next six years, we take comfort in knowing the CPP will be intact for future generations of working Canadians.

We also support the Government of Canada's plan to address other important issues over the course of the next two years, such as providing partial pensions for Canadians making a gradual transition from work to retirement. I should say that included within the temporary help workforce are semi-retired or retired Canadians for whom temporary employment is an attractive lifestyle choice.

We are here, however, because we take exception to the proposed increase in the 1997 contribution rate from 5.85% to 6%, which would apply retroactively to January 1, 1997. The 0.15% retroactive increase, of which half is borne by employers, will have a significant impact on the bottom line of staffing service firms and will place pressure on their cashflows.

The reason for this is simple. The Government of Canada announced in the fall of 1996 that the 1997 contribution rate would be 5.85%, so our members based their bill rates to customers on that confirmed rate. You must understand that temporary help companies are employers of record, and as such, they meet the usual common-law tests of the employer. They are responsible for paying the wages of their temporary employees and making the statutory remittances and deductions from wages. Our members pay the employer's share of employment insurance, CPP and QPP; they pay workers' compensation premiums and employers' health tax.

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As you can understand, those payroll burdens must be known in advance so that when our member companies enter into contracts with their customers, they know what their costs are going to be the following year and they can base their bill rates accordingly.

What we have here, I suspect, is that the Government of Canada wanted, with the cooperation of the provinces, to effectively have this bill agreed to and passed through the House a year ago. That didn't happen; they didn't reach an agreement. So in mid-February the finance minister announced that there would be a retroactive increase in the rate. Well, a number of our members had already conducted business in 1997 or had already entered into contracts based on the 5.85% rate, and now they are facing significant costs.

I must say too that the longer this is delayed.... We're now into the latter part of 1997, and the costs are mounting, assuming this bill is passed without a key amendment, and that would be to maintain the 1997 rate at 5.85%.

What are the costs? We estimate that the cost to our industry of the proposed retroactive Canada Pension Plan increase will be $1.2 million. That is a significant hit that employers will take. We estimate that the cost to employers in Canada, except Quebec, where the 1997 rate is currently at 6%, will be $201 million.

We calculate this figure as follows. We got from Statistics Canada the size of the total paid workforce in Canada minus Quebec, which is 10.7 million. You multiply that by $25,000, which is the Canadian average annual employment earnings less the CPP year's basic exemption of $3,500, and the result is $268.7 billion, which is the total gross income earned by Canadians, except Quebeckers, in 1996. Assuming that all factors are the same in 1997, you take the total 1996 income of $268.7 billion, multiply it by 0.00075, which is the employers' share of the retroactive increase, and you arrive at the figure of $201 million that employers will take.

As a recommendation to resolve this problem, there are several key things here. In my memory and review of issues over the years, I can't recall a time when a government has imposed a retroactive increase in a payroll burden. We believe the announcements for 1998 payroll burden should be made in the fall. Companies are then able to anticipate the increase in advance, before they enter into contracts with their customers.

This next point is key to this bill. Obviously, maintaining the 1997 contribution rate at 5.85% would affect the projected revenues in the CPP account, and it would throw your proposed contribution schedule out of whack. We believe the proposed contribution rates for future rates for future years should be adjusted upwards slightly to offset the loss of revenue in 1997.

A lot of this money, as a result of the retroactive increase, cannot be recovered by our members or other companies in the contract service sector, such as contract cleaners, food service firms, and building maintenance contractors, where there is a high degree of labour—where in fact labour is the key cost in running the business. In our industry and in those industries I've just mentioned, it's roughly 75% to 85%. So, as you can understand, this is a substantial hit that our industry will be taking, and quite frankly, it is going to place some strain on the cashflows and profitability of our member companies.

Jeremy and Meredith, who are members of our organization, have a couple of other points to add.

Perhaps, Jeremy or Meredith, you could comment on the impact this will have on the federal government.

Mr. Jeremy Ingle (Employment and Staffing Services Association of Canada): I've spoken to some people in the purchasing and contracting areas of the federal government, and they are absolutely horrified, because most government contracts are written in such a way that in any change in legislation the supplier to government is entitled to claim for the increase in cost.

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Under normal circumstances that's not difficult. That isn't a great strain. It's a nuisance and it happens. But doing it retroactively is going to cause complete and utter chaos, because, first of all, there are going to be hundreds of thousands of invoices that will have been issued during 1997 that will have to be checked and recalculated. The amount of work to determine how to recalculate those invoices is completely disproportionate, simply because we're talking about a selling price to the government of an item of service but here we're having to calculate the effect on that selling price of the labour content. So we're going to have an enormous number of government employees having to do rate assessments on every single invoice that's sent out to them.

Procurement guys were horrified when they heard about this. They said that it's going to involve them in an enormous amount of work.

We, as an industry, are going to be able to reclaim this with government, but the cost of us both doing it is enormous. What we're saying is that if we don't do it retroactively, there's very little cost and very little trouble to both sides, and if you raise the rate next year, then we minimize the cost to both sides. You don't have the administrative aggravation—and, believe me, it is a nightmare on both sides—but you still get the money. So we can't see any real reason why you can't collect the money next year instead of retroactively.

In actual fact there are some advantages for the government to collect it next year, because the total Canadian payroll will increase next year over 1997, so you will be collecting over a bigger base, so you will actually get more revenue. You could argue that that may not make up for the loss of interest, but I suspect it would. If somebody did the calculations, if you applied the same retroactive rate and added it to 1998, plus the additional payroll that you'll be collecting it from, you would find that you'll actually be better off and you'll save everybody an enormous amount of trouble.

The other thing is that we really have to do this pretty quickly, because, as you know, a very large percentage of Canadian business is computerized and when we run our payrolls on January 1, we have to have this number plugged in. If we don't have the new number plugged in, and you haven't announced it and told the software companies to do their calculations based on that, we're going to be faced with even more of a problem, because then we're going to have to run the first bit of this year on something that we don't know about. The software companies won't know about it either, and they won't be able to program their software to issue to their clients in time to get our payrolls right.

So if we continue with this retroactive proposal, we're heading for complete and utter administrative chaos. I know that a lot of people haven't really looked at it and said, well, this is how we want to do it, but what's it going to do? I'm trying to enlighten you a little bit about the sort of aggravation it's going to cause everybody.

The Chairman: Thank you, Mr. Ingle.

Mr. Egan, do you have anything to add?

Mr. Meredith Egan (Employment and Staffing Services Association of Canada): Just what has been said with respect to the cost to both the companies and the federal government of receiving that money and us going back and re-invoicing all of those individual contracts.

The Chairman: Now we'll move to the question and answer session.

[Translation]

Mr. Crête, do you have a question?

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ): Mr. Courchene, I must congratulate you on your brief, in which you set out a broader approach not limited to the Canada Pension Plan. I have two specific questions.

On page 3, you say that older Canadians should immediately be asked to pay higher premiums in an attempt to strike a balance with younger generations so that they do not have pay as much for something they won't receive. I would like you to say exactly how, in practical terms, such a system could be put in place.

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Second, you suggest that the $7.1 billion surplus in employment insurance premiums should be put back into the hands of contributors since we have already reached the desired surplus level and the premiums are adding up. Have you calculated the impact of this kind of measure on the premium rate?

[English]

Mr. Tom Courchene: In terms of the first question, about the age-related premiums, when I talked about it I said this was probably not something politicians would jump at, but it does make sense from the intergenerational issue I'm talking about.

For most of my life I've paid 3.6% premiums on CPP—1.8% employer, 3.6% me—and now it's about 5%. But you're not going to catch me no matter what. I'm still going to come out on top of the CPP compared with my grandchildren. If you wanted to catch me, if you're going to phase in these premiums to 9.9% in 2001 then it might make sense academically and equitably to make sure the 9.9% goes immediately to me. So you still get me, in five or six years, to contribute.

Now, you'd have to watch out. You'd have to put mine up to the equilibrium at 9.9%, but in terms of the employer side I think it would have to be the same across. The employer side would go up gradually. Otherwise, you'd have some preference for employers to hire older or younger people. I didn't want that.

The point of this argument is not so much that you're going to do it; it focuses the issue on the intergenerational aspect of it.

The second point, I must confess, I missed part of. Were you talking about EI premiums?

[Translation]

Mr. Paul Crête: Yes. I was talking about the employment insurance premiums you refer to on page 4. You say that the $7.1 billion surplus should be given back to contributors. I thought you said that the desired surplus has already been achieved and that there was an additional surplus. If we give the money back to contributors, what effect would that have on reducing the premium rate?

[English]

Mr. Tom Courchene: Calculations I have seen put the equilibrium rate for employment insurance at $2.20 for an individual versus the $2.80 and $5.90 we have now.

Let's say it's $2.90. That's 70¢ for an individual. Corporations pay 1.4%. It's probably about another $1.00, so we have $1.70 of extra funds. If you're starting at 5% you could go to 6.7% without any increase in overall payroll taxes.

In the context I'm arguing, you have not only an intergenerational problem here but also a problem of not making the United States too exciting for young Canadians. How many more Microsofts do we want perched at the University of Waterloo and other universities, trying to buy our students?

I'm all in favour of having free choice for students, but we should at least try to make sure we're not forcing them out by having their tax rates too high. We've invested an enormous amount of money in those people. If they leave, that's a really big cost. The CPP goes down the pipes if we lose their premiums.

I thinks it's going to be progressively more difficult for Finance Minister Martin. Whatever fund he was talking about, he's already achieved, so I think this is a fairly reasonable assumption I'm sure other people besides me will have made.

[Translation]

Mr. Paul Crête: It was said at another committee sitting this morning that a slight reduction in payroll taxes would not necessarily have a direct effect on employment and that it's mainly payroll tax increases that have a negative effect on employment.

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Do you have an econometric model or any information that would enable us to determine more precisely the impact of this kind of measure on employment?

[English]

Mr. Tom Courchene: I have in my office at home, unfortunately not here, a paper by Dale Orr. Maybe it was Dale Orr who was here this morning.

Anyway, Dale surveys the literature and comes up with some estimates of the likely impact of the employment insurance premium staying at $2.85 or $2.90 rather than going down to $2.20. I don't have the numbers offhand; I think it's between 100,000 and 200,000 jobs. But it tapers off after about six years and goes back to equilibrium because this all gets shifted down to the employees. They eventually bear the whole cost of it because when capital is mobile and labour isn't.... We can talk about the 9.9% payroll tax being split between employers and employees, but good economics will tell you that after five or six years it's all effectively borne by the employees, because capital is mobile and makes sure it gets its rate of return.

I can send you this paper, Mr. Crête. It's available in my office and it has a range of different estimates. I can't be more precise than that right now.

[Translation]

Mr. Paul Crête: Thank you.

[English]

Mr. Lorne Nystrom (Qu'Appelle, NDP): I want to ask Professor Courchene two questions, but first of all I would address a question to the group with you, Mr. Stark, in particular Mr. Ingle.

How soon would you have to know from the federal Department of Finance as to whether or not they would accept your proposal in terms of having time to make the adequate arrangements in terms of software and so on? What's the timeframe we're left with here in case there is—

Mr. Jeremy Ingle: There are two areas here. The first thing is if we knew there was not going to be a retroactive increase, I guess January 1.... I can't speak on behalf of the software companies who write the programs for most of the payroll programs in Canada, but we normally get ours probably the week before. So they're usually pretty pressed. I suspect they'll probably need two to three weeks to convert their programs and get them distributed with the new rate in. They should probably know before Christmas.

As far as the other side of it goes, once we know by the last day of December that there's no retroactive increase, the pressure is off. It's not a big problem.

Mr. Lorne Nystrom: If I understand your proposal accurately, you're talking about then collecting roughly the same amount of money but a bit more because the labour force will be higher starting January 1, 1998.

Mr. Jeremy Ingle: Yes.

Mr. Lorne Nystrom: I don't want to be devil's advocate here, I just want to ask a question. I'm not sure you'd call it retroactive then, because maybe Jim worked in 1997 but he doesn't work in 1998, so you'd be collecting it in some cases from some other people. Is that not the case?

Mr. Jeremy Ingle: That would be the case, but it wouldn't be any different from any legislation that wasn't retroactive. Legislation applies from the day.... So yes, you're quite right.

Mr. Lorne Nystrom: I'm sure the chairman will take the initiative to check with the Department of Finance to see whether or not they might entertain some action on this front.

The Chairman: It's duly noted, Mr. Nystrom. Sure.

Mr. Lorne Nystrom: I have a question now for Mr. Courchene. I'm really intrigued by your paper about the clash between generation X and what you call “generation excess” and the fear you have of young people being driven out of the country. Do you have any up-to-date information as to whether or not there is an increase in the exits of young people out of the country?

Also, on the tax brackets, I certainly agree with you. We used to have in this country a number of years ago a large number of tax brackets and now we're down to three. The middle bracket is too high and I'm glad you reminded us of that. Would you recommend in addition to decreasing the size of the middle tax bracket from 26% to 24% an extra tax bracket or two? Would that be a fairer way of distributing more evenly over the system?

The last comment—because I don't think I have much time here—is about the fact that you would like to have a revenue study from the Department of Finance, which is of interest to me as well, because we never really did have any information from the finance department about the impact on seniors' incomes going up to the year 2030. That certainly would be very useful in terms of the RRSPs and the changes anticipated in the seniors benefit and so on.

There are three areas to comment on.

• 1630

Mr. Tom Courchene: On the last issue, I think it's highly interesting to get these data and look at them in the general intergenerational context. As people age, there will be all the increasing medicare payments. This is a huge societal problem, and CPP is part of it. My concern is that we're trying to solve the unfunded liability of the CPP solely within the CPP.

We have all these other intergenerational programs. We ought to be able to move in and out of them, because solving the intergenerational problem solely within the CPP means that we're saddling the young with a higher-than-market rate. If there's no social policy aspect to that unfunded liability, then why not go for a private system? If you want people to bear their full costs, go private. Go to an RRSP. I think Reform has an excellent program on that score.

But if you believe, like I do, that there some intergenerational social policy attributes to it, then handle the social policy issue in its right context. It is an intergenerational issue. There's room to use the fiscal dividend and all sorts of other devices to try to get that premium rate down and make it a true intergenerational equity issue. After all, when the program started out, the first couple of groups of people who got benefits were financed by the young people, and they really benefited.

Now we've gone to the other situation in which some of us in generation XS have to go the other way and help out some of the young now in order to maintain this program over time. So part and parcel of the potential exit rate is whether this is a general taxation level.

I was arguing that I think the marginal tax rate for people—I think the 26% rate kicks in at $29,000 or something—is just very low for the high taxation rates in North America. It would be different if we lived in France, but we don't happen to live in France. Our neighbours aren't the Germans, our neighbours are the Americans. We have to recognize that labour is highly skilled and mobile.

In the same conference, there was an excellent paper by Clément Gignac from some accounting firm in Quebec. He may be from Lévesque Beaubien, an investment firm. He made a very powerful case for reducing marginal tax rates in Canada. It was precisely because young Quebecers were leaving the country. All I'm saying is that the CPP is putting that in.

The thrust of what I'm saying is that we have this fund there that I like and we're pre-funding, which is good. What I'm saying is that there are other pools of revenue that could be put into that fund that will bring the steady-state rate in the CPP down to maybe 8%. If we're looking for ways to invest the fiscal dividend, one of my choices would be the future of our country, which is the next generation, or generation X.

I think I've touched on all your questions, but I don't think I answered any of them.

Mr. Lorne Nystrom: The only one you didn't touch on is this: do you have any up-to-date statistics about young people leaving the country. Is it a worsening problem? Has it levelled off a bit? It might be useful if you have some information. If you don't, I understand.

Mr. Tom Courchene: My guess is that it's a worsening problem that's helped out a little bit by the fact that thanks to Finance Minister Martin's fiscal framework, Canada is finally working well and our job prospects are rising. But job creation in the U.S. has been phenomenal, and we just have to make sure that we provide equivalent opportunities in Canada for our youth.

I could probably find out who knows these numbers. I have all sorts of anecdotal evidence from my colleagues whose kids graduated from Canadian universities and went south. They may come back. I can't be more specific than that right now.

The Chairman: Mr. Courchene, if I could just piggyback on Mr. Nystrom's question, I often hear about brain drain, which is an issue that of course concerns all Canadians. One issue that we never talk about concerns all the young professionals who also come to Canada from other countries. That's essentially brain drain from other countries. That also occurs in this country.

Mr. Tom Courchene: Right. Of course it does.

The Chairman: Okay, that's just a point.

Mr. Tom Courchene: No, it's very important. There's some unfairness in all of this in the sense that we go around the world picking up skilled talent, and when they leave, they burden their own countries with the costs of them not staying, in the same way as when our young citizens leave, if they do, they burden the taxpayers with some moneys that were expended.

• 1635

At some point we should probably attempt to have some international conference on sorting the economic implications of the brain drain, but I don't think we're there yet.

The Chairman: Well, professor, you have to agree that when you look at the depiction of this particular challenge that countries face in relationship to Canada, it's always the fact that people are leaving our country that is highlighted. In articles that I've read they never talk about the people that come here from other countries that are educated, that are highly skilled, that produce high value at a project, that generate well. They avoid that particular side of the argument, which I think is equally important, particularly when you're dealing with a global marketplace.

Mr. Tom Courchene: I agree.

Mr. Jim Jones (Markham, PC): I like the notion on page 3, where you say that generation XS should go to 9.9%.

Mr. Tom Courchene: I don't think I say that, but it should pay a fair return.

Mr. Jim Jones: Well, I think you've said that they should go right to the top level. The older—

Mr. Tom Courchene: Oh. Whatever top level we're going to have. Right.

Mr. Jim Jones: Right. Whatever the top level is.

The other thing is that we have a surplus of $6 billion from the EI that's going into the general revenue fund, so a lot of people that have appeared in front of us have agreed that maybe we should be offsetting some of the premium increases with premium reductions in EI.

Mr. Tom Courchene: Right.

Mr. Jim Jones: If we went right to the top, wherever we had to go to, plus we offset the EI premiums, would that have an impact on jobs in Canada in this sector, and do you have any comments on the two? I think we wouldn't have to go to 9.9%; we'd have to go to something a little bit less than that, but I feel that everybody should be paying their fair share in this. It's not just the future generation. I'd like to know from an impact on jobs perspective what would happen if we went right to the top rate.

Mr. Tom Courchene: I'll have to answer in the same way as I did to Mr. Côté. I'll get you the paper tomorrow. I just don't have the answer in front of me.

In the short run it's a significant impact. Over the longer term, because these payroll taxes get essentially down to where labour bears them, it sort of evens out, it sort of goes back to equilibrium. It's the short and medium term impacts that are significant.

Mr. David Stark: From the studies I've read—an excellent Bank of Canada study was published a couple of summers ago and I believe the OECD has recently done some work in this area—I think payroll taxes are job killers. If the levels of payroll taxes are too high, then it affects the incentive to hire somebody. However, we do acknowledge that unless the premiums to the CPP increase we're not looking at a pension system that will be affordable or sustainable.

I do think, however, that, yes, because there is some $6 billion in the EI account, the EI premiums should be reduced. I think several organizations within the business community would make the same argument.

Mr. Jim Jones: They talk about this fiscal dividend. Well, the first $5 billion to $6 billion of any surplus on the fiscal dividend is going to be generated from the EI fund. That's going into the general revenue fund. So I feel that for the first $6 billion we should be reducing EI premiums. So that would probably eat up the increases of the pension plan for the first year or so. Then maybe what we should be doing, instead of trying to spread this out over six years, is trying to get to the top level, whatever that is, as quickly as possible, whether it's in one or two years—providing that we also don't look at the EI premiums as general revenue to generate new programs instead of saying that EI is being collected as an employment tax and that Canada Pension Plan is an employment tax, and somehow the tinkering should be done between these two funds.

• 1640

Do you think we should procrastinate over six years, or providing that we did the tinkering with the EI, that we should try to get to the top level and preserve the future generations and have the current generations pay for it, too?

Mr. Tom Courchene: Well, I think Dale Richmond, from OMERS, would probably be a better person to answer that.

What is clear is that the sooner the pre-funding, the lower the ultimate premiums are going to be, simply because you can benefit from the earnings on the pre-funding.

My own view is that's a pretty big shock, to go from 5% to 10%.

Mr. Jim Jones: It might not have to be.

Mr. Tom Courchene: You wouldn't have to go that far if you brought EI down. So that's a way to help escalate it along. But the view I've been articulating is that 9.9% itself is too high and we should find other ways of putting some other incomes into that investment fund to help keep premiums even lower still.

The Chairman: Mr. Richmond, would you like to add anything?

Mr. Dale Richmond: I can only reflect on the experience of our fund. We fund pensions now. Contributions for our benefits are really quite favourable, and about 70% to 80% of the pension cost is funded from investment earnings. But that's a fully funded plan. We never intend to do that with the Canada Pension Plan. But it shows the power of the equation.

The Chairman: Thank you, Mr. Richmond.

Mr. Jones, do you have any further questions?

Mr. Jim Jones: No, not right now.

The Chairman: Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you. I want to address a couple of questions to Mr. Courchene and also to David Stark.

Mr. Courchene, in your presentation and in your written transcript you paint kind of a pretty dramatic picture here, talking about the $30,000 taxable income and adding the effective cost of CPP and the effective cost of EI, and so on, and lo and behold, we come up with what you describe as a tax grab on earned income to over 50%. It's very dramatic, and you went and built the rest of your presentation, concluding that we're going to have this massive brain drain of youth because of this 50% rate.

If it sounds too good to be true, it probably is. So I'd like to go through with you very quickly the calculation of a tax return of someone earning $30,000: 17% federal is $5,136; the non-refundable rate—

Mr. Tom Courchene: I'm talking marginal rates here; I'm not talking average rates.

Mr. Paul Szabo: Well, hang on for a second. So that people understand, the inference here is that $30,000 is somehow up there getting.... Let me give you the benchmark starting point. The federal tax is $5,136 on $30,000. There are the non-refundable tax credits, being your personal exemption or personal tax credit, your EI and CPP premiums, all of which get a tax credit of 17%. So that's $2,170, bringing you down to $2,966. The surtax thereon at 3% is $90, bringing it up to $3,056.

If we assume a provincial tax rate at 50% of the federal taxes paid, that brings us up to $4,584. So the income taxes paid by a $30,000-a-year income earner is 15.28%, taxes as a percentage of $30,000.

If you then add the CPP and EI premiums paid, being $1,325 and $900, you bring it up to $6,809, which is 22.7% of a $30,000 income.

Now, I understand.... And it's a sleight of hand here to say we're talking about marginal rates, but you also have to understand that the EI premium and the CPP premium hit a ceiling of income level. So in terms of your argument—and I calculated it out—you have to assume the highest marginal rate on every dollar between $30,000 and $35,000 a year. You have to assume they're self-employed and are thus paying both parts of the CPP and both parts of the EI, plus a 3% premium, getting close to 50%. It's not possible, okay?

• 1645

The fact is, our youth are not being driven off because of the taxes. In fact, the difference between today's CPP and the proposed, to that $30,000-a-year earner, would be $586 per year.

It is something, but I can assure you, sir, it is not enough for young people leaving university to take off to the U.S. when you consider the differential in the social safety net provided.

Maybe you'd like to comment.

Mr. Tom Courchene: Economists work on the margin. I never even considered an average tax rate. It means nothing to me. Marginal tax rates are what drive people.

I'm not saying everybody's going to leave. On the margin, our taxes are getting perilously high, I think. We're going to lose some of our capital.

You're quite right to say that the average tax rate for a person that low is nowhere near the figure I quoted. But if you want to look at average tax rates, what percentage of income flows through the Canadian governments, 45% or whatever? The average tax rate for all of us is about whatever that figure is.

Mr. Paul Szabo: However....

Mr. Tom Courchene: Yes—however.

Mr. Paul Szabo: I think you would agree that for the ordinary Canadian, what really matters is how much comes out of here. This, sir, is the average tax, not the marginal tax.

I would like to actually speak to David.

Is your dad Jack?

Mr. David Stark: Yes.

Mr. Paul Szabo: Your mom was Rosemary.

Mr. David Stark: That's right.

Mr. Paul Szabo: I'm sorry about her passing. She was a wonderful lady.

I agree with your presentation and with your colleague, Jeremy, with regard to things. I spent a lot of years in corporate life as a corporate treasurer, etc., dealing with the payroll side. It is a nightmare, even if you didn't have to go back-bill, just to touch the system, with that ripple effect.

I think you've made a sound suggestion, and I'm going to pursue it on your behalf. You're the first ones to raise it. I congratulate you for that. I think we have to look at the ripple effect, not the optics of a minuscule change to get a round number. I think that's something we can do. We all have more than enough other work to do. So I do agree with you there.

With regard to the EI, however—and this is something that has come up before—I'd be interested in your thoughts or reflections on the fact that should you, say, fund any portion of the unfunded liability or benefits or rate reduction through some type of a subsidy from the notional EI surplus, it does increase the federal deficit, all other things remaining equal. In other words, we're all going to have to pay anyway, because they're going to have to make it up in other ways. It's almost a circular argument, in my view.

The way I feel about it—and I'd be interested in your feelings—if I look at CPP in a tunnel I can make all kinds of arguments that it's not fair here, there and all the other stuff, but if I look at the broader spectrum, in fact the whole basket of things, there is a process of arbitrage or equilibrium that says there is only one taxpayer, ultimately, regardless of how many levels of government you have, and that if you touch this, then you affect something else. It's Newton's law applied to finance.

It may be more problematic to try to deal with the unintended consequence of increasing a deficit. It may have some consequences that you may be even more dissatisfied with.

How strongly do you feel about the EI premium subsidizing CPP?

Mr. David Stark: In the short term, I don't feel so strongly, because I realize that we're not out of the woods yet. Until this fiscal dividend is a reality, then I think we will want to turn our attention to where we should spend that fiscal dividend.

Lowering EI premiums is one option, and increasing RRSP contribution rooms is another. Lowering personal income tax is another option.

I hear what you're saying. In the short term, I'm not making a strong case for it, but I think in the long term, when we have this fiscal dividend, let's just look at those areas I've mentioned and see what we can do.

The Chairman: Thank you, Mr. Szabo, and thank you, Mr. Stark.

Monsieur Crête.

• 1650

[Translation]

Mr. Paul Crête: I would like to understand this better. Employment insurance contributions are collected from people who earn $39,000 a year or less. So if there is a reduction in employment insurance assessments for these people who earn $39,000 or less, that would work to the advantage of young people because the majority of young people are in this bracket. Contrary to what Mr. Szabo says, it's not always the taxpayer who pays: it's the person who earns $39,000 or less who contributes to unemployment insurance. All those whose salaries are greater than $39,000 are not helping to fight the deficit in this way. In these circumstances, couldn't that have an equalizing effect?

[English]

Mr. Tom Courchene: I got 90% of it, but I don't have an earpiece.

The Chairman: Can you repeat the question? But before you do that, can we get—

[Translation]

Mr. Paul Crête: My question is for Mr. Stark and for Mr. Courchene.

Mr. Szabo said that it's always the same taxpayer who pays, but, in practice, if employment insurance premiums are reduced, people who earn more than $39,000 will receive no benefits. By reducing premiums, wouldn't we be contributing to a higher degree of equality among the generations because the salary of most young people is less than $39,000? Wouldn't this be one way of ensuring that high wage earners continue to contribute and do not benefit from this reduction?

Mr. Stark said this was not necessarily a good way, but the basic assumption that it's always the same taxpayer who pays is not what actually happens. Employment insurance comes from people who earn less than $39,000; those who earn more don't contribute, even if they have additional income. So we're making people who have less income pay.

[English]

Mr. Tom Courchene: It certainly is the case that the contribution rates in both employment insurance and Canada Pension Plan are income-related. Because of the exemption under the CPP, the average rate rises to whatever the rate is now, 5.5, and then it starts tailling off on average going toward zero.

But at the margin—when we get back to the average in margins—if the rate is 5.5 on the margin, you're paying 5.5% until you hit the exclusion point, and then you're paying zero on the margin. But you can still, if you want, calculate an average throughout that and what your effective average rate is.

So we do have this system, and there are a lot of recommendations relating to what I think.... In part of the early papers relating to CPP, there have been some people arguing to extend the year's maximum employable earnings much higher. Some of them were even saying put the premium at a reduced rate on all payroll.

This problem exists, and it makes the system a bit more regressive than it would be if there were a flat premium across all payroll. I think that Canadians have generally accepted this, although you could certainly argue that it's a more regressive system than one that has a lower tax rate applicable to the entire wage.

In order to get at that regressivity, you'd have to look at what happens at the other end in terms of the benefits. I've given you a case where a couple of years ago people earning an equivalent of half a Canada Pension Plan really didn't end up getting any extra income when they retired at 65 because it all got taken away in Ontario by the GIS, which is a 50% tax, and the gains in Ontario, which is also a 50% tax. I think that's just a problem with the Ontario system maybe, but those things make a difference. The average on marginal rates differs, depending on your income level.

• 1655

The Chairman: Thank you. Mr. Jones.

Mr. Jim Jones: Thank you, Mr. Chairman.

I'd like to ask the question again that Mr. Szabo asked on the UI rates. Right now $6 billion is going into general revenue. Any surplus that is going to be generated will probably help fund new programs. Are you saying you would just as soon have that $6 billion fund the new programs or have that $6 billion to help offset the CPP premiums? You've said you didn't think it was important.

Mr. David Stark: In the short term, what I'm saying is I'm not going to make a strong argument that this is what we should do, because we don't know how large this fiscal dividend is going to be.

Mr. Jim Jones: The fiscal dividend is going to come from your EI for the first $6 billion. Your first $6 billion is going to be EI surplus.

Mr. David Stark: The other thing we have to be mindful of too is what happens when the country heads into another recession.

Mr. Jim Jones: But do you agree that EI should be self-funding—should stand for employment for that instead of being funding for other programs? So you reduce your EI because that's all you need to collect, and if it has to go up it should fund itself.

Mr. David Stark: Sure, it should be self-funding, but let's just make sure we have enough in the account to offset.

Mr. Jim Jones: So you don't mind it being used for funding new programs that don't have anything to do with employment.

Mr. David Stark: Feel free to jump in, guys.

There are other aspects that are part of employment. There are the training programs that I believe are funded through the EI account.

Mr. Jeremy Ingle: I think the general rule should be if you collect money in order to fund something that's employment-related, you shouldn't spend it on something not employment-related.

Mr. Jim Jones: Thank you, I agree.

Mr. Jeremy Ingle: I don't think that's very different from collecting all sorts of taxes that are specific and spending them on something that's unspecific. I don't think this is any different, to be honest.

When I lived in the United Kingdom they used to collect what they called road-front tax, which is collecting tax on vehicles. They had a huge surplus, and the spendthrift governments used to spend it on everything they could possibly think of. It had nothing to do with the upkeep of the roads. The same principles I believe apply to most forms of taxation. If you're specifically taxing something, you should specifically spend it on that and not something else, because it's fraudulent to the taxpayer to do otherwise.

The Chairman: When you have a deficit, and we did in the past recession in the so-called UI account, was it okay for the government to finance that? I just want to know.

Mr. Jeremy Ingle: I'm not talking on behalf of my industry now, I'm talking as an individual. I can't talk on behalf of the industry on this matter because I'm not prepared.

The Chairman: Let me rephrase it then. If we can't finance it, should we be raising, like the past government did during a recession, the premiums? Don't you think we should be giving some form of either stabilized premiums or in fact premium relief at a time when the economy is going through a downturn so you're not burdening firms with a further form of taxation?

Mr. Jeremy Ingle: Yes, I do. Basically I think if effectively you borrowed from one thing to get you over a problem over a period of time then you should pay it back again. That's what you're saying. We borrowed it out of one fund when we were in deficit, now we're putting it back in again. That seems like good economic sense.

The Chairman: I participated in the restructuring of the Unemployment Insurance Act when we changed it over to the Employment Insurance Act, Mr. Crête. You always need to modernize the structure because of the things that have occurred in our economy, and I tell you, it's not that easy.

• 1700

Having said that, I also want to say that some of the statements I hear about the fact that you shouldn't be using money to finance whatever is unacceptable when you think on the other hand that it was okay to finance the UI debt.... You can't have it both ways. There has to be some consistency in the argumentation.

Yes, Mr. Courchene. I knew you were going to get into this one.

Mr. Tom Courchene: I accept the point you are making. It was inappropriate to raise EI premiums—or UI as it was then—in the 1990s recession. That's why I think most Canadians have been satisfied with the finance minister's using EI premiums for a while to generate a pool—it's a virtual pool, but nonetheless it's a pool—to prevent in any future recession having to raise premiums. The point I think we're making is that right now he has exhausted the limit he set for the pool. Now you have excess revenue beyond the initial amount needed for this pool.

The Chairman: Actuarially it's $15 billion, right?

Mr. Tom Courchene: It started off at $5 billion initially in 1995 or something.

The Chairman: Last year I think there was a decision in an actuarial report that actually stated it was $15 billion. So we're not there yet, or I should say the government is not there yet.

Mr. Tom Courchene: Well, we're pretty close.

[Translation]

Mr. Paul Crête: We don't have any actuarial studies on employment insurance. Two weeks ago, the Auditor General called once again for a separate account so that it could be evaluated. This morning in the Human Resources Development Committee, the majority refused to recommend that this type of separate account be established. It is a point of honour that justice appear to be done and that we know what the acceptable maximum is. No one is doubting that we need a surplus in the fund to enable us to face the next recession or other events, but how do we determine the amount of that surplus? We're talking about it here while we consider legislation on the Canada Pension Plan because it's directly related to employment; there is a link.

All payroll taxes have an effect somewhere down the line. For the moment, we don't have the data that would enable us to say what the future will be, if there is a surplus, what the acceptable amount of that surplus should be so that we can make the adjustments based on the other increases that occur.

[English]

The Chairman: Does anybody want to comment on the comment? Mr. Iftody.

Mr. David Iftody (Provencher, Lib.): Actually, I wanted to ask the same question of Mr. Courchene that the chair did, but I won't. I made a note at the top of your presentation where you said that it was immoral to take funds from the surplus for other areas in government, but I think that's been exorcized, and I won't go there.

I was interested in your suggestion about tapping into the $700 billion in your estimate of accumulated assets under the RRSPs currently being put away as with the baby boomers—I guess that's probably a good way to describe it—and the revenues that will be accruing in that particular fund, and moving that through some tax instruments to try to reduce the collective burden of the $600 billion that you say will be passed down to a younger generation, presumably those around 30 years of age right now.

I think your thinking on that is quite consistent, for example, with some of the research done by David Foot in terms of his work with the growing population within that age category who will, in the next ten years, be coming into a great deal of retirement income.

If it is possible for a government to consider tax instruments to move some of that money away.... To deal with the liability is one suggestion, and I think it's a good one. And if we have a number of those people, particularly in the last three years, who have increased their returns on their mutual funds and these kinds of instruments, wouldn't it be also true that if this large group in the Canadian public will be coming to that retirement age category over the next ten years and have these RRSP funds available to them and their mutuals—this is income that is into the family now—they are much more secure than the retirement group right now? That would lower the benefits we would have to pay to them, ostensibly, which would therefore lower the liabilities.

• 1705

So rather than adding a tax, why not just encourage them to continue to put away for their retirement, as they have properly been doing over the past number of years, and say, look, if you have this retirement income when your RRSPs are due in 10 or 12 or 15 years from now.... Why move to another tax instrument? Why not just say, look, you've got that income there now, we're happy for you and we applaud that but we're going to reduce the amount payable now by the Government of Canada so that also we won't have an increasing level of debt that's going to be passed on to those younger generations coming up? Why not use the second option, in other words, instead of the first?

Mr. Tom Courchene: I have no problem with the second option. In fact, I'm sure all of us around the table would hope that most of us would be able to put enough away for our retirements, and so much the better that markets are going up—until the last week or so. It is true that the richer the population is when they retire, the less will be the seniors benefit and Ottawa will benefit.

Although all that's fine and good, I'm saying something a little bit different. I'm saying that there's $700 billion, present value, coming due as these people start retiring. Ottawa's going to get some money from that through the normal tax system. There's $600 billion of unfunded liability coming through, but nonetheless for every dollar of benefit that Ottawa pays on the CPP it's going to get about 45¢ or 50¢ back. So the CPP is costing only half, or 40% or whatever, of what the unfunded liability is.

All I was suggesting was that we collect these normal taxes but we take a look at this account. It could be enormous. We don't really know. We don't have this accounting for the next decade or so as these things come into play. I was just saying that some of these revenues that Ottawa collects might be directed back into the CPP fund so that premiums won't have to rise as much as they otherwise would. I'm not changing any tax rates; I'm just saying that some taxes that Ottawa collects could be redirected into this fund to help pay off the unfunded liability for the next generation.

Mr. David Iftody: If we're moving that money that's already been accounted for in our current accounting practices without any new tax increases on the RRSPs—

Mr. Tom Courchene: No tax increases.

Mr. David Iftody: No tax increases. Assuming that and keeping that variable constant, what do we do with the lost revenues then? You're saying it's around $250 billion. You tossed out some numbers some time back. If we take that money now, that taxable income, and we move it clearly towards that $600 billion liability, that's fair, but with those lost revenues what does the government do in terms of its overall consolidated fund and the deficit and so on?

Mr. Tom Courchene: There is a problem, because in effect what I'm really saying is let's take some of the fiscal dividend that's soon to arise and put it into the fund. Indirectly, that's what I'm saying.

What I'm also saying is we don't know what this is like. We don't know how big it's going to be, because we've never got an accounting framework for the next 10 or 15 years.

A point I make that I haven't seen anybody else make is that every single dollar that we're accumulating.... The present value of this unfunded liability that premiums are supposed to offset over time.... Ottawa is still going to make from the low-income people about 50¢ on every dollar of benefits. So the federal government through a change—because it converted its seniors program into a negative income tax, effectively—is going to generate enormous moneys from this pension increase. All I'm saying is, fine, but take some of that money, Ottawa, that you're going to benefit by and put it back into the fund.

The Chairman: I'm intrigued by this whole concept of intergenerational equity. It's always referred to in monetary terms, yet if I were to look at the generation that's benefited a great deal from CPP, it's the people who went through World War I, World War II,—

Mr. Tom Courchene: Exactly.

The Chairman: —the Great Depression,—

Mr. Tom Courchene: Right.

The Chairman: —the same generation that didn't have access to what I consider to be one of the finest education systems in the world, even though I'm sure some people will criticize that comment. Nevertheless, universities, colleges, and all this wealth—let's not kid ourselves, we're a very wealthy country—are the things those of the past generation never really benefited from. They didn't benefit from the infrastructure that was built over the years. So when we look at intergenerational equity and we only focus on the monetary returns, isn't that kind of narrow, in the sense of the date?

• 1710

Mr. Tom Courchene: I think it's incredibly wide. I think it's all-encompassing.

I didn't even mention this, but since 1973 the Canadian debt has gone from being about 20% of the GDP to 100% of GDP—if you add the provinces together—and our generation is benefiting from that. That's a future debt that has to be paid off at some point. Now, thankfully, the federal finances are in much better shape and we're going to get, if not the nominal value down, at least the debt-to-GDP ratio down. I commend the budgetary acumen of Minister Martin in this area.

But the other intergenerational problem the young are facing is this negative dowry we're leaving them, namely the federal debt, much higher tuition fees and higher CPP premiums. We think that's really fine and you can make arguments for all of those things. I'm just saying we're getting a little too selfish in our generation and trying to load too much onto them, and at some point it's going to backfire on us.

The Chairman: I'm not an economist, Professor, but what's this thing people keep referring to as this huge wealth transfer that's going to occur within the next couple of decades?

Mr. Paul Szabo: A thousand dollars over the next ten years.

The Chairman: Who will be the recipients of all this money?

Mr. Tom Courchene: I guess it will be the people whose parents have all these accumulated assets.

Mr. David Iftody: Why are you pointing at me?

Mr. Tom Courchene: I certainly wasn't going to point to myself.

Mr. David Stark: Mr. Chair, if I may, I have to catch a train back to Toronto in about twenty minutes.

The Chairman: Okay.

Mr. Tom Courchene: I have the same problem, Mr. Chair.

The Chairman: Thank you very much, on behalf of the committee.

[Translation]

Mr. David Stark: On behalf of my colleagues, I thank you for inviting us here today.

[English]

The Chairman: Okay, we'll suspend. Thank you very much, everybody.

• 1712

• 1720

The Chairman: I call the meeting to order.

You'll have five to ten minutes for your presentation. We will have to leave here at 5.40 for a vote at 5.45. Okay? You may begin.

Mr. Ian Markham (Chair, Pension and Benefits Committee, Toronto Board of Trade): We do appreciate that you allowed us to stay with the Minister of Finance for as long as he gave us, which was an hour and a quarter.

The Chairman: I guess that concludes your presentation?

Some hon. members: Oh, oh!

Mr. Ian Markham: Not quite.

I believe you have copies of our letter. Really there are two points to our letter. The first point is to congratulate the various parties who have brought the Canada Pension Plan to its new state. It's nice every now and then to actually, instead of criticizing, come forward and congratulate. The federal government and the provinces have worked together to produce something that is workable and is a good solution for the future of the pension plan.

We have always felt very uncomfortable with the idea of a contribution rate going to 14%. We're comfortable with the idea of it being 9.9% in the long-term future. We are pleased with the way in which the CPP Investment Board is being structured. We do feel it's going to be an effective arm's-length government structure. We are pleased that the bill recognizes the need for having a sufficient number of directors with proven financial ability or relevant work experience. That's going to be imperative, rather than having simply political appointees. And we know the process to find these people is well under way now.

We're pleased that the investment board will be required to adhere to what you might call the prudent person rule, which effectively causes the plan to operate under the same principles as those governing private pension plans. And we're pleased that the key objective of the board is to maximize the rate of return.

Canadians will see these increasing contributions and this pool of assets as their money. In the past they haven't really understood how the Canada Pension Plan has operated, but with these extra contributions coming out of their pay in the next few years, they'll see it as their money, and they will look to this investment board to invest their money wisely.

It will also change the focus of some individuals who have been rather shy of managing their own money. Now for the first time, as for many people, their own money will be invested by a board of 12 people. They will follow that very closely, and I suspect they will be influenced as well in their own investment decisions within their RRSPs, although it's a different set of objectives.

Having said we're very pleased with the way in which this system has been set up, we know there will be a review in three years' time, so we thought we would start off the process now by looking at some of the issues that have been raised.

An example is partial pensions. We do support the idea of providing partial pensions during the transition from work to retirement, but we want to make sure people understand what this will do to them. Pensions are very difficult for many people to understand. If they're going to draw a partial pension because their income is dropping from their company, they have to understand this is going to take away from the future. They need to understand how those rules will operate. But we do support the general idea of it.

On credit-splitting, it's been suggested that the take-up of mandatory equal splitting of pension credits between spouses on marriage breakdown has been low. While it's possible that this is due to a lack of awareness of credit-splitting, it's also possible that people don't want it. We don't want you or the elected parties, when it comes up for review in three years' time, to assume everybody wants it.

Third, we do not support in any way at all extending coverage of the income scale by raising the limit on pensionable earnings, in other words, the YMPE. This would exacerbate the problem we're already in with the CPP, and we would then have to increase the payroll taxes and employee contributions even further.

Finally, we do support the idea of looking at the relationship between CPP pensions and employment insurance benefits where an individual receives both.

• 1725

There are other issues that were not addressed in the paper called Securing the Canada Pension Plan published in February of this year. We'd like them to be considered in the next round of consultations.

We would like the possible move to partial indexing to be studied, because we're looking at intergenerational equity here. We're looking at how we can help protect our children from having to contribute very significant amounts so our parents and we, as baby boomers, can receive pensions. The move toward partial indexing would help deal with that.

We also believe it may be necessary to raise the CPP age of entitlement from 65 upwards because of rising longevity and the changing labour force demographics, as well as the trend in other countries.

We are particularly keen that when the investment board invests to get a higher rate of return than was contemplated by the government actuary in coming up with the 9.9% long-term contribution rate, those surpluses be used not to improve benefits but to bring that 9.9% contribution rate down, because we want to see better value for money our children. We want to see a better rate of return on their contributions, and that would be done by applying surpluses to lower the contribution rate in the distant future.

Finally, we believe the Canada Pension Plan Investment Board will want to exempt itself from the 20% foreign content limit for numerous reasons that I'm sure others have mentioned.

So that's the presentation.

The Chairman: Thank you, Mr. Markham and Mrs. Van Riesen.

I understand the arguments in favour of exempting the CPP from the 20% foreign property rule. What's the rationale used by the people who are against this?

Ms. Gretchen Van Riesen (Assistant General Manager, Pension and Benefits, Human Resources Division, Toronto Board of Trade): I think there's misperception that investments offshore take jobs away from Canadians through the pension funds investments we're talking about. A paper produced by a very renowned academic in our industry refutes that completely and demonstrates that diversification adds value. That income comes back into the country and there's more opportunity for investment, even in other investment-worthy opportunities in Canada. So there is really no basis for that. I think it's misperception, from what I've heard from those who have claimed it is fraught with difficulty.

The Chairman: I've heard this argument from many people pushing for the exemption of the 20% foreign property rule, but they're not utilizing the 20% right now. I think they're at 14% or 13%. Is that right?

Ms. Gretchen Van Riesen: Certainly there are funds that are right up to the 20% and would love the limit to be higher. You would see that more predominately with the larger pension funds that are more capable of diversifying assets and taking advantage of it.

The Chairman: So there are some that are right to the 20%.

Ms. Gretchen Van Riesen: Absolutely.

The Chairman: But is the average 13%?

Ms. Gretchen Van Riesen: The average may be lower than that because you're dealing with small funds and large funds and you're getting an average, but in actual fact there are many funds. Even small funds are losing out too; they just may not be as cognizant as larger funds of what they are losing by not maximizing diversification right up to the 20% we are allowed. There is plenty of evidence to show there is a loss by not being able to diversify above that level.

Mr. Ian Markham: I'd be happy to leave the paper if you like. It discusses the 20% foreign content limit with respect to pension plans. It sets out the reasons why, for the pension plans and therefore for the investment board, we believe the 20% limit should be increased.

• 1730

I would be happy to leave that paper with you. It's not actually a board of trade paper, which is who we're representing; it's a paper that was just published last week by the Association of Canadian Pension Management.

Ms. Gretchen Van Riesen: Mr. Chair, we actually said we were going to give you a copy. I was here presenting before this committee on the ACPM's view. In fact, we told you we were going to provide you with copies of this paper. It has now been finalized, so we're in a position to do that. It covers other issues as well as this one, which is on 20% foreign property.

The Chairman: It would be in probably hundreds of billions once the CPP investment board is created and begins to invest.

Ms. Gretchen Van Riesen: Yes.

The Chairman: Can in fact our country absorb that type of funding?

Ms. Gretchen Van Riesen: There's a huge question of whether our Canadian capital market can absorb that money. There is a belief that it can be done slowly and carefully, but certainly having the 20% foreign property limit applied to that would only exacerbate the problems that this presents. That's because there isn't necessarily the capability of the capital markets to absorb those amounts.

The Chairman: Any questions? Ms. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): I have one.

One of the concerns that's been raised from time to time about people who were looking at the CPP investment board was about special interest groups influencing that investment, as opposed to always keeping in mind the best interests of the people who are going to accrue the benefit. I guess I would just like to hear from you whether you think we have the necessary safeguards to make sure this doesn't happen.

Mr. Ian Markham: From everything seen by us and others on the board of trade committee we represent, you have the best safeguards you can in there. Honestly, this is an issue we would be deeply concerned about if we saw there was an opportunity for outsiders, including the government, to meddle with this idea of maximizing the long-term rate of return and investing prudently.

Those statements are very strong statements. As long as you get people on the board who have good investment expertise, we don't feel uncomfortable with the approach that's been taken.

Ms. Gretchen Van Riesen: I'd add that the government's structure that was proposed and is being worked on now as we speak is critical. It does engender the philosophy that it is in the best interests of beneficiaries. You park your self-interests at the door if in fact you have that background. I think that's important. It would need to be clarified in the role of the committee.

Mr. Ian Markham: The final point is that as long as there is disclosure every three months, which I believe is the intent, to Canadians as to how their money is doing, then if they see any meddling in the way in which their rate of return has been earned, there will be hell to pay.

Mrs. Karen Redman: Thank you.

The Chairman: Just one more question before I get to Mr. Pillitteri: Do you see a role for the Auditor General?

Mr. Ian Markham: Yes, indeed. I think the Auditor General should be looking at all public sector pension plans, including the Canada Pension Plan. It's going to be a pool of assets. Whether it's the Auditor General's audit or any other form of audit, there should be audits of the assets to ensure that they have been invested in accordance with the bill.

The Chairman: To you it doesn't really matter whether it's the Auditor General or some firm that's doing it.

Mr. Ian Markham: I don't—

Ms. Gretchen Van Riesen: As long as there's open disclosure, as Ian says.

Mr. Ian Markham: Yes.

The Chairman: It's a question that somebody asked me today. That's why I'm asking for expert advice on it.

Mr. Ian Markham: You mean the Auditor General versus outsiders?

The Chairman: That's right. The point is that it's taxpayers' money.

Ms. Gretchen Van Riesen: Right.

The Chairman: So the Auditor General should have access to it.

Mr. Ian Markham: The Auditor General should definitely have access to it, but it may look better if outsiders are also doing an audit.

The Chairman: Okay. At arm's length.

Mr. Pillitteri.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you kindly, Mr. Chairman.

First, I would like to make a comment. It seems to me that everybody's jumping on this bandwagon of increasing the 20% rule. From all the presentations I've been hearing, there's almost like a fear that if we don't increase this, the Canadian economy would not be able to absorb all the capital that will be generated by this fund or other funds that are available here in Canada already.

• 1735

I just wonder, we're jumping to this, trying to increase the foreign rule. I could see foreign currencies, very strong currencies like the Deutschmark in one of our G-7 countries—and France has a strong currency, so I'm not even going to mention it.... But in some of those countries you have almost no content that you could invest outside of their countries. Maybe we're putting the horse before the cart when we're afraid the Canadian economy cannot absorb all of these funds. Even the American funds are not close to what is going outside of the United States.

Ms. Gretchen Van Riesen: They have a higher limit, though.

Mr. Gary Pillitteri: They have a higher limit—

Ms. Gretchen Van Riesen: Much higher.

Mr. Gary Pillitteri: But on the other hand, the limit is not maximized.

Ms. Gretchen Van Riesen: Yes, that's right.

Mr. Gary Pillitteri: It's very minimal. Maybe they are much more patriotic or maybe they believe much more in their own economy—

Ms. Gretchen Van Riesen: My understanding is that they are at 30% in the U.S.

Mr. Gary Pillitteri: Yes, but they are not near that, not in total.

Ms. Gretchen Van Riesen: No, they are. There is no limit, but the actual—

Mr. Gary Pillitteri: They're at 30%.

Ms. Gretchen Van Riesen: —investments are at roughly 30%. They kind of levelled out at that, but—

Mr. Ian Markham: The U.K. levelled out at 30%.

Mr. Gary Pillitteri: On the other hand, don't you think that possibly before we were trying to raise this limit...? As a Canadian I see more money being available within the Canadian economy. It would be somewhat easier if they don't have to finance our debt and so on. They would have to be forced to invest the money in Canada, in business loans, and I think would have much more of an incentive, rather than giving them the opportunity to fly the capital and go to the easier pastures, as we might think of them, outside of Canada.

Would you like to comment on that?

Ms. Gretchen Van Riesen: I would.

The issue is one of what the best interests of plan beneficiaries are at the end of the day. What will generate the highest return so that those benefits being promised are secured in the best possible way?

As I said, the research, the academic fundamentals, shows unequivocally that increased diversification increases return. Given that fact, if the interest is in securing Canada Pension Plan benefits for Canadians, the best interests are served by raising the limit or having no limit. Whether it's also good for the Canadian businesses—which may or may not be credit-worthy businesses in which pension funds should be investing—is a much more debatable point, but it is unequivocal in our minds that the diversification advantages are there, are solid and are tangible.

Mr. Ian Markham: We have estimated that the limit constrains the potential size of pension benefits by 3% to 4%, which is a very considerable loss of pension benefits over the long term. In other words, if the limit were eliminated, over the long term pension benefits in Canada—which is both private pension plans and also the Canada Pension Plan benefits—could increase by 3% to 4% or the cost could reduce by 3% to 4%.

Mr. Gary Pillitteri: Not to be argumentative, but by the same token, since we have a review process, why not wait if it does have such an influence within our own economy, if it is too much for our own economy to bear? That could be changed later, but trying to put on all of a sudden—

Ms. Gretchen Van Riesen: As long as assets aren't forced into imprudent investments in order to satisfy a limit.

Mr. Gary Pillitteri: If we take a look at foreign countries today, in South Korea the government forced so much of that capital going into.... Where do we find ourselves? As Canadians we look at South Korea, Japan, and China. Those countries have made those decisions, forcing the banks and the lending institutions to put so much money into it. Where do we find ourselves as Canadians? Yes, today we might find that it might look greener on the other side of the fence, but on the other hand, we still have to look at those countries making those decisions. As we see what happened to the yen and the won and all of those currencies, with devaluations of more than 10%, where do we find ourselves?

Ms. Gretchen Van Riesen: There are as many examples on the other side.

Mr. Ian Markham: We'll leave you this one paper. You have to go.

• 1740

The Chairman: I'm going to make a final comment here.

On behalf of the committee, I would like to thank you very much for your presentation. The point you raised about the 20% cap is one in which I'm personally very interested. I'm trying to weigh both the pros and cons of it, but I do believe that the ultimate goal of people in the investment industry is basically to come up with the best investment possible for the people. Because the global market is so interconnected, those barriers eventually will have to be erased also. There's no question about it.

Anyway, we'll have to go and vote.

The meeting stands adjourned.