FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 4, 1997

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[English]

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

The order of reference is Bill C-2, an act to establish the Canada Pension Plan Investment Board, to amend the Canada Pension Plan Act and the Old Age Security Act, and to make consequential amendments to other acts.

I'd like to welcome the first three interveners from the Ontario Professional Fire Fighters Association: Mr. Rick Miller, chair of the pension committee; Sean McManus, Canadian director of the International Association of Fire Fighters; and Dale Kinnear, labour analyst for the Canadian Police Association.

Welcome back. You may begin your presentation. I think you're by now veterans at this. Please go ahead.

Mr. Sean McManus (Canadian Director, International Association of Fire Fighters): Thank you, Mr. Chair.

Good evening. I'm Sean McManus, Canadian director for the International Association of Fire Fighters, a union representing over 225,000 professional firefighters and emergency medical personnel in Canada and the United States. In addition, the IAFF represents 17,000 professional firefighters here in Canada.

As we heard earlier, with me today is Rick Miller, pension chair for the Ontario Professional Fire Fighters Association, the IAFF affiliate in the province of Ontario, with a membership of more than 9,800 members. Also with us this evening is Dale Kinnear, labour analyst for the Canadian Police Association, an organization representing over 40,000 police officers in Canada.

I'm very pleased to be here this evening to represent the views of the IAFF in response to this government's plans to amend the Canada Pension Plan by Bill C-2, and on behalf of IAFF's general president, Alfred Whitehead, who unfortunately was not able to present our statement in person this evening.

The position of the IAFF is clear on the issue of pension reform, and it is one that has been stated on many occasions before previous standing committees on finance, dating back to the 1970s.

The IAFF urges this committee to recommend to the government that it amend the Canada Pension Plan during this latest round of consultations so that professional firefighters, police officers, and other public safety officers can access unreduced CPP benefits at age 60 and reduced CPP benefits at age 55.

You might ask why we are advocating such a position. The answer is simple. Firefighters and police officers are dying younger and younger due to the nature of the occupations, and they are therefore not around to enjoy the benefits of the CPP like the rest of the working population. This occurs even though they have been paying into the system during their entire working careers.

Firefighters from across the country had the opportunity to reiterate the IAFF's position to their MPs last week, when the IAFF conducted its annual legislative conference. MPs heard firsthand from firefighters—and maybe some of you did as well—the special significance that retirement has for them because they are faced with some grim facts of life expectancy. Since they are routinely exposed to communicable diseases, hazardous materials, and toxic combustibles, there is increased mortality directly related to the occupation.

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This was highlighted recently with the Plastimet recycling plant fire in Hamilton, when over 100 firefighters were exposed for four days to the fumes over 200 tonnes of burning polyvinyl chlorides, or PVCs. Many of these firefighters experienced health problems immediately after the fire, but many of the serious illnesses that may be experienced by these same firefighters will not surface, in the forms of cancer and heart conditions, until a number of years in the future.

Plastimet-type fires will continue to happen in Canada, which will translate into more and more premature deaths of firefighters. Since firefighters and police officers are routinely exposed to hazardous conditions, the mortality rates will continue to rise. It is therefore unacceptable, but not surprising, that the rate of firefighters' job-related fatalities is two times that of the private industry. Studies have consistently shown that firefighters die of some types of cancer and of heart disease at a higher rate than would be expected for similar groups in other occupations.

As an example, in September 1994, the Industrial Disease Standards Panel, or IDSP, in Ontario released a report after conducting a study of mortality among Toronto area firefighters between the years 1950 and 1989. The IDSP study confirmed what the IAFF has been saying about the mortality rates of firefighters over the years. The study concluded that there was a probable connection between the occupation of firefighting and cardiovascular disease, brain cancer, lymphatic cancer, colon cancer, bladder cancer, and kidney cancer.

These mortality studies clearly indicate that in order to have a fairer application of the CPP, firefighters and police officers should be entitled to receive the benefits, unpenalized, at an earlier age.

Firefighters are often called upon to exert themselves maximally as part of their job, especially during critical phases of rescue work and fire suppression. Those above the age of 55 are physiologically at risk and can be incapacitated and unable to perform the job. Lessened physical capacity makes older firefighters prone to costly, even life-threatening mistakes. That is why retirement at age 55 has long been accepted to be in the best interests of the firefighters and of the communities they serve. This has been confirmed in numerous human rights awards.

It is, however, unrealistic and unfair to retire firefighters and police officers between ages 55 and 60 without also making CPP benefits available to them. Firefighters who retire at age 55 are unable to contribute to CPP from age 55 to age 60, even though this five-year period is within the definition of their contributory period, thereby further increasing the penalty to firefighters when they start to receive a pension at age 60.

It is time to finally correct a wrong that has existed for far too long. The IAFF has been advocating this same position since the 1970s, because it is something we strongly believe is the right thing for the government to do. In fact I have a copy with me of the IAFF's brief submitted to the parliamentary task force on pension reform back in the early 1980s, and the position has not changed from that date.

In recent correspondence from the finance minister to Mr. Miller of the OPFFA, the minister himself acknowledges that fire and police officers have shortened careers. It is time something concrete is done to acknowledge that fact. Too many premature funerals of firefighters and police officers have already occurred without the necessary amendments being made to the CPP.

In conclusion, the IAFF urges this committee and the government to re-examine the firefighters' and police officers' case as a separate hazardous occupational category when amending the CPP. The shorter lifespan of these professionals must be recognized when the CPP is reformed so that both professions are able to retire at age 60 with no reduction in benefits and at age 55 with reduced benefits.

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We appreciate the opportunity to appear before you this evening and are prepared to answer any questions you may have.

Thank you.

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

We'll now move to the question-and-answer session. Ms. Ablonczy.

Mrs. Diane Ablonczy (Calgary—Nose Hill, Ref.): We really appreciate you gentlemen being here and your leadership. All of you have been very diligent. I know this concern has been brought forward to me two or three times, and your concerns are very legitimate. You have the respect and the thanks of the community for what you do, and we do know it comes at some personal sacrifice.

The question I have is always about a cost-benefit analysis. As you know, many groups appear before this committee: women who have to leave the workforce to raise children, new Canadians who want to have a pension but have had some difficulty establishing a long work record because they haven't been in the country as long as others, just as some examples.

The fund we have right now, as you know, is not funded. In fact we have an unfunded liability of about $600 billion, and the burden of paying that—I call it Canada's second national debt—will fall largely on our children and our grandchildren, because there's no money to pay the benefits that are already owed.

So I know you can appreciate the fact that if we expand the benefits even further, the burden for the people who have to pay in the future will be increased. I'm sure you've thought about this problem, and I wondered if you could advise the committee on how you see that particular practical problem being addressed.

Mr. Sean McManus: I have a couple of points in that regard.

Earlier this afternoon we appeared before this committee talking about a specific provision that could be made in the Income Tax Act, a change to the regulations allowing firefighters and police officers to contribute over and above the 2%—2.3%. That would be one way to alleviate that concern.

The other is to recognize that the unfunded liability as it exists right now is something that has to be addressed—we recognize that—but also to acknowledge that there are those specific professions, just because of the nature of the work they do, that are continuing to pay into the CPP plan but will never have the ability to collect those benefits, reduced or otherwise, because they won't be around. What we're looking for is the ability to have those benefits.

We know it's something we're asking for and a lot of other groups will not be able to make that claim, but it is because of the job that firefighters, police officers, and other public safety officers do.

Mrs. Diane Ablonczy: I have just one other question, if I might. I appreciate the fact that you have thought about those practicalities. That was a good suggestion.

The other question I have is this. As you know, many countries around the world are moving to individually owned, mandatory pension accounts, where workers put their contributions in an individually owned and managed pension asset. That would allow professions such as yours to access those individual accounts, if the law should allow, at earlier ages than other citizens, for the reasons you mentioned.

I wondered whether your organization has had an opportunity to look at some of those measures that are being put into place in other countries and whether you think that might be another way to address this particular concern.

Mr. Rick Miller (Chair, Pension Committee, Ontario Professional Fire Fighters Association): A number of departments in the United States, for example, are recognizing age 55 as mandatory retirement age for firefighters. They have, again, the increased pension accrual for public safety occupations to allow them to put in those extra moneys throughout their 30-year careers so that they have those adequate funds at retirement and are still retiring within the recommended age of what these medical experts have testified in these human rights cases. That's, again, what we recommended this afternoon as an alternative, recognizing the concerns of the CPP unfunded liabilities.

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Mrs. Diane Ablonczy: Thank you.

[Translation]

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ): Thank you for your presentation. We are all aware of the importance of the work you do, but I would like more information so as to be able to analyze the recommendation you have made. You spoke a little bit about the conditions relating to fire fighters' private pension funds. From what I know, often, after twenty or twenty-five years, a policeman can retire on a pension that, according to what I am told, provides certain benefits that other members of the society don't get. Could you explain that a little bit more so that we might better understand the situation?

Don't you find that ultimately the solution for most of the problems you mentioned in your brief would be to improve safety? Despite the problems that are inherent to your line of work, would it not be possible to reduce the mortality or the accident rates through greater emphasis on prevention rather than through pension plans or the Canada Pension Plan?

[English]

Mr. Sean McManus: You are quite right that health and safety is something both the firefighters and police officers constantly strive to improve. To give you an example, the Plastimet fire I talked about in the brief is an issue we spoke about with a majority of the MPs last week in terms of improving health and safety in this country. But even with that recognition, you can't minimize the fact that you will be exposed to those carcinogens and the like, and that means firefighters and police officers will continue to die younger.

I hope at some point I don't have to appear before this committee and advocate that because we will have dealt with those health and safety concerns sufficiently. But right now that exists and it is a necessary hazard of the work our members do.

Mr. Dale Kinnear (Labour Analyst, Canadian Police Association): I would like to add to that. I think if it were possible to address all the concerns that police officers and firefighters have just through health and safety legislation or better equipment, it probably would have been done by now and there wouldn't have been a police officer or a firefighter killed in the last ten years.

There are certain circumstances and situations where regardless of the precautions that are taken, whether through equipment or training, people are still going to lose their lives, particularly in acts of violence against police officers and in situations where firefighters have to go into buildings where citizens are at risk or are in situations where they have to act regardless of the situation. We don't get to choose where we can and cannot go the way some people in private industry can refuse to work if it's an unsafe condition. That luxury is not available to us.

That in itself is not going to offer the protection and safety we require, nor is it a saw-off for the position we're taking on earlier access to the pension plan.

On your concern about the pension plans we already have access to, these are defined benefit registered pension plans, the same as those in place in many industries across the country. This is something that is negotiated with your employers. Half of the contributions are made by the employee and half are made by the employer. If they didn't exist in our occupation we would probably be receiving more in salary.

I don't think that's any special break we're getting over and above the average citizen. There are pension plans out there in private industry that are similar to what we have. There are many sectors out there, industry or what have you, where they have chosen not to adopt registered pension plans and get involved in that. They take their money up front. I don't think that really gives us an out that other Canadians haven't got available for them.

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Mr. Rick Miller: I would like to add to your first question. The Income Tax Act currently allows public safety occupations to have different provisions. For example, there are 75 points compared to 80 points for other occupations, or age 50 instead of age 55. Those provisions are in the Income Tax Act.

In answer to your first question, the unfortunate part is that our benefit accrual rate is exactly the same as that for all other occupations. So we're given the sacrifice of our health for public safety, and we're being recognized in the Income Tax Act for this with these provisions, yet we're being asked to leave our career at the same time with the same amount of money.

The Chairman: Mr. Nystrom.

Mr. Lorne Nystrom (Qu'Appelle, NDP): I too want to welcome you before the committee and thank you for your presentations.

I met with some of the firefighters from Saskatchewan last week. I'm very interested in helping support you in your idea of getting a break on CPP because of life expectancy and so on.

It requires a fair change to the CPP, and of course we need the consent of two-thirds of the provinces and two-thirds of the people. I wonder whether you can give us a bit more information in terms of the life expectancy of firefighters and police officers. That might be useful information to have. Can you tell us who you mean in your brief when you mention police officers, firefighters, and other public safety officers? What professions are you looking at there?

The other question is what do we do about other dangerous occupations, like miners for example? It might be useful to have charts in terms of danger on the job. Maybe even farmers would fit into that, I'm not sure.

I guess the last thing I wanted to ask you about is how many people would be affected in terms of police and firefighters alone. I think somebody asked the question already about a cost-benefit study.

If you can give us some of that information, it would be very helpful. I certainly want to help further your brief and cause.

What we need is information, and then we'll do a costing of it. Perhaps the Department of Finance can do some of the costing. They have the computers and the people who can do it in terms of the expertise. If the finance committee were to ask for it, I'm sure with the co-operation of the chair, we could have that done for you. I don't want to put words in his mouth, but he's a very co-operative guy. Anyway, if you can provide us with some of that information, it would be very useful.

Mr. Sean McManus: I'm very pleased to hear that the chair is very co-operative. In furthering that cause, we'd be more than pleased to provide those mortality rates to this committee through the chair. We do have them indeed. In fact, in previous meetings with MPs during the IAFF legislative conference.... Something we have been trying to advocate for a number of years is to actually get the costing-out done by the finance department to see what the cost would be.

With respect to your question on other dangerous occupations, again, with what Mr. Kinnear was saying earlier about the two professions, with police officers and firefighters, they do not have the ability under provincial legislation to refuse dangerous work. All other professions can go into a mine shaft and say it's not right, so they can refuse. You don't have that ability when a house is burning and people's lives are at stake. That's one of the reasons, in terms of other dangerous professions, we're not advocating for that.

In terms of other public safety officers, we have acknowledged that due to the type of stress correctional officers are under, we'd be looking at that kind of an arrangement there. In terms of numbers, there are 17,000 members within the IAFF. There are approximately 8,000 or 9,000 firefighters in Quebec, I believe. There are 55,000 police officers in Canada.

Mr. Rick Miller: If I may also add, a public safety occupation, as defined under the Income Tax Act, is a firefighter, police officer, corrections officer, air traffic controller, or commercial airline pilot. Those are the five public safety occupations as designated under the Income Tax Act today.

Mr. Lorne Nystrom: Would you agree to have them all in the same category in terms of CPP? That's what you're saying to us tonight. Is it all five? I'm not trying to be difficult.

Mr. Dale Kinnear: I think obviously we're here representing the firefighters and police officers. I guess my own personal opinion on that would be that it should extend to the jail guards and corrections officers because of the circumstances they face. Quite recently in the province of Quebec two officers were assassinated. You can't call it anything other than an assassination because of their occupation.

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To my knowledge, the same does not apply to air traffic controllers. I believe there are stresses that play on them, but I don't think they fit in with what a jail guard or a firefighter or a police officer would be exposed to, and I think the same could be said for airline pilots.

The Chairman: Mr. Jones.

Mr. Jim Jones (Markham, PC): Thank you, Mr. Chair. A lot of the points that Mr. Nystrom brought up are related to the information I was looking for.

I think if you're going to do something like this you should be looking at other categories. You could be establishing a very dangerous precedent. You should look at nurses and other people who can be exposed to communicable diseases and things like that. We can't just look at firefighters; we have to look at others who have public duties. We could even look at teachers, who could be exposed to things through violence or whatever in the schools. If we're going to look at this, I don't think it can just be the firefighters. It has to be other professions.

The Chairman: Thank you, Mr. Jones. Was that your comment?

Mr. Jim Jones: Yes.

The Chairman: Mr. Valeri, followed by Mr. Cullen.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman.

First of all, I want to say thank you with respect to the Plastimet fire. My constituency is in Stoney Creek, which takes in part of east Hamilton. After hearing from constituents and hearing the kind of support that they had for the firefighters, I want to extend on their behalf a very heartfelt thank you for the work you firefighters did in that particular instance, and I really thank you for the kind of danger that you face each and every day.

I just want to be clear about a couple of things that you're putting forward this evening. First, you're essentially asking for an exception to deal with the danger that you face on a daily basis in terms of your occupation, and essentially that's an opportunity to contribute increased premiums so that you can access the Canada Pension Plan at age 50 for a reduced benefit and then at age 60 for a full benefit. I just want to be absolutely clear that's what you're asking for.

The other aspect I want you to clarify is whether in fact your occupational pension plans provide any sort of bridging now. If a firefighter were to retire at age 55, is bridging put in place to age 60 when in fact you can start to collect the Canada Pension Plan? And of course there were comments with respect to how the Income Tax Act treats the various dangerous occupations, so I won't go over that again.

Can you tell me at what age you actually start drawing that and whether there is a bridging provision? And how much you would be able to draw in terms of a percentage of your salary at that point?

Mr. Rick Miller: I'd be glad to answer your question. I'm a fortunate member because just last Saturday I was appointed to the OMERS board of directors, and as you're aware, it's the third-largest pension plan in Canada, with assets of roughly $30 billion.

In our municipal pension plan we have approximately 18,500 police and firefighters in the province of Ontario.

I'll give you an example. You and I both get hired at 27 years of age on the same day. You're a caretaker for one of the school boards and I'm a firefighter. If we both have 30 years of service and retire on the same day, I get nothing more than you do because the Income Tax Act clearly states that 2% is the maximum annual benefit accrual rate.

Unfortunately, the registered pension plans such as OMERS can't go against the Income Tax Act. That's why we recommended that to you this afternoon as an alternative as well. As we said earlier, we would like it to be increased to 2.3% for our public safety occupations so that we can contribute more. Basically it allows us to bridge that benefit if we retire before age 60.

Again, in the example of the caretaker situation, that individual can work to 65 years of age. We're forced to retire at age 60, whether we're physically healthy and mentally healthy or unable to do our job. Even if we can do our job, they kick us out. So in that particular example, you can see that we take a hit financially. And we don't have the ability to make up this reduced retirement income from other changes that have been implemented. That's why we've asked this afternoon for the accrual rate, or this one you see in front of you tonight.

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Mr. Tony Valeri: Is there a bridging provision in your occupational plans?

Mr. Rick Miller: The answer to that is no.

The Chairman: Mr. Cullen.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chair, and thank you, gentlemen.

I too would like to acknowledge the contribution the police and the firefighters make in Canada. In my riding, Division 23, the police division, does a great job under difficult circumstances, and likewise the local fire halls. I can confirm they serve one of the better meals in town.

On your proposal, any changes to the CPP would require the consent of the provinces and territories, as I understand it, and I know the federal government can play a leadership role in changes. I wondered if you had had the opportunity to discuss your proposal over the last number of years, or more recently, with the provinces and territories individually, and what kind of response you have had.

Mr. Sean McManus: I can tell you that firefighters, under their provincial associations, have legislative conferences at a provincial level, and they have been advocating for this as well. Response, as you can well appreciate, has been mixed, depending on the provincial government of the day. But it is something we do acknowledge and something we're going to have to work on at both the federal and the provincial levels.

The Chairman: Thank you for a very thoughtful presentation. Of course we'll be reviewing your proposals. You can rest assured some of the thoughts and ideas expressed.... These are my final comments, but I guess Mr. Jones is going to ask another question.

Mr. Jim Jones: I have a supplemental to Tony's comments.

Really, fire departments are municipal responsibilities, aren't they? I think municipalities should be building in this bridging stuff you're talking about. You should first be trying to approach all the municipalities on this. I think corporations, companies, everybody who has people retire early, provide the bridging and the financing, and this is just another cost the municipalities should be incurring. If your comments are very valid, then I would also approach the municipalities.

The Chairman: Mr. Miller.

Mr. Rick Miller: A good example would be that municipalities cannot bridge this benefit, if you want to call it that, because it would be exceeding the 2% accrual rate allowed under the Income Tax Act. For example, if the 2% were amended to the 2.3% we are asking for, that would just basically allow the municipalities and registered pension plans to offer this as a supplementary agreement where the parties could negotiate the costs of this benefit. If you did approve it, then it would go back to our provincial registered pension plans and I as a director would have to make a pitch to the board—it's the same thing—to allow it to be available even as a supplementary agreement. Then it would take on the effect you're suggesting, where the local municipality and the bargaining units would negotiate the cost and pay for the cost of these benefits. But it's the amendment to the ITA we're asking for, which will allow us do this.

The Chairman: Thank you very much, Mr. Miller and Mr. McManus, Mr. Kinnear. We certainly appreciate your thoughts and your insightful presentation.

I'm going to suspend briefly.

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The Chairman: I'd like to call the meeting to order and welcome Mr. McIver once again to our committee meeting.

It seems as if you have season tickets for this committee. Of course you understand the rules here. Please, just begin.

Mr. Don McIver (Chief Economist, Sun Life Insurance Company Canada; Canadian Chamber of Commerce): Thanks very much.

I apologize for appearing before this committee again. I think it demonstrates the fact that there is obviously a shallowness of complement with respect to professional business economists in this country, a deplorable situation, I do assure you. However, today I'm wearing a different hat. This time I'm representing the Canadian Chamber of Commerce. Thank you for giving us the opportunity to speak.

Let me begin by noting I think that the measures in the bill being considered go a very long way towards addressing the deplorable inadequacy of funding to the Canada Pension Plan. I suspect that this action will in fact represent just the first stage of a process of review that will be regularly necessary to assure Canadians that their contributions will provide them with some measure of reasonable retirement income.

While one can doubtless argue the appropriateness of current actuarial assumptions, it seems likely that the recommendations of those future reviews will point in one direction; that is, towards still further increases in premiums or reduced benefits.

I'd like to limit my introductory remarks to touch on just three topics: the issue of whether the contribution is a tax or not; a plea for a better focused plan, with fewer competing goals; and some observations on governance.

Are CPP premiums a tax? This issue is not merely pedantic, because if they are tax, then they serve to exacerbate an already serious overburdening of Canadians, and that's a circumstance explicitly recognized by the government. Webster's defines a tax as a “compulsory payment, usually a percentage, levered on income, property values, sales price, etc., for the support of a government”. As long as the CPP is designed to fill a multitude of welfare, insurance and pension requirements, then the premium sounds very much like Webster's definition.

In fact the revisions to the CPP constitute a major expansion of government spending, raising the future proportion of government expenditure to GDP. That simple fact is often overlooked. It easily escapes us because no new benefits are being announced. But those of us who recognize, and have long recognized, that the existing plan simply could in no way meet the benefits to which it was committed would recognize that the measures taken will cost much more than was initially provided, and hence the need of course to raise premiums.

If government can convince contributors that their premiums guarantee them a valuable future entitlement, similar to that arising from private saving and investments, then the premium hike will have no broader economic consequences. But I think Canadians might well be excused a degree of cynicism, because, unlike binding private sector contracts, whose performance is in fact regulated and enforced by government, arrangements such as the CPP can be altered unilaterally by the collective governments. There can, for example, be today very few younger Canadians who can believe that they are likely to receive a CPP at age 65. To these and many others, the increase will have the appearance of a tax hike, and hence possess many of the economic consequences of a tax hike.

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The Canadian Chamber of Commerce has long taken and oft repeated a stand respecting the job-destroying effects of overly high employment insurance premiums. That program is another example of a scheme initially designed to meet an important social objective, that of short-term income support, to which has subsequently been added less focused objectives—training, regional stabilization, and now, depending on one's perspective with the emergence of a large EI surplus, even deficit and debt reduction.

These objectives might constitute sound public policy, and they're certainly desirable public policy, but the question is, should they be funded via a payroll tax?

At hearings before the committee examining prospective changes to the CPP, the chamber argued that the plan should be directed toward the provision of retirement income for participants. Instead, the revised plan retains the complexity of providing long-term income support for the disabled.

Eliminating that coverage would have enabled the premium hike, with its undesirable employment consequences, to be held substantially lower, but of course the costs of providing for affected individuals would not be extinguished by such a move. Their needs might well be more efficiently provided for, however, rather than as now, where in fact they are provided for by a multitude of different funds and plans operated by a number of levels of government.

I'm thinking of workers' compensation, to some extent EI, and plain welfare, depending on the workers' or individuals' circumstances. They might even be provided for by an extended private sector provision of long-term disability insurance. One should bear in mind that such schemes already serve a multitude of Canadians very well.

The important message from this is that we should be extremely cautious about further increasing payroll levies; call them what you want. Ideally, the way to solve the dilemma, I think, would be to seek further ways of cutting government expenditure.

I realize the number of times that message has been hammered home, but if one could find additional savings in terms of other envelopes of government spending, that would enable us to collect the increased payroll tax necessary to fund the CPP and at the same time reduce the EI premiums so that at least the burden on the payroll tax could be minimized.

The chamber welcomes the proposed establishment of an arm's length investment strategy. It is crucial to the integrity of the governing board that it keep constantly in mind its twofold objective—to manage funds with the best interests of contributors and beneficiaries and to invest with a view of maximizing return without undue risk.

The integrity of this board must at all times be preserved from any hint of any attempt to introduce other public policy objectives into its mandate. The selection of the initial complement of the board will critically affect its credibility and determine the tone of subsequent boards.

The investment strategy of the board should not be constrained by the imposition of the 20% foreign content rule. If that rule has served any purpose, its utility has now passed. Basic economics argues that as our workforce ages, we will need to build up assets abroad to help provide for a rising proportion of dependants.

At the same time, provided governments stay their course, as we of course hope they will, public debt will be falling, and borrowing costs will hence be held in check. In order to achieve the real rate of return envisioned in this review, CPP managers should be given the greatest degree of flexibility consistent with security.

Those are my opening remarks. Thank you.

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

We will now move to questions. Mrs. Ablonczy.

Mrs. Diane Ablonczy: Thank you, Mr. Chairman.

Thank you, Mr. McIver, for your presentation. I have some questions.

I understand that before you make presentations such as this your group does quite a bit of background research. I would be interested in what you found on a couple of areas.

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In the second paragraph on page 1, you say at the end that you believe there will be still further increases in premiums or reduced benefits. I wonder if you could tell the committee why you've come to that conclusion or on what you base that conclusion.

Mr. Don McIver: I should re-emphasize that I'm an economist, not an actuary, so I can't give you an actuarial answer. But indeed, you are correct. Before we adopted our position, we engaged a task force last summer, of which I was co-chair, and we spent a lot of time mulling over the various possibilities, and certainly among our number were some actuaries.

The reason we feel sure that further reviews will require additional stringencies are, as we recognize it now, the revised CPP will be only partially funded, and we recognize—and again, I'm relying on the evidence presented by some of our actuarial friends—that the measures only go part of the way to addressing the demographic factors we can anticipate in the future.

We do know, for example, as you do, that the United States has had to adopt a policy of a phased-in increase in the retirement age of the public pension. We feel that it is going to be inevitable at some point.

Mrs. Diane Ablonczy: I appreciate that.

You mentioned on page two, paragraph four, that eliminating disability coverage would have enabled the premium hike to be held substantially lower. Then you go on to suggest that there could be other ways to cover this disability component, recognizing that it is valuable to Canadians.

Again, I wonder what background evidence you might have, first of all, as to the actual impact on the premium level of removing the disability component, and if that were done, how you would propose realistically to cover Canadians for disability.

Mr. Don McIver: I can't answer the first part of the question offhand, but for that I would turn to the discussion booklet that was put out before the consultations last year, which did detail the component of the premium that was represented by disability coverage. I think it was something like 3% or 4%, but I really would refer you to that.

I'm sorry, what was the second part of your question?

Mrs. Diane Ablonczy: How would people be covered for disability, then?

Mr. Don McIver: Again, there are existing a number of plans maintained by various levels of government that meet basically the same objective, depending upon the nature of the circumstances of the individual's disability.

If an individual has never been able to work because of disability, he or she may be, in all probability, eligible for provincial welfare. If they had been injured on the job and disability resulted from that, they may be covered by the workers' compensation plan.

Of course we've seen recently some of the intricacies of trying to mesh those two programs and how inefficiencies with respect to at least one level of government have been generated because of—at least in that instance—the dual coverage. So the notion is that there would, I believe, be greater efficiency if all of those disability programs were channelled through, monitored by, and enforced, where necessary, by preferably one agency, one level of government.

Mrs. Diane Ablonczy: My last question is with respect to the investment fund that will be set up. You are aware, of course, that it will rapidly contain many billions of dollars, most of which, under the present rules, will have to be invested in the Canadian economy, which is not a big pool in some respects. I wonder whether your study reached any conclusions about the impact this fund will have on the business sector.

Mr. Don McIver: No, we didn't per se. My own assessment, as a member of the investment community, is that although it's a large fund, it's not an excessively large fund.

• 1900

Where we might run into some difficulties in putting together a fund of this size is if some of the instruments in which it is permitted to invest become less available. One of those, I sincerely hope, is government bonds. It is not unreasonable to argue that over a decade or two the supply of government bonds will be substantially lower.

Mrs. Diane Ablonczy: I wonder, Mr. Chairman, if we could ask this witness to table with us his discussion booklet. Has that been tabled with the committee? I would like to have a look at it.

The Chairman: The discussion booklet has been produced by the Department of Finance, and it was distributed to all members of parliament.

Mrs. Diane Ablonczy: So this is not your own research. Okay. I wonder if you have any background research you think would be helpful to the committee. I for one would be interested in seeing it.

Mr. Don McIver: We could certainly make available to you the report of the task force. It is certainly a public document and it has been made available, and we can certainly make a point of making it available to the chair for distribution.

The Chairman: Thank you.

[Translation]

Mr. Crête.

Mr. Paul Crête: I have two questions. You mentioned the gradual increase of the pensionable age to take into account the fact that people live longer. Would this increase, on top of productivity gains in our economy, not have a negative impact on the employment prospects of younger people, over many years?

You talked about encouraging people to work longer as baby boomers will start retiring. This, added to greater productivity, will increase unemployment for younger generations.

[English]

Mr. Don McIver: This is a difficult issue. In order to provide for the largest GDP for our economy—this is, if you like, the global maximum optimizing issue; what we want as an economy is to have the largest GDP possible—we should be striving to ensure that impediments to productivity enhancements are abolished. We should be looking for incentives in the workforce. We should perhaps be looking at eliminating regional distortions in public policies on the migration of labour. But the desired end result is the largest possible GDP, assuming we are not engaged in any type of exploitation.

The next question is how you distribute the income generated in that way.

That is the way in which I would approach your question. Ideally, I think we would like to see all Canadians working longer years, if you like.

I hope that addresses your concern.

[Translation]

Mr. Paul Crête: You've raised an important issue. After all, the aim of a society is not necessarily to have the highest gross domestic product possible, but rather to achieve a level of economic efficiency that would allow better distribution of wealth throughout the population.

In the 19th century, we had children working in mines and this is not necessarily something that we would want to encourage in the future. This is a wide-ranging issue in society.

Regarding the funding of the plan, you say that you agree in principle with the increase in contributions but that the increases could have been smaller if your proposals had been carried out in the past.

Don't you think that one of the ways to minimize the impact of the increase would be to reduce employment insurance premiums, not by an equal amount since that would be impossible, but at least by a significant amount, so that there would be less of an impact on the pay cheques of employees and on payroll taxes paid by employers to the state? This would be an effective way to compensate at least part of this increase in contribution rates.

• 1905

[English]

Mr. Don McIver: Absolutely. That's certainly an avenue we would like to see followed. But my qualification on that was to suggest that one recognizes that as it now stands, the EI premiums represent a payroll tax in part for the reduction of debt.

We don't want to see the reduction of debt limited, hence my suggestion that the ideal would be to see other avenues of government spending reduced so that we could reduce the EI premiums and thus the total payroll tax of EI premium and CPP premium could be maintained at a more manageable level.

[Translation]

Mr. Paul Crête: The immediate effect of the increase in contribution rates will be a reduction of the purchasing power of workers, especially those who make under $39,000, who are also the majority of those paying unemployment insurance premiums.

We may wish to have a reasonable surplus in the employment insurance fund, but wouldn't it be possible to find this money elsewhere? Presently it may well be the easiest way for a government to fight the deficit but it is not necessarily the best way to reach the goals we are aiming for.

[English]

Mr. Don McIver: I agree with you. I think that is the issue. The question is whether or not a payroll tax is the best way of paying for these services.

You also have to ask whether or not the services should be paid for in the first part. I recognize that this a public debate and not a matter of pure economic analysis, but we should first decide what the programs are and how best to fund them in a manner that is least distorting of our economy.

[Translation]

The Chairman: Thank you, Mr. Crête.

[English]

Mr. Jones.

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

I have a few questions here. One is that in your paper you're talking about the integrity of the board. What has to be done to make sure this board has total integrity and has the interests of all the people?

Mr. Don McIver: First of all, you have to select people—and I suggest that the initial selection period is probably the most critical—who have undoubted expertise—and perhaps this sounds a bit like a motherhood statement—in the area in which you are asking them to operate. You have to nominate for the initial board individuals who are thoroughly expert and who enjoy the reputation of their peers, who are recognized by their peers in the investment community as being honest, clear-thinking, professional investors.

That sets the tone of the initial board. Subsequent boards are much more likely to be coloured by the complement of that initial board. If that has a firm reputation, it's going to be a lot easier to attract people to a very responsible position in the future.

Mr. Jim Jones: On the 20% foreign content rule, do you have any evidence to prove that if it was raised higher we would enjoy a better return on our investment? If you do, what percentage level should this be going to for foreign content?

• 1910

Mr. Don McIver: No, I don't. In all probability—speaking now for the totality of the investment field—I supect that right now, even if you eliminated the 20% rule, in aggregate, you would not have 20% of assets held abroad. However, you would enable those individuals—and I'm talking now outside of the CPP, of course, because the rule applies across the board—and plans who elect so to do, to follow the most efficient course, unfettered by regulation.

The other reason I think it is crucial to eliminate this rule derives from pure economics. If I may give you an extreme example, let's assume that everybody in Canada is retired. They clutch in their hands a number of financial assets, but those financial assets, if they are a call on the production of the Canadian economy, are going to be worthless, because there is no production in that year of retirement.

That's the extreme example. But of course as the proportion of the population who are outside of the productive sector increases, then you are moving more towards that. So you're really putting a strain on the distribution of the annual GDP, the annual production of the Canadian economy, in every year that process continues.

One of the solutions to that is to ensure that the assets we clutch in our hands are those of economies whose population perhaps has a completely different demographic profile to our own. So they're out there, in essence, today. We lend to them; we invest in their economies so that they can be producing for us and returning funds to us in the days when we're retired collectively and we need that inflow. That's the basic economic rationale for eliminating the 20% rule.

The Chairman: Mr. Jones, do you have any further questions?

Mr. Jim Jones: Yes, I have one more question.

Initially, this fund is not going to be a large fund. I've been told it will be $57 billion to $75 billion over the next 10 years. But after that it could start to grow very quickly, and that's a lot of power to be putting under one fund.

Do you have any comments on say breaking it up into four additional funds, and having one for the Maritimes, one for Ontario, one for the Prairies, and one for B.C.? Would there be advantages in management and performance? And also, what would be the impact on the marketplace?

Mr. Don McIver: It's not a notion I would like to see carried through, for the basic reason—and this was included in our remarks—that I think the funds should be directed to the mandate, the objective of providing for the beneficiaries, and in essence maximizing the return.

If you were to break it into regional plans, then it might lead towards regional investment policies—in other words, alternative public policies, not necessarily intended to achieve the simple goals that are laid out in the mandate.

The Chairman: Thank you, Mr. Jones. Mr. Valeri.

Mr. Tony Valeri: Thank you, Mr. Chairman.

Mr. McIver, I have a couple of points.

You indicated in your brief that you feel that the elimination of the disability portion of the CPP would in fact hold the premium hike substantially lower. The contribution amount for disability is about 1.1% of the contributory rate, essentially.

I wonder whether you or your group had done any research with respect to what the benefit would be if we pulled that out of the plan and then went to the private sector, as you indicated, or went to some other avenue to cover the disability benefits.

Mr. Don McIver: No, we have no quantitative assessment.

Of course we discussed it in a qualitative sense, and I suppose to economists it more or less stands to reason that if you reduce the number of operators delivering a service, there are obviously efficiencies to be gained there. It would also seem fairly obvious that the monitoring and the enforcement of disability claims would be much more efficient were it put in the hands of one operation.

• 1915

Then of course you wouldn't have, either, the types of circumstances that you've seen, with one province changing its policy with respect to its workers' compensation plan and encouraging not so much a change of policy, but changing its payout, helping to reduce its own expenditure by encouraging recipients to turn to the CPP first for disability. Those types of inefficiencies just don't seem justified.

Mr. Tony Valeri: With respect to what you said, private plans build on the Canada Pension Plan as well. The argument is always made that if the Canada Pension Plan did not have a disability provision, then in fact what you would see would be larger premiums for private plans. So there's recognition that the Canada Pension Plan is essentially the foundation upon which these other programs have been built.

I don't know whether you're aware—and perhaps you can comment—that for the price of $175 per year a Canadian in fact purchases the disability provision in the Canada Pension Plan. I was wondering if you can take that $175 and see if you'd be able to replace that in the private sector for that amount of premium.

Mr. Don McIver: If that is a true costing, I expect our actuaries would say, give us the chance, yes. But I don't have those figures. I can't answer that.

Mr. Tony Valeri: Do you think your actuaries would say, give us the chance, yes?

Mr. Don McIver: Provided that those numbers are indeed reflective of the cost of providing the public plan right now and that they are not overly subsidized or indirectly subsidized, then yes.

I suspect there may be avenues of subsidization that enable that figure to be—

Mr. Tony Valeri: This is the percentage that's dedicated solely to the disability benefit.

Mr. Don McIver: Yes.

Mr. Tony Valeri: It doesn't involve any other benefit, and it's actuarially fair. It's there to cover the cost of the benefit. I just would be surprised to see if a private sector company would be able to provide that product for $175 per year, not being able to pool that thing over the entire working population.

Mr. Don McIver: I'm not sure of what I'm paying for long term disability, but I don't—

Mr. Tony Valeri: I would suspect a lot more.

Mr. Don McIver: I wouldn't be sure. I didn't actually think so, but I don't read the—

Mr. Tony Valeri: If in fact you were to go away and find some of that information, then I would certainly be interested in receiving that.

Mr. Roy Cullen: I'll defer to the regular member of the committee—if you have a question.

Mr. Paul Szabo (Mississauga South, Lib.): It all depends on what you're asking about.

Mr. Roy Cullen: Okay, I'll split the time.

I'll cut right to the chase. I'd like to challenge the fourth paragraph of your brief, where you pose the question, are CPP premiums a tax? Then you go on to use Webster's definition, defining a tax as a compulsory payment, usually a percentage, levied on income, property values, sales price.... Up until that point, I'm buying that it's a tax. But then it says, for the support of a government. Clearly the CPP employer-employee contributions go into a separately administered fund. They don't see the consolidated revenue by any stretch of the imagination. I think your thesis is that it's because there are other CPP programs, but I just would like, for the record, to disagree that the CPP is a tax.

If we're talking about contributions or levies based on payrolls—and I'll use that as opposed to the words “payroll tax”, particularly in the context of the CPP—I am quite interested in whether these types of levies or contributions are affecting job creation. It's something that I've looked at quite closely, and the research I have been able to obtain, looking at empirical evidence, not sort of theoretical or gut-feel arguments.... In other words, there have been jurisdictions that have played around with “payroll taxes” and the effect on employment. The evidence I've seen is fairly mixed. I wonder if you have any evidence to suggest that this type of contribution or levy based on payrolls does have an effect on employment levels.

Mr. Don McIver: You are certainly correct: it is a very mixed literature. I have seen studies trotted out to defend either point of view, some of them quite extreme, really tempting one to deny them outright. Nevertheless, it is a fair observation. I think the bottom line is that taxes destroy jobs. But taxes of course have a necessary purpose in our society. If we didn't have taxes we probably wouldn't have any jobs at all, because we wouldn't have an economy or a society to support it.

• 1920

What is the best means of collecting the revenue necessary to meet essential programs? That is the real thesis worth pursuing. The chamber has found in speaking to its members that one of the things that discourages them from employing more workers is payroll taxes. One of the most insidious problems with payroll taxes is that they tend to pose a substantial burden on the lower-income employees. If you're going to hire someone and pay his EI and CPP premiums and he's working for $30,000, that can represent a very substantial portion of his income. If you're hiring him at $200,000 he's capped out at a much lower level, so the proportion you're paying relative to his salary is much lower. So there really are problems with payroll taxes. We need to find the best tax solution to the problem.

Mr. Roy Cullen: Thank you.

The Chairman: Mr. Szabo.

Mr. Paul Szabo: Thank you, Mr. Chairman. I have a couple of quickies here.

In my view, the whole issue about whether the CPP is a tax is a political issue. You may want to use it for political hay or rationalize that it's necessary, but for the ordinary Canadian the point is moot. One way or another, it comes out of his or her pocket. That's a political item. And it doesn't matter who has to debate it, it does affect Canadians.

The issue about age seems to be counterproductive in terms of inter-generational equity in that it shifts the future burden down. I think we're trying to push it the other way. I'm surprised you would support the age thing at this time, although I can see that down the road it may be an element of future amendments. But at this time it does not help the inter-generational argument.

The idea of zapping the disability and saying maybe workers' compensation might be able to.... We're not all going to get under the same umbrella. Chances are it will be a dog's breakfast to try to find something else to prop up everybody who's not covered by workers' compensation and keep everything harmonized, equitable and fair.

There is the idea of using the EI notional surplus to deal with some of the costs of the CPP. I'm going in circles here, because if you tell the government to take $10 billion and give it to this investment board it will increase the deficit by $10 billion. We'll have this money sitting here that's going to be invested. That means the opportunity to target tax cuts and give business incentives, etc., will be diminished by the fact that $10 billion has gone out. So there is an element of circular argument: if I do this there's an equal and opposite impact that may not satisfy the objective that was in mind.

Even though we've delivered $4 billion worth of EI premium cuts since 1993, not much of that has translated into very many jobs, considering the amount of money. There has been good improvement, but if we go the way many interveners are talking about and have massive reductions, we're going to have a double whammy of the negative impact of a rate cut, and in a downturn a negative impact simply because the volume of people working has gone down. That surplus.... I want your views actually on the size of the surplus and whether or not prudence says you should be at this level at this time until we get a firmer footing on where the hell we are.

• 1925

Mr. Don McIver: My understanding is that the actuary has looked at the EI fund from a cyclical perspective and determined that it is overfunded relative to the economic risks of a downturn. In other words, we have the necessary nest egg built up and it should be sufficient. As we all know, this is a very notional item in the first place, but sufficient resources are there to meet the necessary expenditures of the fund which would be likely to come along in an economic downturn.

I take your point, and I appreciate that the end result as it stands now is that the surplus on the EI goes straight into debt reduction, if you like. We've got to the stage where we don't have to talk about deficit, we can talk about debt reduction; and that's highly desirable. It's because of my sensitivity to that in my prepared remarks that I suggested if we're going to reduce the impact on the payroll levy that arises from the increase in the CPP and the EI combined, then the most desirable way to do that would be to find some savings in other levels of expenditure so you can get the whole total down.

The second method would certainly be to examine the entire tax system and find out whether or not—this comes back to your question—there isn't a better way of funding those combined.... The pension we would definitely want to come as an employment levy, but as for the EI, or the part of it which is directed towards debt reduction, is there a better way to get that, either through expenditure reduction or through another tax, one that has less impact on job creation or job maintenance?

The Chairman: Mr. McIver, on behalf of the committee I personally would like to thank you not only for your contribution here this evening on Bill C-2 but also for your participation in the pre-budget consultation. You've been very generous with your time, and it's greatly appreciated by the committee.

Mr. Don McIver: Thank you very much. I'm impressed by the fact that the committee is putting in these long hours as well. I recognize it's a burden to have to listen to economists so frequently and for such protracted periods.

The Chairman: Actually, you're more interesting than you think.

I'm going to suspend for a couple of minutes.

• 1928

• 1930

The Chairman: I'd like to call the meeting back to order.

I have the pleasure to introduce to you Mr. David Perry from the Canadian Tax Foundation, well known to all members of the committee, of course. Mr. Perry, welcome.

Mr. David Perry (Senior Research Associate, Canadian Tax Foundation): Ladies and gentlemen, I'm honoured to be here in such august surroundings. I'm afraid it's another economist who's testing your endurance again.

I should remind you that the Canadian Tax Foundation isn't a policy advocacy organization and it doesn't take positions on issues of public policy. So my remarks tonight should be considered as personal reflections on the issues before you.

Bill C-2 embodies a commitment of the federal and most provincial governments. So the main details, presumably, cannot be changed at this time. That commitment, however, is important to many Canadians and reflects a uniquely Canadian way of doing things. We did not privatize it by moving to compulsory RRSPs, as was suggested. We didn't, unlike in past decades, enrich and expand the program. In keeping with the current austere times we simply ensured its continuation. But it was important to establish the CPP as a continuing presence and as an essential part of the overall retirement income system in Canada.

It's not with the CPP that the real quarrel lies in the private sector. Looking at the macro-perspective on the proposed changes, they certainly do affect fiscal policy and they limit the options open on all pre-millenium and a few post-millenium budget rounds. Given the increases in CPP rates and the public antipathy to tax increases in general, it effectively means there will be no other tax increases in the next two or three years.

This isn't serious, however—to state the obvious. The improved budgetary balance at the federal levels suggests that far from tax increases, tax reductions are appropriate. This then has the effect of transferring the surplus for the reduced deficit from Ottawa and the provinces to the CPP fund. This surplus, which is designed to grow quickly to build up the investment fund of the CPP, will create a drag on the economy that can be offset by tax reductions or spending increases at the federal or provincial levels at the expense, I think, of debt reduction. For example, reducing the employment insurance premiums would be the most direct offset against the CPP increases, but that would throw all of the responsibility for assuaging the taxpayer and levelling out the economic effects squarely on Ottawa. This could come to be as much of a straitjacket for federal fiscal policy as the deficit crisis has been over the past few years.

While the percentage increase in CPP rates, 65%, seems exorbitant, it represents an increase of only two percentage points of income for individuals and four percentage points for the self-employed. That's up to the threshold of $35,000, and that's before taking the offsetting credits available into the income tax into account.

The change for employers represents less than 2% of payroll, again on a pre-tax basis. With a phase-in period that increase can be offset by wage and salary increases lower than would otherwise prevail, passing the burden along to the worker—I should add here parenthetically, passing the burden to the lower-income worker, because that would be effective only for people earning less than $35,000.

As we discussed a few weeks ago in Toronto, from the international perspective our social security levies are low in comparison with most of our trading partners. This suggests that the projected increase could be accommodated without any serious impact on our competitive position.

If, however, the burden of payroll taxes is considered excessive, the proper course might be to look at the whole picture: employment insurance, Canada Pension Plan, workers' compensation and provincial payroll taxes. Devices to lessen the effect of such taxes for newly hired, lower-wage employees might be more effective than simply putting off changes to the CPP.

• 1935

Really, what options were available to restore the CPP to stability? The first was obviously a change to a more fully funded system. This is the option that has been chosen and it reflects the compromise that minimizes the long-term effects on younger workers. It involves higher increases in the short term to build up the fund.

The decision to entrust investment of accumulated funds to a separate body rather than simply lending them to federal or provincial governments presents the possibility of higher returns and commensurately higher risks. The plan guarantees pensions regardless of those risks, however, and that moves the cost of the risk from retirees to workers.

The option chosen does imply that the young will pay more into the plan than they will receive. It assumes, however, that there is some value, even to the young, in having a minimum retirement income consistent with work experience and insulated from economic and market fluctuations.

The question also arises as to whether the tax increases are bearable. This is very much a matter of perspective. There are no compelling arguments that the increased rates will cripple the economy, especially given the opportunities for reductions in other tax rates, notably, the unemployment insurance premiums.

There's no question that in the short term half of the increase in rates will fall on employers, with a negative effect on our international competitive position in labour costs. Canada's expert on payroll taxes, Jonathan Kesselman of UBC, argues that the international competitiveness issue can and would be resolved by automatic exchange rate adjustments.

In the longer term, Kesselman points out, as have many economists in the developed world, the bulk of the burden of payroll taxes on employers is ultimately borne by workers in the form of lower wages and salaries.

Again, the phase-in period allows that sort of adjustment to be made, as you effectively put a freeze on wage increases for the first $35,000 of income.

Either of the other two options that were open would certainly have implied higher overall costs, albeit with different timing and different victims. If we changed to a pay-as-you-go system we could produce lower contribution rates in the short term, but when the full impact of the retirement of the population bulge hits, the rates would have to be considerably higher, unacceptably high to many of our young people.

There's a further problem with staying as a pay-as-you-go system. The crisis in the CPP spawned a cynicism in the country that the plan would not be there when the young need it. The concern about bankruptcies stemming from the rapid drawing down of the CPP fund led many to believe that the plan would collapse. By restoring a stable fund, the government's intention to maintain the CPP becomes credible.

There is a possibility of dropping it altogether, but to summarize that very briefly, you have the same problem of protecting existing workers and those with a significant equity in the plan from total collapse of the plan.

And I have to declare a conflict of interest here, because I have thirty years in this thing, so I—

Some hon. members: Oh, oh.

Mr. David Perry: —stress that point about protecting.

Effectively you would not only be paying off us elders, but you would also be working very hard to try to build up your own fully funded plan over your own lifespan. There's a double whammy for the young whichever way you do it.

There's an important point here, I think. The lack of national passion about the CPP changes shouldn't be interpreted as satisfaction with the whole retirement income system. The proposed seniors' benefit as it's presently designed imposes some very high rates of tax on middle-income Canadians and can have the perverse effect of discouraging private savings in RRSPs for that same group. Clearly, the seniors' benefit needs attention, which I understand it's getting at this point.

Further, the registered pension plan and RRSP contribution limits have also become a problem for many Canadians and Canadian employers. The federal government's first concern was to minimize the cost of the old age security pensions while ensuring an adequate minimum retirement income for all. The seniors' benefit, while not without its problems, accomplishes that. The changes to the CPP ensure that those earning up to the average industrial wage will have additional support in their golden years.

The income tax subsidies for RPPs and RRSPs allow these same workers to save to build up a retirement income that is more proportionate to their working income. But higher-income Canadians find that the RPP and RRSP limits are inadequate to build commensurate retirement income without resorting to savings out of after-tax income and paying tax on the income from such savings.

• 1940

The changes originally proposed to the RRSP and RPP limits would have avoided leaving the managerial and scientific classes without government assistance for retirement savings. A succession of budget crises, however, postponed those changes. The result is that those facing marginal tax rates of 50% or more, usually the savers in the community, have little incentive to save, and often little incentive to stay in the country. The tax treatment of investment income, of which retirement savings is but a part, may soon become a serious problem for Canada.

I welcome your questions, Mr. Chairman.

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

We'll now proceed to the question and answer session. Mrs. Ablonczy.

Mrs. Diane Ablonczy: Thank you, Mr. Perry. We appreciate having you here, and your expert input.

Page 2 of your submission says that the increase in CPP rates is 65%. In fact, it's 73%. I was curious as to why there was such a discrepancy in your figure.

Mr. David Perry: I think it might be a calculator that didn't quite....

Mrs. Diane Ablonczy: It just misfired.

Mr. David Perry: Yes. Sorry about that.

Mrs. Diane Ablonczy: That happens to me too.

On page 3, under “Change to a more full funded system”, it says, “The option chosen does imply that the young will pay more into the plan than they will receive.” I wonder if you can elaborate on that conclusion and how you reached that. I guess it either implies or is actually the result.

Mr. David Perry: As I understand it, having looked at a couple of analyses of the proposals, the total lifetime benefit for somebody in their mid-20s would be less than the total amount paid in, given the proposed structure of the thing. That is the problem. This relates to the problem of cleaning up the original design of the CPP and at the same time putting the future benefits on a more fully funded system.

Mrs. Diane Ablonczy: That conclusion, I think, is borne out by the actuaries' report, which says in fact that the real rate of return for children would be 1.8%, which of course is less than the value of their contribution.

That being so, has your organization drawn any conclusions about the sustainability of this proposal? In other words, at some point, 20-year-olds are going to figure out that they're getting less than the value of their contributions and perhaps won't be too keen on continuing to prop up the system.

Mr. David Perry: As I keep reminding my teenage son, 20-year-olds must remember that they have some obligation to the generations that went before them.

The problem is, if you look at some of the other possibilities, the shifts are even worse. The whammies of, for instance, going strictly to the pay-as-you-go system, where the rates rise dramatically to 14-plus by 2010 or something like that, would be even more onerous, I would think, and more unacceptable to those who are just coming into the system.

Mrs. Diane Ablonczy: I sincerely hope, by the way, that your admonitions are sufficient to keep your 20-year-old paying my CPP, even though the rate of return I'll be getting is considerably more than he will be getting. I somehow doubt that this level of generosity is going to be too widespread in 20 years.

Has your organization studied at all any other options or proposals or possibilities about how to address that particular issue, which I think is really germane to the sustainability of this particular set of proposals?

Mr. David Perry: Our expertise does not lie in actuarial science, unfortunately; we have just looked at some of the studies that have been produced. We haven't done our own work on it, I'm sorry.

Mrs. Diane Ablonczy: Sure. I understand that you have a life, too. I just thought if you had, it would have been interesting.

• 1945

The other question I had is this. On page 5 you mention that if the individual were to be managing a pension account on his or her own—and as you're well aware many countries have gone to individually owned and managed pension accounts—you mention it would be fairly risky. Would it be less risky for those same funds to be in the same sorts of investments managed by government than it would for individuals?

Mr. David Perry: The risk is transferred under a government proposal such as the proposed CPP. Under the strictly do-it-yourself operation the risk is borne by the retiree as to what kind of return he can get at retirement and after retirement, for those who are not in a position to modify their income on their own. The risk under a government pooling system such as the proposals for the Canada Pension Plan would involve guaranteeing retirement incomes and making up the difference, if there is indeed a difference, by imposing higher rates on those who are still working.

Mrs. Diane Ablonczy: I understand that. It just strikes me that an investment is an investment, no matter whose name is on the account. If there is a loss in the investment as you point out, somebody loses. If the government CPP fund has a big loss, then you say it's guaranteed, but really it's guaranteed by us; by people who are working. So in one way or another we're actually guaranteeing the loss, no matter whose name is on the account.

I think you're agreeing with that conclusion.

The other thing that was interesting to me, and I really applaud you for this, is you went beyond the CPP to look at the whole macro-picture of retirement security. In other words, CPP is only one small component of retirement security at best. If we get everything we're supposed to we'll get something less than $8,600 or so a year when we retire; and I don't think many of us here or anywhere would be too keen on living on $8,600 a year. So as you rightly point out, there's a seniors' benefit, there are private pensions and RRSP savings. I really think it's important that this whole thing be looked at in the big picture, and I applaud you for doing that.

You mention specifically that there will be this 50% clawback on the first $12,000 of income under the seniors' benefit. I wonder if you can just comment on how that will affect the CPP benefits flowing to retired taxpayers.

Mr. David Perry: As I understand it, the CPP would be subject to the clawback, just as any other income would be, so it certainly will reduce the seniors' benefit in that way.

I think it's important to go back to the beginning of the CPP, where it was considered that old age security took care of a quarter of an adequate pension income for an average industrial worker, the CPP benefits would provide another quarter of an average pension for a CPP worker, and then the individual was on his or her own for the other 50% of an adequate pension income. The RPP and RRSP limits for the average industrial worker made it possible to top that up to a reasonable level, given the limits.

Now that the seniors' benefit has been changed, there is an erosion of that first 25% of the basic building blocks of a retirement income. You have to regret the fact that there hasn't been an overall review of the retirement income system as was promised a number of years ago, so we could all be happy that the seniors' benefit, or the basic, without qualification, demi-grant kind of pension would be integrated with the government working pension and integrated also with tax assistance for private saving systems.

Mrs. Diane Ablonczy: I appreciate that information.

The Chairman: Mr. Crête, please.

[Translation]

Mr. Paul Crête: I want to congratulate you for your brief. It is a very high quality explanation of the whole operation. I think many taxpayers should read it in order to better understand the whole issue of the Canada Pension Plan.

• 1950

On page 2 of your document, you say that reducing employment insurance premiums would be the most direct offset but that this would throw all the responsibility for assuaging the taxpayer on the federal government etc., and that this would be as much of a straightjacket for federal fiscal policy as the deficit crisis has been over the last decade.

In a context where we would want to very significantly reduce employment insurance premiums this would sound reasonable, but if the federal government were to go for a more acceptable surplus in the employment insurance fund, a level of surplus that would still provide future security in periods of economic crisis, and only implement a small decrease to ensure a sufficient surplus, would your proposal still be valid? Would it not be the only way to reduce the negative impact of this on consumption?

[English]

Mr. David Perry: I regret that the translation left me a little bit confused.

[Translation]

Mr. Paul Crête: Would you like me to repeat?

If the reduction in employment insurance premiums were smaller than the CPP increase, would your reasoning still be the same? Would this still be as much of a constraint on fiscal policy as the deficit crisis has been over the last few years? What you say seems to me quite disproportionate if the reduction in premiums is not excessively large.

[English]

Mr. David Perry: Yes, I see the point. It's a matter of degree. If the unemployment insurance premiums were dropped simply to offset the Canada Pension Plan increases, then the effect would be less pronounced on the federal budget surplus or deficit than would be a drop in unemployment insurance premiums down to the self-sustaining level for the EI fund. This would minimize the restrictions on federal budget policy, but it's still going to eat up part of the room the federal government has to manoeuvre in terms of tax reductions. The pressure on the EI premiums, public opinion polls notwithstanding, will continue from a number of quarters.

[Translation]

Mr. Paul Crête: You start with the assumption that the employment insurance fund can be used as a tool to fight the deficit and that it is not strictly an insurance plan to provide income to workers who are unemployed.

You state this at the outset. In order for us to adequately manage both these tools, would it not be useful to have actuarial studies on the future of both the employment insurance system and the Canada Pension Plan, as the bill prescribes for the latter, before making any such decisions?

[English]

Mr. David Perry: Yes, I agree. The reports that we've seen on unemployment insurance operations and projections are pretty informal. All I've seen is a couple of leading articles in newspapers.

The question of whether unemployment insurance premiums should be solely related to unemployment insurance costs or whether they are a general tax is a difficult area. Certainly the effect of unemployment insurance premiums at the present time on federal budget outcomes is that they are going to the reduction of the deficit. The inevitable result of any changes in the EI premiums, regardless of their formal intent—whether it's to put the EI fund on a more actuarially sound basis or whether it's an explicit trade-off against the Canada Pension Plan—will be to minimize the amount of room the finance minister has to introduce discretionary changes in tax policy, other than those two payroll taxes.

• 1955

Does that answer your question?

[Translation]

Mr. Paul Crête: That's fine.

[English]

The Chairman: Thank you, Mr. Crête.

Mr. Nystrom and Mr. Jones, very briefly, you'll get one question each.

Mr. Lorne Nystrom: Welcome to the committee, Mr. Perry.

I share your point of view about the abolition of the CPP and about going to super-RRSPs. You are saying in your brief that if that was done, there would be a considerable cost on the workers, as you have to have the fulfilment of the obligations for those who have paid into CPP, as well as a building up of their own fund.

When you say considerable cost, do you have any information that you can share with us as to what that cost might be? If you were to abolish the CPP, as the Reform Party is suggesting, I know it would be a much more expensive way to go for young people. Do you have any specifics by which you could enlighten my members to the far right?

Mr. David Perry: I wish I did. Unfortunately, when you get beyond your own area of expertise, you have to rely on secondhand reports to a certain extent. Intuitively, you can say there would be a problem, but in terms of the actual magnitude of the numbers, no, we haven't done anything.

Mr. Lorne Nystrom: That was my short question.

The Chairman: You're too accommodating tonight.

Mr. Lorne Nystrom: I could change that.

The Chairman: Mr. Jones.

Mr. Jim Jones: Thank you for your brief, Mr. Perry.

I think you were pretty political on your explanation of the UI premiums. I definitely think the contributions from the people who have contributed to UI were supposed to be used for unemployment, not to fight the deficit, and especially in light of the fact that the throne speech introduces 29 new taxes that are all going to be coming out of the surplus of the UI.

I would just like an explanation on something on your first page: “The changes proposed in the CPP rates affect fiscal policy”. What do you mean when you say they limit the options for future budgets?

Mr. David Perry: Simply because you're raising taxes at a time when people are looking for some sort of tax relief or spending increases or debt reduction, you have a pool, the so-called fiscal dividend. In terms of the average person and in terms of macro-economic policy—the national aggregates—you've automatically lowered that fiscal dividend by taking some of that and putting it into the Canada Pension Plan.

First of all, the provinces would be similarly limited in their options for tax increases should that very unlikely event prove attractive. They would also be on the hook to a certain extent for some sort of offset. If the Canada Pension Plan is a joint federal-provincial program, and if Ottawa proposes to make some tax changes in order to accommodate part of the CPP increase, it may well look to the provinces to provide similar offsetting tax relief in order to accommodate their part of the tax increase.

So as it looks right now, it goes against the general thrust of tax policy over the next couple of budgets. By doing that, it limits the options at the federal and the provincial levels.

Mr. Jim Jones: Thank you.

The Chairman: Mr. Valeri, followed by Mr. Cullen, and Mr. Szabo if he has a question as well.

Mr. Tony Valeri: I'll be very brief, Mr. Chairman. There are a couple of points I want to make.

There was reference being made to the calculator not quite working when you calculated the 65% increase in CPP rates. I think it's important that we point out that the calculation the Reform Party has actually made in fact shows a 73% increase in the rate. That's taking the 1997 rate and moving to the proposed 2003 rate. But if we did nothing with this pension plan, and if we looked at the rate of the existing schedule in 2003 and compared it to the proposed rate in 2003, you would actually see a 38% increase. So there is in fact another calculation that I think you'd have to make to actually compare what the proposed schedule is proposing with respect to the rate.

• 2000

There is another point I want to make. You talked in terms of reducing unemployment insurance premiums being the most direct offset at this point. For the year 1997-98, the reduction in the EI premium more than offsets the increase in the CPP premiums, so some of that is in fact already going on with the present policy.

Those are just a couple of points I wanted to make, both for clarification and for your information. Thank you.

The Chairman: Mr. Cullen.

Mr. Roy Cullen: Mr. Perry, thank you very much for your presentation.

You put out the fishing line, and I'm going to bite. In the last sentence of your brief you say, “The tax treatment of investment income, of which retirement savings is but a part, may soon become a serious problem for Canada.” I wonder if you could elaborate briefly on that.

Mr. David Perry: That's the economist's concern that savings are taxed twice. The first time they're taxed is when you earn the income and you try to scrape some savings. You're scraping savings out of after-tax income, so that income has already borne tax once. Should you be lucky enough to earn any investment income out of those savings, that investment income is taxed once again. So there's sort of a double whammy on the taxation of savings.

It's interesting to see that some of the European countries are looking at other ways of addressing this problem. Either Sweden or Norway—I'm sorry, but my mind is a blank at this point, which is Air Canada's fault—has introduced a separate flat rate system for investment income that is considerably lower than the marginal rate system on earned income. Rather than being subject to a top marginal rate of 55% or 60%, as earned income is, the investment income is subject to a flat tax of 28% to 30%. There is no exemption, there are no deductions, and so on. But that recognizes the problem of the fact that under a system like ours, you do get this sort of double whammy on savings.

That's the reason the RRSP, for example, is so attractive. Not only do you get the immediate deduction, but all the income that's generated from the savings pool is exempted from tax until it comes out.

Mr. Roy Cullen: I just have a quick supplementary. I was going to ask you if they have a similar RRSP-type system in these other jurisdictions.

Mr. David Perry: They generally do, but the generosity varies from country to country. We used to think we were much better off than the States because they had a very small IRA system and we had this very elaborate RRSP system that was much more generous. The Americans have been developing similar vehicles and have been extending the IRA concept. In many cases the Americans now offer a more attractive package for savings than does Canada.

Mr. Roy Cullen: Thank you.

The Chairman: Mr. Szabo.

Mr. Paul Szabo: Mr. Perry, in terms of a percentage, how many Canadian taxpayers earn more than $75,000 a year?

Mr. David Perry: I believe it's less than 10%. I would guess it's in the 5% to 7% range.

Mr. Paul Szabo: Yes, I would think so. For $50,000 and over, I think it's about 10%, and it goes down from there. I raise this because you have to make $75,000 a year in order to be able to put $13,500 into your RRSP. You raised it in your report, so I'll ask you if you think dealing with increasing RRSP limits is a priority that should be on the table, given the condition of the other 95% of Canadians.

• 2005

Mr. David Perry: For many Canadians, the possibility of saving up contribution room and making a big splash at the end will provide them with the kind of kick they can use to build up a retirement fund when the mortgage is paid off, the kids are out of school, and all that sort of thing.

The concern, apart from some lawyers, accountants, doctors, and so on, is that we've got a class of scientific and managerial talent that's highly mobile. They are earning more than $75,000, but less than $500,000. We're not talking about bank presidents.

They're finding the existing tax burden high. Their vehicles for minimizing or saving tax are being taken away from them. Retirement savings are limited for these people, so it makes a green card look that much more attractive.

Look at the marginal rates they face in Canada, which range from 46% to 53% or 54%. Compare them to the marginal rates in the States, at 45% to 47%, and in the U.K., at 40%. Those are our two closest competitors for hotshot talent.

Mr. Paul Szabo: If I may, Mr. Chairman, this is my last point. When I think of the incremental value of deferring taxes and getting a boost on investment-income potential because of the deferral, I have some difficulty with how one could be so concerned about that when we had a $100,000 lifetime capital gains exemption, which, when brought in, did not apply only to gains from the point of introduction forward, it applied also to accrued or holding gains. There were a hell of a lot of Canadians out there who had $100,000 capital gains who cashed in almost immediately and got this enormous tax break, which is no longer available to the rest of Canadians. I sort of wonder whether or not the argument about whether I get a little help on each and every item shouldn't be discounted by the fact that the tax expenditures, current ones and those that have ceased, have benefited primarily that 5% group anyway.

Mr. David Perry: Is it the 5% group or is it the 1% group?

Mr. Paul Szabo: It might be the 1% group.

Mr. David Perry: The capital gains exemption was valuable to a particular type of person, excluding families with cottage properties, which was a big item in Ontario.

The Chairman: Thank you very much, Mr. Perry, for a very interesting presentation, as always.

I'm going to suspend the meeting for a few minutes, and then we'll be back.

• 2008

• 2013

The Chairman: I'd like to call the meeting to order. As you know, we are studying Bill C-2, an act to establish the Canada Pension Plan Investment Board and to amend the Canada Pension Plan and the Old Age Security Act and to make consequential amendments to other acts.

The next presentation will be from the Canadian Institute of Actuaries, Mr. Normand Gendron and Mr. Christopher Moore. Welcome, gentlemen. I think you know how this committee operates. You'll have ten or fifteen minutes to make your presentation, and then we'll proceed to a question and answer session.

Mr. Christopher S. Moore (Past President, Canadian Institute of Actuaries): Thank you. I'll start off. My name is Kit Moore, and I'm here with Normand Gendron. We both are representing the Canadian Institute of Actuaries.

Between 1993 and 1996, the—we call it the CIA, so if I say CIA, don't get disturbed—CIA ran three task forces dealing directly or indirectly with the future of the Canada Pension Plan. In 1996 I chaired one of those task forces, a task force on the future of the CPP and QPP, and we reported to the government's public consultations held in May 1996. Normand Gendron was also a member of that task force, and that's why he's here today.

In our view, Bill C-2 has responded to most of the major concerns that we expressed in that task force report, which represented the view of actuaries across Canada. Although the specifics differ, in many cases Bill C-2's provisions agree in substance with the key recommendations of the 1996 task force report.

First, we had stressed the need to keep the CPP, given the importance it has in our total retirement system of pension, RRSP, and social security, and given its $600 billion of existing commitments that have been made to its contributors and pensioners since 1966.

• 2015

Bill C-2 appears to recognize this importance by keeping the CPP in substantially its present form, by not phasing it out, and by not suggesting that it be replaced by a separate RRSP program.

As we pointed out in our submissions last year, the CPP needs to be fixed, not replaced. In fact, actuaries have been saying this for over 20 years now—individual actuaries and actuaries as a group—with little apparent outward response from previous governments, even in the face of changing economic conditions since the CPP was introduced in 1966.

Over those 20 years the cost of CPP benefits continued to rise more than the contribution rates did, so the CPP's financial condition continued to worsen, instead of improve.

Many of you might have been familiar with this book written by actuary Geoff Calvert in 1977. It's called Pensions and Survival—The Coming Crisis of Money and Retirement. In it he warned of the need to fix the CPP's financing, and that otherwise we would be faced by a declining CPP fund in 1995—which we were, for the first time—and its disappearance early in the 21st century, which we are still faced with without Bill C-2 or the kinds of changes set out in Bill C-2.

The second theme of our task force report was the imbalance in the sharing of contributions among different generations of contributors.

First we had the windfall—we called them the “windfall generations”, starting with the early groups of CPP retirees, especially those fortunate people who retired in 1976 after contributing to the plan for only 10 years. Later groups of retirees did not do quite so well, but there is no question that they too have received windfalls, and today's new CPP retirees will still get more than their fair share from the CPP.

Our task force wanted some kind of action to be taken to significantly speed up the increase in contributions so that today's contributors would pay a larger share, and tomorrow's contributors—our children, our children's children—would receive a fairer share of the CPP cost burden and the pension benefits out of the CPP.

Bill C-2 does this by providing that contribution rates would increase to 9.9% in the next six years, very much in line with what we had suggested in our task force report, but using a different approach to get there, which takes me to point number four on the one-page summary.

The third theme of our task force report was not followed explicitly in Bill C-2, in that we had suggested a more dynamic form of funding the CPP, where contribution rates would vary directly with economic conditions. We called it “smart funding”—not that other funding is not smart, but we just used that term to describe it.

On the other hand, Bill C-2 actually does provide for more frequent monitoring of funding through the actuarial reports being made every three years instead of five, and the CPP chief actuary is familiar with the methodology behind our smart funding concept.

Those facts, along with the higher level of CPP funding available in future under the provisions of Bill C-2, would mean that the CPP actuary will have ample opportunity to make use of those concepts that underlie smart funding. There is no need to have them out front; they can be used in the back room.

We see the distinct possibility of some of those concepts being brought into the actuarial assessments that are going to be made every three years.

A fourth theme in our report involved some limited changes in CPP benefits to bring the CPP costs more into line with contributions. Here we endorsed very strongly the move to more stringent disability administration and eligibility conditions. We stressed the need to stay that course until disability costs were brought back into line.

• 2020

We looked at the QPP and saw quite a difference there, and felt that they should be brought back into line with QPP. Bill C-2 supports that move almost exactly as we had proposed, so we're very happy about that.

We also suggested eliminating or phasing out the year's basic exemption, the YBE, the first $3,500, on which contributions aren't paid. Bill C-2 would freeze the YBE at $3,500, in effect phasing it out over a much longer period of time. It is not as much change as we had suggested, but it is a move in the right direction. In addition, Bill C-2 freezes the death benefit at a maximum of $2,500, which would add to those cost savings.

We had recommended that if smart funding were not adopted or couldn't be used even indirectly to increase the funds' returns, as it was intended to do, the government should consider increasing the CPP retirement age of 65, the retirement age for full benefits, to say 67 or 68 years of age. That has been done in the United States and is being considered by some other governments.

Instead, Bill C-2 would change the earnings base from a three-year final average to a five-year final average, which actually is more consistent with the final earnings basis that is used in private pension plans. Given today's rate of wage increases, it would actually be probably much less objectionable for contributors because it would be equivalent to raising the retirement age by well under a year, so it is not as significant as we were suggesting. So it is actually a very good alternative.

Our final theme was a significant one, given the increased funds that were going to be anticipated under the CPP if funding were increased. That is the issue around the investment of those funds. I would like Normand Gendron to cover that part of our report and our reaction to Bill C-2.

[Translation]

Mr. Normand Gendron (Vice-Chair of the Board, Canadian Tax Foundation): I would like to deal with what we had in Section 4 of our task force report on the Canada Pension Plan and the Quebec Pension Plan, with regard to investment.

We said that the rate of return to the Canada Pension Plan varies with the degree of capitalization of the fund. If the Plan were to remain substantially on a pay-as-you-go basis, as it is presently, its assets would be relatively small and, therefore, returns generated by those assets would also be small.

However, on a fully funded basis—and our report provided one of the approaches that could eventually lead to full funding of the plan—the rate of return becomes a key factor.

The provisions of Bill C-2 would lead to a greater degree of funding of the Plan, but not as high as our report contemplated. In such a context, the management of the plan's assets becomes very important.

Secondly, since the money comes from the workers, accumulated funds must be used to guarantee the best possible benefits and the best possible level of contributions.

So we recommended that the fund be managed prudently but still try to maximize the return to workers. In this regard, we suggested a diversified portfolio in order to reach these objectives. Bill C- 2 says that the fund will be managed on a diversified portfolio basis. In essence, this meets our recommendations and should provide for better rates of return over the long term.

We also emphasized in our report the need to insulate investment decisions from political and social pressures. The only objective should be to maximize the return to contributors, both present and future.

• 2025

Bill C-2 provides that the Investment Committee will be independent of government political pressures. The English version uses the word

[English]

arm's length.

[Translation]

Therefore, we will have to monitor over the medium and long-term how this independence will be maintained.

We also suggested in our report investing in index funds in order to circumvent any political or social influence over the choice of stocks. In this way, the plan would not invest in any given company but rather in the market as a whole.

This would also help to minimize the impact of these purchases on the market. If we were to buy individual stocks, given the hundreds of billions of dollars which will eventually accumulate in the Canada Pension Plan Fund, these transactions would impact on the price of individual stocks.

Bill C-2 provides for investing in indexed funds but only as far as equity investments are concerned. As for bonds, an interim approach is used where provinces will be able to renew their long term bonds. Afterwards, for the first three years, the Investment Committee will be required to invest up to 50 % of its assets in bonds of provinces who participate in the Canada Pension Plan.

Eventually we will have a diversified portfolio but this will take quite a few years in view of the mechanisms that are being put in place for the initial period.

Finally, we said in the report that if the amount of money in the fund became too large, if the amount reached several hundred of billion dollars, the Canadian market might be too small to allow for a proper return on capital. We suggested that in such a situation it would advisable to invest in international markets, possibly in a greater proportion than the 20 % limit pension plans are presently allowed.

Bill C-2 provides that foreign investments will be limited to 20 % of the assets, taking into account the projected level of assets for the coming years. It is likely a proper level but we anticipate it might have to be increased in the long term.

These are my comments on asset management. I will ask Mr. Moore to complete our presentation.

[English]

Mr. Christopher Moore: I guess by what we've said, you could see we're very pleased with the direction taken by Bill C-2 to fix the CPP, and to do it quickly, without delay. We support that move.

The Chairman: That was made quite clear.

Mrs. Ablonczy.

Mrs. Diane Ablonczy: Thank you, Mr. Chairman.

We sure appreciate you gentlemen being here. It sounds like you've done the country a service by bringing concerns forward about the Canada Pension Plan, urging reform and actually helping to craft it with your professional expertise. I, on behalf of Canadians, really do appreciate that.

I have a couple of questions for you that only you could answer. The first one really is about how certain we can be about the CPP premium levels. As you know, we've been told now that they will not need to exceed 9.9%, but I think a lot of Canadians have some real concerns about the reliability, particularly of short-term actuarial projections, but over the long term as well.

For example, in the sixteenth annual report of the chief actuary of the fund, he said that by 2007 there would be $135 billion in the fund. Now the estimate has been lowered by $40 billion, to $94 billion, and this is all in the space of a month or so. So I think we do need to try to satsify ourselves as to the reliability of these projections. Just how much credence should we put in that? What would you advise us on that issue?

Mr. Christopher Moore: Certainly that was a concern we have had over the last 20 years, that projections were not necessarily as realistic as they could be for the long term. There will be ups and downs in the short run, there's no question.

I think the projections that have been made by the CPP chief actuary are consistent with the projections we used in our report. He's now using a slightly higher real rate of return in his latest report; I think it's 3.8% real rate of return, as opposed to a 2.5% real rate of return, reflecting the move into the market.

• 2030

With the way the markets have been in the last few months, people may not feel quite as confident about the long term. But I think that over the long haul he's done the right thing, and that's consistent with the results we developed in the work we did on the investment aspects of the fund. We had shown that the returns on the QPP were significantly higher than the returns on the CPP. We'd also compared CPP returns with the market returns, the median returns in the pension funds in the marketplace.

As as far as projections are concerned, I think the answer in Bill C-2 is to see that more frequent monitoring of the actuarial condition of the plan is carried out. I think the three-year valuations—as opposed to five-year—will certainly help.

Mrs. Diane Ablonczy: What I hear you saying is that there may need to be some adjustments in the 9.9% contribution.

Mr. Christopher Moore: That's right. But what we need to do, and what I expect the CPP chief actuary will be doing, is to look at the long term. We need to be looking out over the next 30 years, not looking at the next year or the next quarter.

Mrs. Diane Ablonczy: The second question I have is about the unfunded liability in the plan. You mentioned that it was $600 billion, and I understand that's slated to rise. What do your projections show the rate of increase to be?

Mr. Christopher Moore: We haven't done any projections on that. We've looked at the cost of paying that off, and of course that depends on over how many years you pay it off, whether it's 30 years, 35 years, or 100 years. If it's over 30 or 35 years, we'd be talking about something in the neighbourhood of a 7% or 8% contribution per year. That's over a longer period than a normal pension plan would be permitted to be—

Mrs. Diane Ablonczy: I'm talking about the amount of the unfunded liability.

Mr. Christopher Moore: We haven't done any projections beyond the present $600 billion.

Mrs. Diane Ablonczy: I have a question about the QPP. As you know, a number of Canadians are drawing funds from the QPP, but as you've mentioned, the QPP has earned a better rate of return than the Canada Pension Plan, due to better management, one assumes. Yet the rates for the QPP will rise by 9.9% as well. Reaching equilibrium in the QPP obviously wouldn't require a 9.9% premium. I'm wondering if you know in your study why that rate of increase is the same.

Mr. Normand Gendron: I can answer that. There are two main reasons. One, as I mentioned earlier, is that the Quebec Pension Plan had a little better rate of capitalization, of funding, but it's very marginal, and anyway it's still just a couple of years of payments that are accumulated as a reserve, if you like. Of course the lower the assets, the more insignificant the rate of return is. If you're producing a return on 10% of your liabilities, even if you do a real great job and earn 2% more than the market, you'll only have reduced your actual liabilities by 0.02%.

One other reason is the fact that the Quebec benefits have been a little more generous over the years. That additional rate of return has financed some of those benefits over the years.

Mrs. Diane Ablonczy: Okay.

I have just one more quick question, if I may. In your report you did raise the issue of intergenerational equity, which I think is of concern to all of us. The chief actuary estimates that the real rate of return for our children and grandchildren under these changes will be 1.8%. I'm wondering if you consider that to be equitable for them and if you think that's sustainable in light of their evaluation of the cost benefit to them.

Mr. Christopher Moore: That's a hard question to answer, because everybody has different standards for what returns they expect under different conditions. The CPP is certainly a more secure plan than most pension plans in terms of the employer being more secure than most employers the plans sponsor. I think it's also a very low-cost plan. The administration cost of the plan is much lower than the administration cost of a regular pension plan.

• 2035

If you allowed for those factors, 1.8% might be a little higher, but it's still not going to be much above 2% real rate of return. That's better than some of the returns I've achieved on some of my investments, but it's not a high rate of return. As a base for someone, though, I think it's a solid rate of return. That's the long-term rate in the plan as it now stands.

Whether that's high or low depends on each individual. Somebody who's used to getting a real return of 15% on their funds is not going to be happy with 2%. Someone else who has had worse returns in the past will feel it's reasonable. But I think we're looking at really a basic pension plan for the country. It's not a savings plan. At least I think the positive side of that is that it's much better than what we've seen reported in some cases, where the statement has been made that people are not going to get their money back out of the Canada Pension Plan. That's not true.

The Chairman: Monsieur Crête.

[Translation]

Mr. Paul Crête: I wonder if you have done any work on the impact of the increase in contributions on the economy. Since actuarial science allows you to make projections, I wonder if you have evaluated the repercussions of this on consumption and on the economy in general.

Secondly, you say that if the amounts in the fund become too large, the foreign investment limit should be increased.

Would you consider it appropriate that the Bill, from the outset, would provide that this limit would remain at 20 % until the assets reach x billion dollars? Should we not provide right now in the Bill the future rules for foreign investment? Should we already provide for this? What would be the asset amount beyond which the proportion of foreign content should be increased, in your view?

[English]

Mr. Christopher Moore: That was certainly one of the recommendations of our report.

I'll answer the second question first, dealing with the foreign markets. We felt that one of the advantages of having a real pension fund for the CPP invested in real markets was that we could find ways of adding value to the CPP's assets, and one of those ways was by investing internationally and bringing additional returns in from outside Canada. We made no specific recommendation, although we were thinking in terms of the same rules that would apply for pension plans and RRSPs, which at the moment is a limit of 20% of book value. Of course there has been pressure to increase that 20%, but whether or not that goes up is a separate question.

We did and do support the concept of investing a portion of the funds internationally.

Does that answer the full question?

[Translation]

Mr. Paul Crête: I understood, looking at Item 6 of the French text of your document, that if the funds in the plan became too large, the limit should be increased. Does it not follow from this recommendation that we should right now provide a threshold above which this limit can be exceeded and also provide right away for a review of this legislation after x years? Would it not be desirable, in terms of investment policy, to let investors know from the start that some day the limit might exceed 20 %.

Mr. Normand Gendron: I said earlier that the present limit of 20 % seems appropriate in view of the amount of assets the plan will have to invest. However, the Canadian capital market represents only 2 % of the world market.

• 2040

This is a limitation that could possibly become important over time. At the same time, Canadian baby boomers will accumulate savings for their retirement and they too will have to invest on the Canadian market, which is relatively small, since they have a foreign content limit of 20 %.

It is likely that the limit applicable both to private plans and the Canada Pension Plan will have to be increased. If the Bill ties the CPP limit to that applicable to private pension plans, it would likely be sufficient, once the Canadian market has become too small to allow for proper diversification.

Mr. Paul Crête: Have you evaluated the economic impact of this increase on employment or consumption?

[English]

Mr. Christopher Moore: We were looking at the contribution rate more from an actuarial point of view. We were looking at what the CPP fund needed to support the benefits that had been promised. There were two main factors there for us. One was that action hadn't been taken over the past 20 years that in our view should have been taken to increase those contribution rates. Admittedly, the contribution rate increases would have been much smaller if they'd been started 20 years ago.

Secondly, we were sensitive to that 14.2% projection for the year 2030, which we felt was excessive and possibly might not be supported by the generations that would have to pay the 14% or higher rates. We were looking for ways in our recommendations of keeping that total contribution rate from employees and employers down. We were looking at something between 8% and 10%. We were satisfied with the balance that Bill C-2 proposes. We didn't do any economic assessment of the impact of the increases, but I think we were looking for something that would correct the errors of the past and modify the projections of the future.

Mr. Jim Jones: Can you expand on what is meant by “smart funding”? I just haven't heard that.

Mr. Christopher Moore: Smart funding is a concept we described in our report. We do have a few copies of our report available if you want to take a look at it. It has a very simple graph with some simple examples.

We were trying to make the point that when real rates of return are high, as they are now, money that's put into the CPP, once it's put into real markets, is going to be earning higher rates of return and benefiting the fund. When real rates of return are very low, as they were when the CPP was introduced in 1966, those are the times when you tend to want to pay as you go, to have a low-cost, low-contribution formula. So we had designed on a very rough basis, as an illustration, a formula that would contribute at a higher level when real rates of return were high and a lower level when real rates of return were low.

The interesting thing about a pension plan is that you have liabilities on the one side. Those liabilities actually go down in value when rates of return are high, and at the same time you can get a better return. The balance of the effect on the liabilities and the returns that can be achieved under those different conditions actually would produce a rate that wouldn't vary very much from time to time. In the examples we showed we had actually built this based on a funding target 30 years from today. The funding target would be increased when real rates of return were high, and it would be reduced to zero—which is pay as you go, that's the basis we have been on on the CPP more or less—if real rates of return were low.

The rates varied between 7% and 10% over a period of 30 years under different extreme examples. You can take a look at the graph we did. I can certainly understand why it wasn't adopted as an official policy, because it's going to be very hard to implement. But as a concept underlying the approach taken by the CPP actuaries, I think it does have value. I would hope it's being used at least implicitly, indirectly.

• 2045

So take a look at it if you like. There's a section in the report that's devoted to smart funding. I personally think it's a valuable concept, but I understand that perhaps it's not practical for use in a direct way.

The Chairman: Thank you, Mr. Jones. Mr. Szabo.

Mr. Paul Szabo: Can you help me with some mathematics? I know it's late, but this would be helpful to me.

I'd like to get an estimate of the worth of an annuity of $24,000 a year for 17 years, in terms of present value. You can assume a reasonable long-term rate of, say, 5%. I didn't bring my computer, but you guys can probably do this in your head.

While he's doing the calculation—

The Chairman: Do you want me to suspend while you go through this calculation?

Some hon. members: Oh, oh.

Mr. Paul Szabo: So that's one part of it. I'm going to try to equate it to another part.

I looked at the history of the CPP from 1966, when it came in. As an employee, the premiums charged to an employee in year one equalled about $74 a year. It was very small relative to today.

Mr. Christopher Moore: Based on the 1.8% that the employee put in.

Mr. Paul Szabo: That's right.

If I added up the column right down to the year 1995, the cumulative contributions—and that's forgetting about investment, etc.; just the actual, absolute value of the contributions—came out to under $10,000. For 30 years of contributions it was less than $10,000.

If I made those contributions, how much would that have been worth? It's roughly $10,000 in terms of absolute value, but if you take the time value of money and investment, etc., how much could that $10,000 grow to be if I had invested it in, say, market rates—reasonable rates of return on the market—assuming that I even had the employer share?

So now I have $20,000. I think I might be able to triple it, so I might be up to $60,000, $70,000, maybe even $100,000, of today's value of money. If I had invested all the contributions, employee and employer, for the last 30 years at market rates, I could potentially have $100,000 today to invest to buy an annuity.

I asked you for the value of a 17-year annuity of $24,000 a year, discounted at 5%. What's the ballpark figure?

Mr. Normand Gendron: At 5%, the ballpark is $270,000.

Mr. Paul Szabo: Okay; $270,000. This is very helpful. On the first day of debate in the House of Commons, the leader of the opposition stood up in the House and said, “Mr. Speaker, if I had taken all those premiums and invested it in an RRSP, I could get $24,000 a year instead of just getting the $8,800”.

What you've basically told me is that it is not possible to have invested annual contributions, the employee and employer share, at a reasonable rate of return and generate $24,000 a year from the CPP premiums. Is that true?

Mr. Normand Gendron: Not having gone through the calculations, I can't answer that positively one way or the other. But the figure I gave you is about the money needed to pay for that pension if it's indexed—

Mr. Paul Szabo: So even if I assume that this $10,000 became $100,000 today, and I retired, I couldn't buy a $24,000 annuity until age 82.

Mr. Christopher Moore: Actually, it's interesting; I don't want to get you off that until you're ready, but that's going to be a difficult one to get one solid answer to. There is a solid answer to a related question in the CPP actuary report, which I'm sure you have access to. We've also reproduced that table in our report on page 5. If you got a copy of that you could look at it.

• 2050

It shows for each calendar year of birth what the CPP internal real rate of return is. It's interesting; the people born in 1911 made up the most fortunate group in the CPP. They retired in 1976 after paying for only 10 years. They had an assumed real rate of return—real rate of return—of 22.4% a year on their funds. That's because there was a very high subsidy built in.

I think many people have recognized that the CPP did accomplish a great goal in dealing with poverty among the elderly over the seventies and eighties. That's been recognized from all directions, really.

That rate of return, then, will be a little higher now, because we're looking at slightly better returns projected for the fund. The return was quoted earlier of 1.8% for the later generations. They've used the ones born in the year 2012. In between, if you were born in 1948, you're talking about a 5%-plus real rate of return, in addition to inflation.

So I think that's a valuable table the CPP actuary now includes in the report.

Mr. Roy Cullen: What about 1944?

Mr. Christopher Moore: Well, 1924—

Mr. Roy Cullen: No, 1944.

Mr. Christopher Moore: Oh, you're talking about yourself. Sorry; 1944 is something over 5% to 6%.

The Chairman: What about 1960?

Some hon. members: Oh, oh.

Mr. Christopher Moore: That's 3%.

At any rate, that's a very useful addition to his report, because it does give people some idea of what kind of return there is. This is not a plan that is intended to be a savings plan. It's intended to be a pension plan. But it does have a savings element implicitly built into it.

The Chairman: On behalf of the committee, I must say, this was a very interesting presentation. Obviously you've done a lot of work in this area. It's evident by the type of analyses you've been able to provide to us. Your information is going to be quite helpful as we look at and study Bill C-2, a very important piece of legislation.

Mr. Christopher Moore: We're pleased to have had the chance to provide some input.

The Chairman: Thank you very much.

The meeting is adjourned—

Mr. Jim Jones: Mr. Chairman—

The Chairman: Sorry, Mr. Jones. I almost did it again, didn't I?

Mr. Jim Jones: Yes, you did.

Last week I tabled some questions that I want the chief actuary to answer on Thursday. I've revised the questions so that they're more reflective of exactly what I want to know. I also have an additional five questions. I'd like to table them. I have copies here for anybody who wants one.

The Chairman: Thank you, Mr. Jones.

Any further comments, housekeeping items?

Have a pleasant evening. The meeting is adjourned.