FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Friday, November 7, 1997

• 0905

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): Good morning, everyone, and welcome to the meeting dealing with Bill C-2, an act to establish the Canada Pension Plan Investment Board, to amend the Canada Pension Plan and the Old Age Security Act and to make consequential amendments to other acts.

This morning we are fortunate to have representatives here from the Atlantic Institute of Market Studies and from William Mercer Limited.

Gentlemen, you have probably appeared in front of the finance committee before. You have approximately 10 to 15 minutes to make your presentation and thereafter we will engage in a question and answer session with members of the committee.

To begin this morning's proceedings we will start with the Atlantic Institute of Market Studies, represented by Mr. Don Cayo and Mr. Fred McMahon.

Welcome.

Mr. Don Cayo (Atlantic Institute for Market Studies): Thank you.

I am Don Cayo and this is my colleague, Fred McMahon, our senior policy analyst. He has pulled together a paper and I'll ask him to present it to you.

Mr. Fred McMahon (Atlantic Institute of Market Studies): Thank you, Mr. Chairman, for your invitation to make a presentation on the Canada Pension Plan.

Arguably no single piece of legislation is as important to Canadians as the CPP, both in the long term and the short term. The consequences for the incomes of retired Canadians are obvious. As well, the use of funds and the contribution rate affect job and wealth creation and investment, with both short-term and long-term consequences.

Unfortunately, much of the debate on the CPP focuses on a mostly imaginary particle, money. Money simply marks a claim on the current productive resources of the economy. When pension payments are made in the future, retirees won't live on the money but rather on the share of society's resources they can buy with it.

We face a difficult problem, however, when we consider the productive resources of our economy. As the baby boomers age, the number of workers per retiree will decline dramatically. This means we have to build a more productive economy or everyone's piece of the pie will shrink on average in the future. That in turn means directing expenditures away from current consumption towards productive investment.

How well does the current CPP further this goal? Hardly at all, as virtually everyone now would agree. The largely pay-as-you-go Ponzi scheme creates little investment capital. The requirement that funds be lent to provincial governments at low rates simply encourages borrowing in other parts of the economy.

The proposed reforms are an improvement, but the most that can be said for them is that they make a worse situation bad.

Under the proposed changes the CPP investment fund will grow slowly. It will be a decade before it reaches the $140 billion range, which is only four or five years' worth of pay-outs. By this time many of the baby boomers will have already boomed into retirement. The proposed change is little more than bookkeeping adjustment designed to hit the steady-state contribution rate needed to keep the CPP solvent from current contributions. It is not a change designed to help boost Canada's productive capacity to the point needed to look after the baby boomers without a general loss of welfare. On these grounds the proposed changes fall well short.

Although money may be largely an imaginary particle when discussing the future productive capacity of society, money as a claim on resources is important in another sense that is crucial to the CPP debate. The allocation of such claims determines whether the pie is divided fairly and whether individuals believe their claim is secure. On these grounds, too, the proposed reforms fall short.

The problem of intergenerational transfers is inadequately addressed by the slow increase in CPP contributions. The guiding principle still seems to be that the younger you are the more you should pay for your elders' retirement years, an odd principle but one that would be well implemented by the proposed legislation.

Nor do the changes adequately reassure individuals, particularly the young, that they will receive a fair pension for their investment in the plan. The skepticism of young Canadians towards the CPP is well documented. Until Canadians have something like secure property rights to their own pension contributions, this skepticism will remain well founded.

Although individuals contribute individually to the plan they have no individual rights over what happens to their money. Parliament can simply change the rules at any time. Past actions make this more than an academic threat.

• 0910

Any large pension fund under government control, on an independent board or no, will always be at political risk. The more fully funded the plan, the more money there is, the greater the risk. The risk can be transmitted through subtle nodding and winking between the government and its appointed board members to the effect that this or that investment would be a good idea. It's only incidental that it carries short-term political benefits.

It could go all the way to wholesale looting. One can imagine the rhetoric. We can't afford such an extravagantly large pension fund when real Canadians today face some hideous prospect that we can turn aside by using the fund to help existing Canadians.

The fiscal dividend debate is instructive here. Even before dollars' worth of debt was paid down interest groups were already scrambling to make claims on the dividend. Many called for spending the dividend while we were still making debt, not paying it off.

It only takes one bad decision from one short-sighted government to seriously damage any CPP retirement fund. More importantly, individual Canadians would have no power to hold back their pension contributions from politically motivated uses. They simply have no rights to their contributions; they are disconnected from them.

Thus the proposed reforms are inadequate when judged against key criteria essential to creating a successful program. If the proposed reform package is all Parliament does, then in a decade or so we'll encounter another virtually universally accepted consensus, one that parallels the current views of past CPP management.

This would be that a short-sighted Parliament once again missed the opportunity to right the CPP, to encourage the creation of wealth needed to look after the needs of Canada's aging population, to alleviate intergenerational unfairness, and to provide Canadians, particularly young Canadians, with the confidence that they will receive benefits for their contributions.

No solution to the CPP mess is perfect. Past mistakes will cost us. Underfunding means we will inevitably have to rob Peter to pay Dad. But Parliament needs to tackle the large problems in the CPP rather than make relatively small changes that leave deep flaws untouched.

The first priority is to move to a fully funded or near fully funded plan so we can build the resources we need for the future. This means increasing the contribution rates quickly. That also carries the advantage of reducing the intergenerational transfer.

However, doing this under the rubric of one large publicly controlled fund creates problems and risks.

The political risk of having a large basket of money effectively at government's disposal has already been discussed. The bigger and more powerful the fund the greater the risk.

A fully funded mega-plan would be too big for its own good. It would simply have too much power in the marketplace. Its slightest shuffle would severely distort equity markets.

A better plan that is frequently discussed in hearings involves the creation of RRSP-like accounts. Canadians would be required to make pension plan contributions but could direct these to differing investment plans. These plans could be licensed by the government and required to follow low to moderate risk strategy. A pool-sharing policy could be implemented to limit the risk for any one of these plans. Whether and to what extent such safeguards are necessary, however, should be fully debated.

In any event, to say Canadians aren't capable of planning their own future is a paternalistic statement worthy of a former Soviet state. It is also at odds with the evidence. In fact, considering the way government has handled the CPP it could be argued that governments, not individuals, are incapable of properly planning for the future.

A choice of different pension plans would create a more varied investment landscape. Differing funds will spot different productive investments, providing a better coverage of our investment opportunities than one mega-plan.

Also this approach provides Canadians with some ownership over their pensions and a greater surety they will receive benefits for their contributions. Any government would face huge political difficulties in trying to order around a bunch of privately administered funds in which Canadians felt they had some level of property rights.

The approach carries another immediate and long-term advantage. Increases in CPP premiums under the current proposal would be largely seen as a tax grab, little related to future pensions that many, particularly the young, doubt they'll ever see. The premiums act like a payroll tax, something most economists agree is the most destructive tax around, a job killer that reduces the incentive to work.

The long-term consequences of such a job killer is that we create less wealth today to invest in productive resources for the future.

The situation changes with individually controlled contributions and in more than a bookkeeping manner. Give individuals ownership over their pension contributions and they become an investment for the future rather than today's tax grab. Individuals who can see their pension accounts grow and thus can understand the importance of these accounts for their own future may well find this sort of plan replaces a disincentive to work with an incentive.

• 0915

Of course, current obligations must be met. This involves an intergenerational transfer, but one that is unavoidable. It is better to be honest about this and make up a shortfall with either separate streams of contribution—one for the shortfall, one for building for the future—or better to make up the shortfall through general revenues and turn the pension plan into a pension plan.

Still, this sort of plan will not produce adequate pensions for everyone, particularly the less well-off. A clear priority of government must be to prevent the kind of elder poverty Canada has experienced in the past. The way to meet this problem is through programs addressed to the problem; that is, through an appropriate mix of income support programs. Trying to mix together a mess of different, often conflicting priorities in one plan simply makes it less likely that any of the goals will be met. As well, the fuzziness of the goals allows for increased political meddling, providing a menu of pretexts for politically motivated action.

To sum up, we now have a considerable consensus about the fundamental problems of the CPP, its pay-as-you-go nature, and the disconnect between Canadian CPP contributions and their pensions—which has led many to believe they are being rooked. Now that these problems have been recognized as quite amazing, public policy is not moving to address them. The current package only mitigates the problems. It leaves the fundamental flaws in place.

As the committee is aware, other nations have had success in implementing the types of changes we and others have recommended here. Such proposals are under active consideration elsewhere around the globe. To build for our future, we should do as well in Canada.

Thank you.

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

We'll now move to the representatives from William Mercer Ltd., Mr. Malcolm Hamilton and Daniel McCaw. Welcome.

Mr. Dan McCaw (President, William M. Mercer Limited): Thank you very much. My name is Dan McCaw. I'm an actuary and president of William M. Mercer Limited. I'm joined today by my colleague Malcolm Hamilton, an actuary who shares my interest in Canada's retirement income system. Our remarks will touch upon Bill C-2, the future of the Canada Pension Plan, and the importance of public policies that consider the needs of future generations as well as our own.

On balance, we support Bill C-2. The Canada Pension Plan is, in most respects, well designed and efficiently administered. It provides a modest pension to working Canadians in exchange for a payroll tax. The CPP is an important element of Canada's retirement income system, and in our opinion it should be preserved.

While the design of CPP is sound, the method chosen to fund it is not. Pay-as-you-go funding made sense in the 1960s when Canada had a young, rapidly growing population. But Canada's demography has changed in the last thirty years, and the Canada Pension Plan must change with it.

The contributions of Canadians who turned 65 in 1976 paid for approximately 15% of their CPP benefits. The contributions of Canadians who turned 65 in 1986 paid for less than half their benefits. And even today, those who retire have not fully paid for the benefits that they'll receive. This has resulted in substantial and growing unfunded CPP obligations.

We commend the federal and provincial governments for setting aside their differences and acting on this important matter, and we commend the opposition parties for acknowledging the need to act and for putting forward constructive alternatives. Around this table and within our firm, there are different views about what the CPP should look like in the future. However it looks, it must be solvent, and we must treat future generations fairly. This means increasing contributions now and arguing about plan design in the future.

Mr. Malcolm P. Hamilton (Principal and Benefits Consultant, William M. Mercer Limited): The CPP's problems did not arise overnight, and they will not be solved overnight. Contribution rates should have been increased in the early 1980s, when it was clear that the environment was no longer conducive to pay-as-you-go funding. Unfortunately, not only did we fail to act on the CPP contribution rate, we compounded the problem by running up a significant national debt.

The largest generation in Canadian history will begin to retire in ten years. Unless we act quickly, it will leave in its wake $600 billion of federal debt and $600 billion of unfunded Canada Pension Plan obligations. Trillion-dollar debts are not easily finessed. They cannot be wished away. They cannot be ignored. They cannot be shuffled painlessly from one generation to another. Someone must pay; and if things are done fairly, everyone must pay.

• 0920

In the case of the CPP, payroll taxes must increase. We can double them quickly or we can triple them slowly. The issue is not whether to increase contributions but when and by how much. The issue is whether the baby boom generation should bear some of the cost of salvaging the CPP or whether the entire burden should fall on future generations. Bill C-2 says the baby boom generation should pay more, and with this we agree.

There is one aspect of Bill C-2 we do not support. In our opinion it is a mistake to ask nothing of senior citizens who enjoy a quality of life that is every bit as good as their children's and grandchildren's. Senior citizens are quite capable of contributing something to save the CPP by accepting partial inflation protection for a temporary period.

The precedent set by Bill C-2 and reinforced by the proposed changes to Old Age Security is a dangerous one. We are saying benefits paid to senior citizens can be withdrawn only generationally and the burden of future economic disappointments must fall entirely on working people. As we move towards a future where seniors will account for one-third of our electorate and one-third of our taxpayers, we will come to regret this precedent.

As for the investment fund, many believe the combination of a large fund and inspired investment strategies will solve all our problems. Unfortunately the fund is not large, not relative to our capital markets nor our economy, and not relative to the obligations of the CPP. According to the chief actuary's projections, when the plan matures the fund will cover less than 20% of its liabilities. Because the fund is small, its investment performance will have little impact on member contributions. Canadians need not worry about large losses, nor can they expect good returns to reduce their contributions materially.

The investment policies and strategies adopted by the CPP's investment board need not be inspired. Competent will suffice. Market performance is what we need and what we should expect.

Finally, let us be clear about who the heroes of this legislation are. Young Canadians are being asked to pay much more than we paid and much more than the benefit is worth in the current economic circumstances. In exchange they will receive smaller benefits than those enjoyed by today's seniors. According to the actuarial report tabled with this legislation, young Canadians can expect to earn a 1.8% real return on their investment in the Canada Pension Plan. That's less than half the rate of return my generation will earn and less than half the rate of return young Canadians could earn elsewhere.

Unfortunately, at this late date there are only two viable alternatives: renege on the CPP's commitments or overcharge young people. Bill C-2 chooses the second and in our view better alternative, but there should be at the very least an acknowledgement of the burden placed on young Canadians and a commitment on the part of the older generations to pass on a much diminished national debt in exchange for all we are asking of them.

The Chairman: Thank you very much, Mr. McCaw and Mr. Hamilton. We will now proceed to the question and answer session, beginning with Mr. Anders.

Mr. Rob Anders (Calgary West, Ref.): Thank you very much. I thoroughly enjoyed both presentations.

One of the aspects mentioned was about having a monolithic public plan that will distort the marketplace. Is there not only the complication of its distorting the marketplace because of its size and because of one individual controlling it, or one entity controlling it, no matter who it is, but also the possibility, with its being a public fund, of having political manipulation, as has happened and as is the precedent with so many other funds of this size or of its like which have been created before?

• 0925

Mr. Fred McMahon: We certainly addressed that in our presentation when we talked about the larger the fund, the greater the risk of political involvement, either through winking and nodding or because of some important imperative of the day in which short-term imperatives overwhelm long-term consideration.

So, yes, it's a very great risk.

Mr. Don Cayo: To add to that, there's already some evidence of political manipulation. Look at some of the rules, for example, on offshore investing. That's already limited within the legislation. I think there can be temptations to go much further than that.

Will there be temptations to require regional pensions to be invested regionally? The opportunities for that kind of thing are endless. The temptations will be endless.

The Chairman: Anyone else? Mr. McCaw.

Mr. Daniel McCaw: I think all those comments are absolutely valid. First, we're talking something in the neighbourhood, when mature, of $100 billion, which sounds like a lot of money. It is, clearly, but relative to a $600 billion shortfall right now, it's not that large an amount, and relative to capital markets in Canada, it's not that large an amount.

Second, I think we need to work very hard to make sure that this investment process is done on an arm's length basis.

Third, in terms of impacting markets—and this is perhaps getting a little too far down the road—there are lots of investment alternatives, including buying indices and so on, where you are actually investing in the marketplace, but you're doing it in accordance with the index market and buying in accordance with the marketplace itself so that you're not getting disproportionate investments in one sector of the economy, one part of a country or whatever.

Mr. Fred McMahon: I'll add to that, if I may. I think that's quite right. A $140 billion fund is not going to be so huge as to distort the marketplace, but if you move, as I think you should, to a more fully funded fund, you will begin to get into the size where one monolithic fund could distort the marketplace.

The Chairman: Mr. Anders.

Mr. Rob Anders: Another thing that is curious to me is how other countries around the world—Chile, for example—have undergone massive changes to their pension systems. I wonder if you can comment on some of the things you know about some of those other changes and whether or not those people should have had the opportunity to be able to present before this committee so that we could have had knowledge, in a sense, from those other countries on what they've done with their public funds.

Mr. Fred McMahon: Any time you do something new you hit a few bumps on the road, but the Chilean experience, as you know, has been overwhelmingly positive. It created a great pool of capital that helped build the country.

While you've certainly had before you better international experts than us, our understanding is that it's also worked well in the other nations that have implemented something similar to “super RRSPs”, or whatever you want to call them.

Mr. Malcolm Hamilton: It's very hard to compare pension systems in different countries. The Chilean system has worked very well for Chile. In retrospect, they did a good thing. It's worked well for them. Whether that same good thing would work in Canada is another matter.

They did it at a time when they had a lot of nationalized industries they could sell off. They did it in a very different economic and industrial environment than we have in this country. They had extraordinary returns on their capital markets. We've already had those. I'm not sure we can expect another 10 or 20 years of them.

So I think it would be dangerous to assume that just because it worked well in Chile it would work well here.

Having said that, I think it's very healthy to have a debate about whether the Canada pension plan in the long run should be individually controlled accounts or whether it should be the kind of plan it is today. My fear, though, is that if we start that debate now and if we say we should do nothing until we have that resolved, we could still be debating that in 10 years. The whole baby boom generation could be retired and we could still be debating that point.

Frankly, it's too late then. At that point you're dismantling something that's insolvent with not much hope of salvation. Our view is fix the thing first. Get some money in the fund. Get it right side up. Then there's going to be a lot of time to decide how to organize it to best serve the interests of Canadians.

Mr. Don Cayo: I tend to agree with Mr. Hamilton, but I would also point out that he mentioned in his remarks that it was in the early 1980s that this problem first became apparent. We're looking at about a 15-year time-lag in trying to address it.

• 0930

These things do take time. It's very often politically expedient to put them off until they literally hit the point, in terms of both financial crisis and public perception of it, when it becomes acceptable to talk about it. The difficulty is that if we move toward a partially funded plan now and discover at some point down the road it is not sufficient funding and get into another of time lag before we deal with it, as Mr. McMahon has pointed out, that will also exacerbate the problem of the fund becoming too monolithic at some point.

I don't object to a fast temporary fix in terms of higher contributions right now, but I don't think this debate should end with that.

The Chairman: Thank you.

Do you have a further question? Mr. Anders.

Mr. Rob Anders: I want to run this one up the flag pole and link it in. Right now we're looking at about a $12 billion overpayment surplus in the EI fund. The government is saying we should expect to have at least $15 billion in there, and depending on what the rate changes are it may go up much higher than that.

There's been talk before of a registered unemployment savings plan so money could be put by individuals into their own EI funds. It would be much like a super RRSP except it would be done for their employment insurance moneys and if they needed to draw from it they could. If that type of thing were done at the end of their working years they could roll that money into their RRSPs for their retirement incomes, for example, and also be able to use those moneys in the long term to counter any of the problems we're currently seeing in terms of huge rate increases with the pension fund.

I'm wondering if you can comment on that and what you think the viability of something like that is.

Mr. Fred McMahon: It's a very interesting idea and something that would need a lot of thought and study. However, I am suspicious of programs where you have mixed goals, because you don't really know what you're doing. If you mix unemployment insurance with the Canada Pension Plan you get that muddying that has done us so much damage in the past. If you did put in a system like that, you would have to very carefully structure it or you'd end up serving neither goal properly.

Mr. Don Cayo: While that might make an interesting supplement to a pension plan, I don't think it's a substitute for it, because anybody who ran into unemployment problems would end his or her career with no money and presumably would become a public ward.

Mr. Rob Anders: This is just an idea off the top of my head, but we could have an RUSP and an RRSP, with the RRSP being mandatory. People could possibly top it up above and beyond that as they currently do with an RRSP. That way you'd have a certain percentage of funds dedicated strictly toward unemployment, some dedicated mandatorily toward retirement and also have the option of being able to top up your retirement income.

Mr. Don Cayo: If you perceive CPP payments to be a payroll tax, which I do, and if you perceive EI payments to be a payroll tax, which I do, it would be far more productive to simply lower the payroll tax on the EI side of it, where there's the opportunity to do that now.

The Chairman: Thank you, Mr. Anders.

[Translation]

Mr. Dubé, do you have a question?

Mr. Antoine Dubé (Lévis, BQ): Yes. Your presentations are clear. I found interesting the idea of having those two groups back to back. I would like to know what the Atlantic Institute of Market Studies represent. What is you field of work? Are you sociologists, accountants or...?

[English]

Mr. Fred McMahon: We're kind of a pocket think-tank, a miniature version of something like the C.D. Howe Institute or the Fraser Institute only not as large. My background is in economics. I have an MA from McGill.

[Translation]

Mr. Antoine Dubé: Are you affiliated with a university?

• 0935

[English]

Mr. Fred McMahon: No, we're a privately funded, business-funded, independent think-tank.

[Translation]

Mr. Antoine Dubé: What kind of businesses?

[English]

Mr. Fred McMahon: It's from all sorts of Atlantic businesses, again very similar to the sort of funding that the C.D. Howe Institute would have, for instance, from a whole basket of companies, other institutions, individuals, you name it.

[Translation]

Mr. Antoine Dubé: Thank you. And the other group?

[English]

Mr. Daniel McCaw: William M. Mercer Ltd. is a firm of consulting actuaries. We consult to corporations and business in a lot of areas, but the major area we consult in is the pension programs that provide for their employees. So as actuaries, we're consulting to organizations about pension matters.

[Translation]

Mr. Antoine Dubé: Thank you.

[English]

The Chairman: Mr. Jones.

Mr. Jim Jones (Markham, PC): Thank you.

I enjoyed your presentations. I have a question of the Mercer group. What would happen if we took a hit within the next year, went right to the maximum to fund the pension plan instead of doing it with rate increases over the next six years? Would that make the long-term viability of the plan a lot more secure? I'm saying I would propose that we'd get the UI premiums down, and if that weren't enough money to offset the increases, take the hit, so that we get right to the maximum.

Mr. Daniel McCaw: As Malcolm said, the way the current Canada Pension Plan is structured, if we leave the benefit structure more or less the way it is, we're just talking about timing, aren't we?

Mr. Jim Jones: Yes.

Mr. Daniel McCaw: It's going to take 30 or 35 years, but the contribution rates are going to have to triple.

What's being proposed in Bill C-2 is to take them up two-thirds, take them from 6% to 10%, roughly, and do it fairly quickly, and obviously the government has actually made assumptions on this—that if we went to close to 10% very quickly over the next, say, 6 or 7 years, we could stay at 10% indefinitely.

Now, your question is what if we went to 10% tomorrow, or 9.9% tomorrow? Well, arguably, you might not have to go quite that far if your goal was to have a stable contribution rate. I wouldn't want to guess what it might be, but it might be 8% or 9% rather than 10%.

Mr. Malcolm Hamilton: Probably 9%.

Mr. Daniel McCaw: Yes, probably 9%.

Mr. Malcolm Hamilton: If you go to 9% tomorrow instead of 10% over six years, let's say, what would happen if you did that is a shock to the economy in the sense that if there were no offsetting change anywhere else, then people would notice that they had a lot less spendable cash next year, as opposed to noticing a gradual reduction in their spendable cash over six years.

We don't pretend to be experts on how the economies handle shocks. It's something nobody likes doing to an economy, so we don't have any particular objection to ramping it up as quickly as one can without precipitating some sort of a crisis. Whether or not going immediately to 9% would do something significant I really couldn't tell you.

Mr. Jim Jones: It would be interesting to look at.

Mr. Fred McMahon: I think virtually everyone agrees that it's better to move quickly rather than slowly, first, because of the cost factor, and secondly, because of the intergenerational fairness. The only concern, as was pointed out, about moving quickly is the shock to the economy, but you had mentioned adjusting EI premiums.

As well, as the polls are now showing, Canadians are getting a taste for tax cuts. If you moved on the tax-cut front elsewhere, you could offset the shock to the economy by moving more quickly to higher contributions. So you now have the opportunity to offset that elsewhere so you won't get that shock to the economy, while improving the intergenerational fairness by moving quickly rather than, actually, relatively slowly to the steady state.

The Chairman: Do you have another question, Mr. Jones?

Mr. Jim Jones: Not at this time.

The Chairman: Mr. Szabo.

• 0940

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, gentlemen, for the presentation. There's no question this is an issue you can philosophize about, you can analyse, you can do a lot of things with.

I was taken by the suggestion that somehow maybe we had better get the seniors to pick up a little share of the problem we have. It reminds me of a little speech a colleague once gave at a gathering. The point he was making was that for my children, when I'm taking care of my children, I want to treat them all equally, but not necessarily the same. For example, if Canada were to come in with a national apprenticeship program and offer it to all Canadians, what would it be worth to a youth who is unemployed versus a senior who is in retirement? Clearly there's a difference, but they all get the same benefit.

The point is that as you know, with the seniors having come through a couple of wars and the depression of the 1920s and 1930s, there was little opportunity compared with the opportunity for today's workers to provide for retirement, with the number of working years, etc. If we had not brought in the Canada Pension Plan in 1966—there was none; it never existed—would we have done something for them to take into account their circumstances, and quite frankly the poverty that likely existed otherwise, of that group? I guess the issue—and I would like your comments—is whether we should look at the CPP plan and its proposed changes and analyse it in terms of the impact today only with regard to CPP or we should put that in the context of the total national benefit programs available to all Canadians, which are not necessarily the same for everybody.

Mr. Malcolm Hamilton: When you're looking at intergenerational equity you have to look at everything. You can't focus just on the CPP, in isolation from Old Age Security or anything else.

The CPP, I think it's now widely acknowledged in retrospect, should have been done differently. If not in the 1960s, at least in the early 1980s something should have been done differently. Nationally we've made a mistake. We made another mistake running up a big debt. The issue is simply who is going to pay. I guess all we're saying is if you look at the Canadian public and you look at the financial circumstances of all the different generations and all the different age groups and you ask which groups are capable of helping out here, seniors are no longer the poorest group in Canada. Young people, young families, are the group where poverty rates are the highest these days, if you look at after-tax income. I think it would have had a more equitable appearance if we could have brought forward a change where we could have said all generations are contributing to salvaging this.

The contribution Mercer suggested seniors might make is a temporary period of less than full indexing. It wasn't a matter of let's roll back the benefits or let's take it away, it was let's take 1% or 2% out of the indexing rate for 10 or 20 years. I don't think that would have burdened many seniors.

For the low-income seniors, frankly, the CPP benefit is largely used to justify paying them less GIS and less gains in Ontario. They actually would have lost virtually nothing cash-wise. It's the high-income seniors who would have ended up contributing something; and I would have thought that was appropriate.

Mr. Paul Szabo: To follow on that, that there are some seniors who are very well off...but there are also seniors for whom the CPP and the OAS represent virtually all their income. Even a 1% de-indexing might cost them, in today's dollars, about $100 a year. In the light of ability to pay with regard to some of that group, if they can't afford it, then somebody is going to have to backfill them, because they are literally on a fixed income and have no other opportunity to restore that from other sources, since they are in retirement.

Mr. Malcolm Hamilton: My point is that they automatically get backfilled. If you look at Ontario, if you're a low-income senior in Ontario and you lose a dollar of CPP benefit, you get an extra 50¢ of GIS and an extra 50¢ of gains. You're backfilled automatically. Nobody has to do anything to backfill for low-income seniors in Ontario.

• 0945

Mr. Don Cayo: On the question of the lack of opportunity that seniors had to prepare for their own retirement, there's some difference, perhaps, in the circumstances they as a group faced, in what I would call the old seniors versus the younger ones. If you're looking at people who lost many of their productive years to World War II, who lost many of their productive years to the Dirty Thirties, that may be so.

There is also a generation of younger seniors who had their most productive years in some time when the economy was growing very greatly. They saw immense increases in property values that younger Canadians are unlikely to see—increases in prices they originally bought for and in prices they could sell for, and so on.

I'm glad Mr. Hamilton talked a little further on that question, because the one thing I disagreed with in his original presentation was not that seniors were equal in income as a group. I think that we probably produced the first society where seniors as a group are better off than our young people as a group. And it is a question of proportion.

I do have a concern about low-income seniors. Perhaps some should have prepared better, but if they haven't, they haven't. We have created quite a humane society for them. I would not want to see that seriously eroded. At the same time I worry very much about my children and a whole bunch of other people's children.

The Chairman: Ms. Redman, do you have a question?

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman. I'd like to pick up on something from the first presentation.

Mr. McMahon and Mr. Cayo, you were talking about a worry about safeguarding the CPP fund, despite the fact that one of the initiatives this government is taking is to put it at arm's length to make it cleaner, clearer and more self-sustaining.

To an earlier question you said you're very suspicious of initiatives that serve two purposes. With the Bill C-2 proposals this government put forward, notwithstanding the fact that you don't want to see this super fund, can you see any changes, any safeguards that could be suggested that would speak to this?

I found your comments about the subtle nodding and winking interesting. One of the reasons the reforms are being brought in or there is the suggestion of this proposal is so this very kind of regional suasion and political interference wouldn't happen. Are there safeguards that haven't been suggested that could?

Mr. Fred McMahon: First, let me make it clear that I do think what you're proposing is an improvement over what's been there in the past. I also say that all it does is make a worse situation bad.

I don't think you can absolutely safeguard something like this from either subtle or overt political interference unless you actually give Canadians individual rights over their contributions. As long as it's a government-controlled, government-run fund, you run the risk of subtle or overt interference. If you give people actual rights to their own contributions through something like an RRSP-like system, then you make almost impossible any political interference.

So, no, I don't see any further safeguards—there might be a package of them—in what you're doing. I just think you can go to another system that makes any political interference virtually impossible.

Mr. Don Cayo: There are people who believe that every time there's an appointment to a government board it's a patronage, or whatever, and often there are connections. A similar phenomenon happens in business.

If you hire somebody to run your establishment that you're not actively involved in running yourself, whether it's a government appointing an independent board or whether it's somebody hiring a manager, generally speaking you hire that person because you like the cut of their jib, because there's a tendency to think the way you do. That alone creates some dangers in political appointments.

The terms are renewable, so presumably the person who performs well in the eyes of the people who are making the appointments is more likely to be reappointed than not. There's the potential for at least that chill to happen.

• 0950

I agree with Fred. I think it is very difficult to put in a full set of safeguards. And that doesn't presume that there has to be corruption or under-the-table stuff or anything else; it's simply the way systems work—old boys' clubs and, I hope in the future, old girls' clubs. Those kinds of things do have an influence—like-minded people and that confusing of goals. There's already some confusion in the goal.

The act states very clearly that the purpose of managing the fund is to make money for the fund, and nothing else, however worthy, is to interfere with that. But already the fund has the equal purpose of taking care of the huge liability mess that exists from the way the economy has been operating. So right off the top you have two roles. One is to invest money wisely for the future of the people who are investing in it now, and the other is to clean up the mess that was created by 30 years of government policy.

The Chairman: Mr. Hamilton.

Mr. Malcolm Hamilton: There's something that I think can be done which works pretty well. I assume it's going to be done, but I don't in fact know whether it's intended, and that is to tell the Canadian people regularly how their fund did vis-à-vis other funds with similar mandates.

A real-life story I'll give you is the Ontario teachers' pension plan, which was run prior to 1990 as basically a hostage portfolio of government bonds. The plan was restructured in 1990 and set up with a mandate similar to what you'd give to a normal pension fund. The members were given annual reports on how they were doing, on what progress they were making and on what returns they were getting, but most importantly, on what returns they were getting relative to other pension funds with similar mandates.

Then there were attempts to politically interfere. The Rae government, as you may remember, at one point decided it would be a good idea to have venture capital investments. The money was going to come out of the public sector pension funds in Ontario. Rae sent a group around to talk to all of the funds. The teachers' unions just wouldn't hear of it, absolutely would not hear of it, because the one thing they knew was that if they went into this venture capital, no matter how good it sounded, if it bombed and the performance was adversely affected and 150,000 teachers were getting statements saying their pension fund, half of which they paid for, was underperforming because of this adventure, they were all dead. It was that simple, so it just didn't happen.

Nothing's foolproof, but if you want to go a long way towards guarding against this kind of thing, you make sure that group's operating in a fishbowl, because when you're operating in a fishbowl in the investment area you're very careful.

Mr. Fred McMahon: Let me just quickly note that the reason that worked with the teachers' pension fund is that the teachers actually felt they had ownership over the pension fund. The unions felt that they had ownership over the pension fund. It wasn't any good deed on the part of government. It was the fact that somebody had ownership of that money that prevented the political interference.

With the fund you're setting up, nobody other than the government really has ownership over it, and that's where the threat comes from. I agree the fishbowl helps, but it goes back to the fundamental question of somebody feeling they had an ownership stake in a fund, which halted that political interference.

Mr. Malcolm Hamilton: I was there, and the point I'll make is that it wasn't just the teachers' representatives saying not to do it. Even the government appointees on the teachers' board for the plan didn't want to do this, because they knew they were on the firing line and they knew it wasn't so much that the unions were looking or that the taxpayer was looking; they knew the members were looking and they had to deal with that.

The ownership you have to build here is some sense of ownership in this pension fund on the part of the Canadian people. If you build that, then you tinker with it at risk, believe me.

Mr. Don Cayo: But the sense of ownership doesn't do everything. I do agree that it is a worthy thing to do, but if you look at the way private mutual funds run, for example, there is that sense of the fishbowl in that anybody can look at it and can intelligently compare performance with other competing mutual funds.

The fact that all of them are very motivated by a sense of ownership in the funds they manage doesn't mean that they're all top performers. You still have some at the top, some in the middle and some on the bottom, so despite the motivation, it's still possible to make some bad decisions. I'm all for anything that ups the motivation, but I'm also worried about the potential of bad decisions.

But what happens in private mutual funds is that with the best motivation in the world, you still make bad decisions and you don't perform very well. Everybody who has money in there can vote with their feet; they can get out and get into somebody else's fund. That's the ultimate clout. The fishbowl is good, but the ultimate is the ability for people just to say, I'm not going to put my money there any more. That's what's totally lacking in any monolithic plan. There is no option. If I'm unhappy for any reason, I can't do anything about it.

• 0955

The Chairman: Thank you. Mr. Anders.

Mr. Rob Anders: I have two points. One is that I want to read a couple of quotes and get a comment here. One is:

The survey shows seniors pay much more to these pension issues than the young. So the government is doing the obvious and expedient political thing: “greasing the squeaky wheel,”.... By the time the young figure out they're being exploited, it will be too late for them....

A bit of a continuation on that:

The safety net that was supposed to transfer wealth from affluent young people to poor senior citizens now transfers wealth from poor young families to comfortable seniors. When seniors look at government they see money...when the baby boomers look at government, they see jobs.

I'm wondering if we could get a comment, Mr. Hamilton. I believe those comments were attributable to you. I'm wondering if you still agree that what's happening here is a serious intergenerational scam?

Mr. Malcolm Hamilton: Other than the scam, there is a serious intergenerational problem here, and we just paid no attention to the tax burden we were imposing on future generations. We didn't pay any attention for 30 years, and now we have to pay the bills.

Having said that, though, there's no magic bullet fix here. The money was spent and now it's time to pay up. The young people weren't around when it was spent; they weren't the beneficiaries of the spending of it, but they're going to have to do a large part of the paying.

So what concerns me is that I think we're too reluctant just to say we made a mistake and we're going to have to dig our way out of it, and the young people are being asked to sacrifice. Too often we just try to slough it off and pretend that this is a good deal for young people. It isn't a good deal for young people, they are being asked to sacrifice and I hope they do. But we should acknowledge it, we shouldn't just try to bury it.

Mr. Fred McMahon: Interestingly, that can in itself be viewed as a case of political interference in that you're benefiting today's voters at the expense of people who vote less. So you can actually look at the overall structure, the six-year lag and so on, as a political interference on a large scale. So you can find it both large and small.

Mr. Rob Anders: In a sense that's like deficit financing and building up debts to pass on to future generations in terms of passed-on taxes, not only in the case of pensions.

Another thing I'd like to briefly touch on is that if there was a super RRSP system, for example, I'm wondering if one of the benefits as well with a system like this is that there would be transferability in the case of a death, that for example survivors' benefits could be passed on directly from a spouse who dies to the remaining spouse.

Mr. Fred McMahon: For real property rights, you need to have transferability. The specifics would have to be carefully studied and worked out, but yes, something like that would make a lot of sense and add greater surety to your own rights to the pension.

The Chairman: Any further questions? Mr. Dubé.

[Translation]

Mr. Antoine Dubé: The bill creates a new board, with the aim of improving the return on contributions in the future. In your opinion, does the bill offer every guarantee that the objectives will be met in this regard?

[English]

Mr. Malcolm Hamilton: I haven't read the bill carefully enough to say that, and it's not my area of expertise anyway. I think there are people better positioned to comment on that than I am.

Mr. Fred McMahon: It's very difficult. I almost feel like simply saying I agree with those remarks; there are better people to address it. It is very difficult to predict the future stock market, future investments and so on. The great danger remains using the fund for politically motivated purposes, which will lower the return.

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Mr. Daniel McCaw: I don't think we really want to get to this, but this touches on one of the key aspects of a super RRSP fund—I think was the term that was used.... One of the key differences between a defined benefit plan—that's what CPP is; we put in a contribution and we're promised a defined benefit, 25% of the YMPE when we retire—and a defined contribution plan where we put in money and it's like a bank account—an RRSP is like a bank account; it earns what it earns—is that irrespective of the financial performance in the defined benefit plan, the individual is to a degree protected. If the performance is very good maybe the contributions don't have to be as much, and if the performance is very bad we might have to increase the contribution somewhat, but the benefit is defined and known.

If we go the super RRSP route—and I'm not speaking against it, it's just that there's no panacea here—in future, if we do very well, you and I will have more pension. If the fund doesn't do particularly well, you and I will have less pension. There's no guarantee behind that.

Mr. Fred McMahon: Let me add to that. Mr. McCaw is right. There is no magic solution to any particular problem, but already today's young people simply don't believe they're going to get CPPs. I'm not sure that this current system actually creates that sense of surety of pay-out at all. I think you'd feel more sure of pay-out if you were able to monitor your own fund and, again, had some sense of ownership over it.

Mr. Don Cayo: I agree. I think the defined benefit has already been defined for young people as being guaranteed to be low, inadequate and unfair.

[Translation]

Mr. Antoine Dubé: I agree.

In the present system, the contributions are obviously paid by people who are working in businesses. I want to come back to Mr. Hamilton's question, that is exploring the possibility of making the seniors contribute, those who are already retired. I would like to explore this a bit further. How could we make them contribute? In what way? Through income tax?

[English]

Mr. Malcolm Hamilton: The easiest way to make the seniors contribute would be to index it at CPI minus one for ten years, so every year instead of their benefit going up by the increase in the CPI, it goes up 1% less than that. Effectively, they're not contributing; they're receiving slightly less than they otherwise would have received. That will help build a bigger fund and I think it would do it in a way that doesn't represent much of a burden on senior citizens.

I'll return to the point I made earlier. The low-income senior citizens have a number of other federal and provincial programs that pay them less because they're getting CPP, so if the CPP gives them less, those other programs as regards low-income seniors will give them more anyway.

The cost would come mostly out of seniors with good incomes. There are lots of seniors with good incomes who have got an extraordinary return on their investment in the CPP, and I think the solution would look a little more just if we could say all Canadians created this problem and all Canadians are going to help to solve the problem, not that everybody created the problem and largely young people are going to solve the problem, which is pretty much the solution we have today.

Mr. Don Cayo: If I can jump in here, I think something of that kind of principle is already built into the bill, but it affects young people in paying as opposed to old people in taking out. But as I understand it, the first $3,500 of earnings are exempt and that's going to be frozen. That's a rather low amount of money. If someone's earning that little money, they don't have a lot to spare to put into a pension plan. But as that's frozen, if we assume continuing inflation, which that benefit decrease assumes, that's going to get to be less and less real money in effect that is exempt from the premiums. So that kind of principle has already been built in to gradually ding low-earning young people for more money and I'm not sure it would be unfair to build in a sort of compensating loss of income for seniors.

The Chairman: Mr. Nystrom.

Mr. Lorne Nystrom (Qu'Appelle, NDP): My question is on the defined contribution idea. If this were 1966, 31 years ago, to start a defined contribution plan or a super RRSP plan might be a lot easier because there was no other plan in place. If the country were to move in that direction, how would we handle the transition in terms of the $600 billion unfunded liability? Someone suggested that doubling the GST might do it, as might a huge increase in income taxes.

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The other thing I wanted to ask you at the same time is that—

The Chairman: [Editor's Note: Inaudible]

Mr. Lorne Nystrom: I think the Reform Party wanted to double the GST, but we'll let them explain that later on.

The other part of it would be that the CPP is not just a pension plan. It's also an insurance plan in terms of survivors' benefits, death benefits, disability benefits, and so on.

So how would you handle those two things: the transition and the $600 billion liability, and also the part that is not actually a pension plan?

Mr. Fred McMahon: As the presenters from the Mercer group said, admit you've made a mistake, first—and an understandable mistake. People did this out of the best of intentions, but admit they made a mistake.

Mr. Lorne Nystrom: But at that time I was only 19 years old. Mr. Jones was in his thirties, but I was only 19.

Voices: Oh, oh!

Mr. Fred McMahon: Okay, we'll blame it on Jones.

Mr. Jim Jones: Come on, now. I wasn't in my thirties. I might have white hair, but....

Mr. Fred McMahon: You have a number of options. You can basically set up a separate stream, or it's often been mooted that you can pay it out of general revenues. There is a fiscal dividend coming. I don't think we want to strike up more politicized spending. This would be an appropriate use.

Mr. Lorne Nystrom: With respect, that's very vague. Do you double the GST, or do you cut back on something else to pay it out of general revenues without a tax increase?

Mr. Don Cayo: Well, in fairness, I don't think we came prepared with the calculations to answer this question. I have no idea whether doubling the GST would be in the ballpark of the money needed or not.

You have asked the hard question. This is a very difficult one. I can't give you an answer, but I can tell you that I think the difficulty of the question, the very real cost of the question, is not a reason to avoid doing something that will make the question go away in the long term, as opposed to entrenching the question in the long term.

At the level of funding that you people are looking at, I think it is adequate right now. Is it going to be adequate in two, ten or twenty years? Nobody knows. You could go through this process time and time again. Questions like the size of this fund, how monolithic and how investment-skewing it can be, and how much economic damage it can do by relatively small shifts at some point, have all the potential to increase as the percentage of funding increases. You just continue the potential for these kinds of problems forever, as opposed to dealing with it right now, and it's a very difficult question to deal with because it's a heck of a pile of money.

Mr. Lorne Nystrom: What about the insurance side in a defined contribution plan?

Mr. Don Cayo: I haven't really thought about that, to be honest, but it is a good point. I assume it would be something along the lines of unemployment insurance, even if unemployment insurance were looked at in terms of the insurance component. I don't know. I'm sure there would be a solution for that. It would have to be thought about, and I haven't got the thoughts on the top of my head.

Mr. Fred McMahon: The transferability of the accounts themselves would be one way to address it. We also make the point that you're paying for the shortfall one way or another in the CPP. Whether you move to super RRSPs or not, you're going to meet the obligations to seniors that the government has already taken on. It's a matter of how you do it and whether you actually say you're using the money for the purpose that it's being used, or just mix the whole thing together.

Mr. Don Cayo: I will draw your attention back to a point that I thought Fred made quite effectively in his initial presentation. If the individually managed or individually directed RRSP funds had the effect that he predicts of boosting the economy, of making the pie bigger, it will be easier to find that money in a bigger pie than in a smaller one.

Mr. Daniel McCaw: I suggest that not only is it an excellent question, I think it's illustrative of something we were saying in our presentation. I believe that where we go in future with the CPP in terms of its structure and its benefits, especially if we make the radical change—and I'm not saying it's not appropriate over time—to something that's more defined contribution than defined benefit, it's going to take a lot of time and a lot of work. It's a very complicated question.

• 1010

If in the meantime we decide we're going to do nothing else, the problem is going to get nothing but worse and worse. We already have a $600 billion problem with CPP.

I think what we're saying in the paper is that the first thing we need to do, before we get down into the weeds of how and whether we should be redesigning it, is to do something about the funding. The comment was made earlier by one of the gentlemen that we've had people fight in the wars, and we've had people go through the Great Depression. Personally I agree with all of that. We also have people who didn't fight in the wars and didn't enter the workforce until after the Great Depression, who have been retired for 10 years and paid very little towards the Canada Pension Plan benefit that they received. Many of our parents are in that position.

The decision we have to make is—and we need to think about this very seriously, because I think it's almost a moral issue—if they didn't pay for it, are we going to push it off on our kids? They didn't pay for it. Are we going to step up and take some responsibility—the people in this room—and see that contributions are increased now, rather than saying we can push this off, and we'll let our kids pay 15% for it 30 years from now if it's still around. I personally view that as almost an immoral thing for us to do.

The contribution issue is the first issue, and I agree, it's a very difficult issue. A lot of people out there are saying “I can't afford it. It's a payroll tax. I'm an employer. I pay 3% and my employees pay 3%. I can't afford to go to 5%. My employees go to 5%. It's an extra 2%. Business is tough.” I appreciate that, but we have to face this issue.

Mr. Malcolm Hamilton: And we have to face it in a general context. If you want some sad reading, go back and read the reports of the advisory council for the Canada Pension Plan. There you have decades of reports, all of which looked at this funding issue. In all of them you're going to find a statement that says something like this: increasing the contribution rate to 12% or 13% today would bring along an economic catastrophe; it would be very bad for the economy. Then three pages later you'd read: there is no reason to doubt the ability of future generations to pay 14% and 15% for the thing that it would be unconscionable to ask us to pay 12% or 13% for. This went on year after year after year, this kind of nonsense. We've got to guard against that happening, not just in this program but in other programs.

The last thing is on the DC and how to finesse the $600 billion. There's no way to do it. But if you're really interested in that, I think that probably the best treatment of it was Jim Pesando's paper that the C.D. Howe Institute put out. I don't know if he's going to appear before this group. He didn't dodge the issue. He didn't dodge the issue of the $600 billion. He said what would be required and how he'd go about doing it, and it's very competently done. That doesn't mean you have to agree with the conclusion, but I think it's a fair treatment of the option.

The Chairman: Mr. Assad.

Mr. Mark Assad (Gatineau, Lib.): Picking up, Mr. McCaw, on what you said and about the unpaid liability, I read a rather interesting approach to the matter. It was that if we look at the baby boom generation—who represent about 9.3 million of our population today, and who are for all practical purposes the affluent sector of our society—that generation has been very favoured. They came in the best of times. Over the next 15 years or so, they will become the greatest inheritors in the history of this country. They will inherit somewhere in the vicinity of $1 trillion from their parents, and probably quite a few from the generation that you mentioned did not “pay their way”, if you want—I'll use the term, and I should qualify that you called it a “fair share”.

Now, the approach was, seeing that this baby boom generation is the most affluent, and benefited and is benefiting still, and will benefit in the future, and will be the greatest inheritors, why couldn't we bring back a reasonable—I'll even say modest—succession duty as we have had in the past? For instance, it exists in the United States, and I would say it's much higher than modest, it's quite substantial, depending on your worth. Most of the OECD countries still have succession duties. It seems to me that is a viable option to at least address some of the unpaid liability of the CPP.

Mr. Daniel McCaw: You're putting me a little bit out of my depth in terms of tax.

Mr. Malcolm Hamilton: I'll jump in.

Mr. Daniel McCaw: But Malcolm will jump in—whether he's out of his depth or not, he'll jump in.

I would comment—some people say this and you've probably heard it—because you're right about Canada versus the States. Some would argue that in Canada they tax you while you're alive and in the States they tax you when you die. So some balancing act might need to go on there.

• 1015

But yes, I would agree as far as the baby boom is concerned. I think the number that's been quoted is in the neighbourhood of $1 trillion over the next 20 years in inheritance, yes.

Mr. Malcolm Hamilton: One of the reasons you wouldn't do succession duties is all that does is encourage the seniors either to move or to buy things they don't want to buy. There are few groups more effective at organizing their financial affairs to avoid paying estate and succession duties than senior citizens. If you tell them you're going to tax whatever is left over at the end of the day.... A lot of countries have tried. It's a very hard thing to actually collect much.

Second, if you stand back and look at what you're doing, on one hand we're saying we can't cut back any government benefit to seniors, because that would be unfair, but on the other hand we're saying since they don't have much use for the money, we're going to tax it all away from them when they die. If they don't need the money, probably the easier thing to do would be to de-index or deal with some of the benefits rather than pay it all to them and then try to tax it all back at the point they've proven they don't need it.

Lastly, on the affluence of the baby boomers, we need to look at some of the statistics here. If you look at Revenue Canada's tally of who pays taxes and how much, if you take 67-year-old Canadians and look at their after-tax income, on average, it's 94% of what it is for 37-year-old Canadians. It's 94%. A 37-year-old Canadian is supposed to be saving for retirement, paying off a mortgage, and paying to raise children. For 67-year-old Canadians, a lot of that is behind them. So this notion that the baby boom is somehow much more affluent than today's seniors is just not right.

The Chairman: Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): I have a couple of questions.

First of all I wanted to address the issue of the hysteria about young people thinking there's never going to be a CPP plan. I have this theory that it's actually developed by those who want to create this big problem because they don't believe in our collective responsibility and they want to in fact destroy the CPP plan. They would prefer to construct some kind of “survival of the fittest” plan.

If you create lots of hysteria, if you have all these young people running around saying there isn't going to be a plan anyway.... I'd argue they probably haven't invested in RRSPs yet either. They just haven't started thinking about retirement at 25 or younger. That may be part of the problem.

I had a couple of specific questions, however. To both groups, have you done some gender analysis of the changes you would request? And do you see a possibility for something to happen in the future—and I wonder what that would be—to possibly lower the rate? I suppose one of the issues would be whether the fund were performing quite well.

The last question is, what do you think we need to address in track two? Obviously this is the first part of it, putting the plan on a good footing, but we have a plan to discuss a lot of the additional issues in the equity and some of the other changes we could make in track two. What would you like to see discussed at that point?

Mr. Fred McMahon: First let me address the preamble to your question.

It is a simple fact that when you survey young people, they are very skeptical about the CPP and what they will get out of government. That hasn't been programmed into their minds by some evil right-wing conspiracy. And frankly, they have the right to be skeptical about it. As any number of presenters, I'm sure, have pointed out, there's a great difference between the amount somebody born in 1920 will put in and get out and the amount a young person will get out.

Whether there's intergenerational unfairness in this is not an open question. There is intergenerational unfairness in it. Their skepticism is real and it's well founded.

No, we haven't done any gender analysis ourselves, though that would be something worth doing, particularly because we have in Canada largely solved the problem of elder poverty, and we should not make program changes that will allow that to re-emerge. It's not clear to me that the CPP is the best program to address that. The CPP should be a pension plan, not an income support plan.

• 1020

As for fiddling around with the CPP in the future, as the gentleman from Mercer said, let's get it on a solid footing now.

Mr. Daniel McCaw: One of your comments related to what might happen to contribution rates in the future if experience didn't unfold in accordance with what's anticipated through Bill C-2. I will make you one guarantee as an actuary: things will not unfold as they are anticipated.

But the build-up of that fund is really more as a result of reducing the intergenerational transfer and paying more today. Even the government actuary's numbers suggest that fund will never reach the point where CPP is going to be any more than about 20% funded.

So you can see that the impact—and Malcolm made this point very well—of superior or slightly inferior investment performance, when you never have, at any point in time, more money than covers 20% of the liabilities anyway, is going to have a huge impact on contribution rates. We could have a much greater impact on contribution rates through changes in immigration policy or changes in the birth rate, if we had more Canadians than we've experienced over the last 30 years moving into the workforce and making contributions to the program.

Mr. Malcolm Hamilton: I want to say something on the confidence issue. Part of the confidence problem comes from the fact that we're not telling the right story to young people. I personally am confident young people will get their benefits. I'm also confident they're going to overpay. If we did a better job of saying that the bad news is you're going to pay too much and the good news is you're going to get your benefit, everyone could probably get behind that story.

Unfortunately, the stories that go out there are, on the one side, that you're not overpaying and you'll get your benefit, and on the other side, that you're overpaying and you won't get your benefit. Neither of those is the right story. If there's lack of confidence in the CPP today, the lack of confidence arises because for 15 years, the official story out of Ottawa was that the people who criticized it were lunatics, there was nothing wrong with this plan, it was all fair, and it was all going to work perfectly. Now all of a sudden young people are told that we have to have big contribution increases. So they tend to be skeptical of the stories they're hearing, and no wonder.

Ms. Paddy Torsney: And what are the issues you want us to look at for track two of the changes to the CPP?

Mr. Malcolm Hamilton: I don't really have much to say there. If we went to our own organization and asked what the CPP should look like in 50 years, we'd have all sorts of different visions of what it might be. We don't have any particular view of how it should turn out, and hence don't have much to say about that.

Ms. Paddy Torsney: You specifically have recommended some changes for the current group of seniors. Have you done some gender analysis to see how that would weigh? A gender analysis does not suggest that you have to change your position, but have you looked at the differing impacts of the changes you've suggested on male versus female recipients or older versus younger seniors? There is quite a big difference between the two groups.

Mr. Malcolm Hamilton: The analysis that I tend to look at is an income analysis as opposed to a gender analysis. Most seniors are women. Most men die early in their seniorship. So if you have the indexing, that will affect mostly women.

However, the important thing probably should be what the effect is on low-income seniors, whether they're men or women. All I can tell you there is all sorts of other programs are carving back the CPP they get, so if you make a small cut to their CPP, they'll get a fair chunk of that back in other benefits. So it's the higher-income ones who would be adversely affected, and that's probably how it should be.

Mr. Don Cayo: If I could jump in on this question of false impressions, I do agree with Mr. Hamilton that the very valid kinds of concerns that Mr. McMahon spoke about do come out misunderstood, twisted, and so on, but that is really, I must say, Madam, a two-way street. For you to sit there and characterize what we're proposing as a “survival of the fittest” kind of plan is simply not fair.

Ms. Paddy Torsney: I was not suggesting that.

Mr. Don Cayo: I'm glad you're not, because as Fred said, we are proposing, for example, that there would be government licence plans, standards of performance, and the same kind of requirement to look at risk in the investment that you people are talking about imposing on the government board. We are simply talking about a plan that would have a chance at making some real money, as opposed to no chance at making some real money, for people who are young now and are required to pay. I certainly would not want our vision characterized as some kind of survival and fitness plan.

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Ms. Paddy Torsney: I didn't suggest it was.

The Chairman: We're going to have two final questions from Mr. Anders and Mr. Szabo.

Mr. Rob Anders: Quebec has already set up the Caisse de dépôt et placement du Québec outside of the CPP. In Alberta we're looking at the youngest demographics of any province in the country. We're also looking at the lowest unemployment rates. Some numbers I've seen that were just roughly crunched—they didn't go through an actuarial analysis—indicate that Alberta could save about $500 million a year in terms of what we're putting into the CPP. It could run an Alberta registered savings plan or something like that, independent of the Canada Pension Plan, because more people are paying into it because of low unemployment and Alberta won't run into this huge problem as a result of the baby boom bubble.

Can you comment on the political pressure that will be brought to bear in the next 10 years by Alberta and other provinces in better situations than the country generally on this, to opt out of the CPP?

Mr. Fred McMahon: I simply haven't personally thought through that question. It's an intriguing one, but without doing some serious thinking I couldn't respond.

Mr. Don Cayo: I can't respond either, but let me talk about the other half that Fred and I have discussed a little that we have some concern about.

We fear there will be political pressure for regional investments—for Atlantic pensions to be invested in the Atlantic area only. I fear that if there were some provincial break-out of the plans, i.e. Alberta going it alone, it would tend to exacerbate that problem. We do not see that as a desirable thing. When money is being managed well it should be going where it's most secure to build the best return.

My concern about that would be enhanced if that came to pass. I was honestly not aware of those kinds of demographic numbers, although they make great sense to me when you say them. But we're an Atlantic think-tank and we tend to look at our navel, not yours.

Mr. Paul Szabo: Since there has been so much discussion about gender analysis, I think I'd like to put on the table the fact that there was a gender analysis done in February 1997. It's available as a public document. For your information, under the current CPP system women get $2.62 for every $1 they put in. Under the proposed CPP plan they will get $2.56 for every $1 they put in. So it's a slight reduction in the benefits out versus the contribution.

Men today under the current plan get $1.34 out of the plan. It will increase to $1.36 under the proposed plan. No matter how you look at it, women get twice as much out of the Canada Pension Plan as men.

If you do the analysis carefully, taking into account mortality rates and all this other stuff, it just means women get a lot more of the survivor and death benefits coming into their pockets.

The gender analysis is a red herring in this one. The issue for me, and I really want to know the answer from you, is that today CPP is a universal plan and not income redistribution. You've told us that however it occurred, we want to change the Canada Pension Plan to a quasi form of income redistribution that will effectively be means tested or whatever. As for the suggestion we de-index, that is a universal adjustment and doesn't discriminate effectively between rich and poor. The suggestion that the income reported on a tax return reflects the wealth is nonsense. It doesn't reflect the fact that somebody who only has $10,000 of income has a cottage, a summer home and a larger family home that are worth several million dollars. They may be declaring income only because they have non-income-producing assets. They have capital versus income return.

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So the question I really would like to know the answer to is whether you are recommending universal de-indexation or a modification of indexation to try to recoup some of it, or would you go further and say I do want to de-index but I will only de-index subject to a means test which effectively takes CPP out of the universal system?

Mr. Fred McMahon: Parliament could solve the gender problem just by ordering men to live longer.

Obviously the question about indexing is directed at the gentlemen from Mercer. Our argument is not for using the CPP as an income redistribution program at all. In fact, we argue against mixing goals in the same program. We would like to see the CPP be a pension plan and for income redistribution to be managed by policies that are meant to redistribute income, not a pension plan.

Mr. Daniel McCaw: On your comment about our suggestion on the possibility of de-indexing, I would start by saying that from our perspective it's on our agenda—clearly; we said it—but it's of secondary importance to fixing this contribution rate and fixing it more quickly. We've covered that already.

Our feeling was that we have a problem with CPP and we strongly believe all Canadians should share in fixing that problem. There should be a bit of pain for everybody. That's essentially, from 30,000 feet, the philosophy behind the suggestion that everybody would pay a bit. Frankly, when you're asking everybody to pay a bit and you're asking for a partial de-indexation of existing pensions and course of payment, as we were, you're asking for the least—that partial de-indexation—from the people who have benefited the most from the way CPP has been run for the last 30 years. We all know we're in this problem because the people who retired 20 years ago paid for very little of their benefit. The people who retired 10 years ago also paid for not much more than half of their benefit.

That was the philosophy behind it.

The Chairman: Mr. Hamilton.

Mr. Malcolm Hamilton: The statement you started with was an interesting one, that the CPP was not intended to be an income redistribution plan. This is the most massive intergenerational income redistribution plan ever devised in Canada. There was massive income redistribution.

Mr. Paul Szabo: Now you're paying the consequences.

Mr. Malcolm Hamilton: Yes, now maybe I'm paying the consequence. This has been massively redistributed.

On the other point, the point about the people with the large assets and the low incomes, I don't have the resources to do that study. I would like to see it. My guess is you will find the place where there is the greatest imbalance between large assets and low income will be senior citizens, it will not be people working.

Mr. Fred McMahon: I want to connect two dots in a way that I suspect has occurred to a lot of people here. That is the question of surety of receiving your pension. The fact that we can sit around this table making unilateral or arbitrary changes to the CPP—which may make a lot of sense; I'm not arguing against that sort of de-indexing—the fact that Parliament and you can arbitrarily make such changes in the program that will affect future pay-outs without the individuals who contributed to the plan having any say in this just shows why people are skeptical about the CPP and are unsure of what they will actually get out of it. That the CPP is a sure-thing pay-out, which was mentioned as a virtue of the plan, is no sure thing.

Mr. Don Cayo: If I can come back to one of Fred's points in his presentation, if you could de-index 1% you could also as easily cut it in half. I do not expect this Parliament to be mean-spirited or to launch some attack on seniors, for a number of reasons—niceness and political realities and all those things combined. Fred's point was that it would take only one really bad government decision, or one bad government in the history of the CPP, to screw things up in a massive way. I'm sure it's each according to your own political colours, but you can look back at the history of Canada or the history of any of Canada's provinces and probably find a government you think was profoundly bad and did some really dumb things. It does happen in the cycle.

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The Chairman: Ms. Torsney has a couple of comments.

Ms. Paddy Torsney: Yes, I want to clarify for all honourable members that I'm quite aware that there is a gender analysis of the government's proposal. My question to the panel was, specifically, have they done a gender analysis of their changes, since there were specific changes that were asked?

My comment to Mr. McMahon is that I think you had said these changes are being made without any public input. This issue has been discussed for the last two years. A lot of us held meetings in our ridings for input on what people wanted. These proposals have also been discussed, obviously, and negotiated with all the provinces, who may have had their rounds of public input as well. But at the federal level, it has been two years under study, with lots of input.

Mr. Fred McMahon: I certainly never meant to imply that there was no debate. Considering that we're sitting here debating it, it would be hard to make that point.

The point I was making, however, is that after debate Parliament can arbitrarily make changes, whatever is said in the debate, and that individuals, although they have individually made contributions, don't have control over those changes.

Mr. Don Cayo: If I can just jump in, I thank you for bringing that gender matter up, because I did want to say something. We did not look at the gender analysis. We were invited here with roughly a week's notice. It's simply something we've not looked at, which doesn't mean we don't care. I do think that despite the fact that women are taking more out of the Canada Pension Plan for the logical reason that they live longer, the whole question of women's earnings—

Ms. Paddy Torsney: They have babies, too.

Mr. Don Cayo: And babies, too.

The whole question of women having less opportunity because they tend to earn less and because they, in some cases, have shorter careers because of absences from it is a tremendously important question to Canadians. While we have not looked at it in the context of Canada Pension, I don't want to leave you thinking that we don't think there's any issue there to look at.

Ms. Paddy Torsney: That's fine.

The Chairman: On behalf of the committee, I'd like to express to you our sincerest gratitude for a very interesting round table. You brought out some very interesting points that will help us study Bill C-2. Thank you.

This completes meeting number 50 of the finance committee.