FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, November 6, 1997

• 0904

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): Order. Welcome, everyone.

The order of reference is 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. This first witnesses this morning are from the Canadian Labour Congress, Ms. Nancy Riche and Mr. Bob Baldwin.

Welcome.

Ms. Nancy Riche (Executive Vice-President, Canadian Labour Congress): Thank you.

• 0905

How much time do we have?

The Chairman: You have approximately 10 to 15 minutes, and then we'll move to a question and answer session.

Ms. Nancy Riche: Okay. I will read a prepared statement. Although we do have a lengthy brief that has been submitted to the clerk, as requested we have a one-page piece in point form as well.

Bob Baldwin, my colleague, is also the national director of economic and social policy at the Canadian Labour Congress. We'll both share the question and answer session, probably more him than me. I will read the statement for the record.

Chair and members of the committee, I want to thank you for the opportunity to appear before you to present the views of the Canadian Labour Congress on Bill C-2. We have prepared a formal submission to the committee, which is being distributed. This submission is quite extensive in the issues it covers. My opening remarks will be drawn primarily from the introduction and the summary that covers the first five pages of that submission.

The CLC and the labour movement as a whole have been involved in all aspects of Canada's retirement income system for decades. Pensions are an area of deep and abiding interest to the labour movement and so is Bill C-2. From the time the Canada Pension Plan was created, the CLC recognized that it had major advantages over workplace pensions and RRSPs as a way of providing retirement income.

Over the years our major concern with the CPP has been that its benefits are too low. Even with its low level of benefits, the CPP and the OAS are the most widely available sources of income for older Canadians and they account for nearly half of all income received by Canadians over 65. They are also the building blocks on which workplace pensions have been built. Their existence has been particularly important in allowing workplace pensions to focus on providing early retirement benefits.

The CLC was one of the first organizations, if not the very first, to advocate the regular five-year review of the CPP contribution rate. Thus we would hardly fault the fact of the review, which has given rise to Bill C-2. But it must be said that neither the contents of Bill C-2 nor the process that led to it are satisfactory.

On the content side the following should be noted. Bill C-2 implements a number of benefit cuts that will have their most adverse effect on single older women and people with disabilities. These cuts cannot be justified by reference to excessive future expenditures under the CPP.

Bill C-2 redefines the earnings on the basis of which contributions will be made to the CPP in a manner that increases CPP contributions more for people with low earnings than for people with high earnings.

Bill C-2 changes CPP financing arrangements in a way that will lower the CPP contribution rate by a small amount, but this is accomplished in a way that will reduce short-term economic growth, increase the pressure to raise the limit on the portion of pension fund assets that can be invested outside of Canada, and create misunderstandings about the nature of CPP financing. It is based on very pessimistic assumptions about Canada's economic future.

Bill C-2 creates the Canada Pension Plan Investment Board, which has some serious shortcomings as it is established in Bill C-2.

Bill C-2 includes some measures that are designed to improve stewardship and accountability, but does not address some of the most serious problems in this area.

If the contents of Bill C-2 are a problem, the process of getting to Bill C-2 has been an even bigger problem. Three and a half years have elapsed since the 1994 budget speech, in which the government first announced its intention to revise public pensions to make them affordable and sustainable. During that period the government has provided little information to the public on the basis of which it could develop informed opinions. Much of the information it has provided has been highly misleading.

Throughout this entire episode the government has acted as if its obligation to provide information is limited to providing the information that supports its preferred policy position. This is not only a limited interpretation of its obligation, it is a thoroughly corrupt interpretation of its obligation that reflects utter disrespect for a serious debate of public policy.

• 0910

Rather than dwell at further length on this issue, we will note several things quickly.

The government has reached the stage of implementing changes to the CPP without producing any analysis for the public on the impact of the CPP changes or on the incomes of retirees and other affected groups now and in the future.

The government has not fulfilled its promise made in the 1994 and 1995 budgets to produce a paper on aging that would “examine the challenges and opportunities posed by Canada's aging society” and provide background information on possible changes to OAS and CPP.

The government has not lived up to the commitment it gave at the Fourth United Nations World Conference on Women, which was in Beijing in 1995, that it would make sure major policy initiatives would be accompanied by an analysis of their impact on women.

The government is bringing forward cuts to CPP disability benefits that are totally at odds with the spirit of its own task force, the Scott task force on disability issues. The government is heralding CPP changes as improving the fairness of the CPP to younger generations, yet the benefit cuts and the regressive broadening of the contributory earnings base apply to young people, and the assumptions on which the whole financing package is based assume that young Canadians will face years of slow growth in incomes and high unemployment.

The combination of unwarranted benefit cuts, a regressive change in the contributory earnings base, and an illegitimate process for developing proposed changes to the CPP means that Bill C-2 has to be opposed.

Even if it means going back to the provinces to renegotiate a new package of CPP amendments, the regressive changes just referred to need to be removed from Bill C-2. This is a course of action that involves no imminent danger to the CPP. It's a course of action that will be resisted by some provinces. It is a course of action that requires strong political leadership in support of the CPP.

In addition to the major shortcomings just noted, Bill C-2 has other aspects that require change. Some of these do not require provincial approval because they do not involve a change to CPP benefits or contributions. These changes should be acted on if Bill C-2 goes ahead, and they should be taken into account if a new bill is brought forward. These changes are described more fully in our submission.

These changes include the following.

The objects and powers of the investment board should make explicit reference to the promotion of income and employment growth as an object of the board's activities.

The composition of the board of directors of the investment board should reflect the diversity of the contributors and beneficiaries.

Benefit improvements should not be fully funded, as would be required by Bill C-2.

The provision of Bill C-2 that would require a stable fund-to-expenditure ratio should be dropped because it appears to be incompatible with the more important objective of maintaining a stable contribution rate.

It should be a requirement of each review of the CPP contribution rate that governments provide an assessment of the retirement-to-income prospects of Canadians through time and the role of the CPP in providing retirement income.

Moreover, these assessments should be done in a way that satisfies the commitment to provide gender analyses of major policy initiatives.

Any proposed changes to CPP benefits should be accompanied by clear impact analyses on affected groups, and the abolition of the CPP advisory board should be reconsidered.

In addition to proposing change to the CPP itself, our submission includes a number of recommendations on the process for handling reviews and changes to the CPP that do not require legislative change.

By far the most important is a proposal that before future equivalents of the CPP information paper are produced, there should be open parliamentary committee hearings at which people can put forward their views on what should be on the federal-provincial agenda.

• 0915

The CLC is also mindful of the fact that there will be future reviews of the CPP contribution rate. Thus, in our submission, we have identified issues that need to be placed on the agenda for future reviews.

Irrespective of the fate of Bill C-2, several general points need to be made about Canada's retirement income arrangement to set context for both Bill C-2 and future reviews. The changes to the CPP embodied in Bill C-2 and the proposed seniors' benefits are premised on the claim that the current OAS and CPP will not be affordable or sustainable in the future. This claim is poorly supported.

In the budget plan tabled with the 1995 budget, the point was made that OAS and CPP expenditures expressed as a percentage of national income would increase from 5.3% in 1992 to 8% in the year 2030. Eight percent of national income is less than the current average expenditure on programs similar to OAS and CPP in the industrialized world today. This raises the obvious question about why this level of expenditure will not be affordable or sustainable in Canada in 33 years, when it is widely affordable in other countries today.

Secondly, there are a number of forces at play that may cause the incomes of the future elderly to be lower in relation to incomes in society as a whole, when compared to the incomes of today's elderly. There's a real risk that the aging of the population will be accompanied by an ever-growing portion of the population living on some substandard income. This real possibility is totally unsatisfactory. It is also a possibility that has never come into view in the lopsided discussion of pension reform over the past several years, discussion that has been orchestrated by the federal government.

Finally, a point needs to be made about the choice between public pensions versus so-called private workplace pensions and RRSPs as a way of providing retirement income. This point is important, because the view that seems implicit in the government's proposals is that people should rely more heavily on private arrangements.

The superior design characteristics of the CPP have already been noted, but it also needs to be noted that the so-called private arrangements are not purely private. They rely on billions of dollars per year in subsidies through the tax system and are heavily regulated in the public interest. More importantly, these so-called private arrangements have never been as widely accessible as public pensions.

All our experience tells us that to rely more heavily on these arrangements involves a deliberate choice to make retirement income less evenly distributed. People who enjoy greater well-being before retirement will generally enjoy even greater relative advantage after retirement under the so-called private arrangements. Women, people of colour, and others who are disadvantaged in the labour market, will suffer the greatest relative disadvantage in the so-called private arrangements.

The CLC submission covers a wide range of issues, and we would be pleased to take questions. I would also just like to point to an article that appeared in The Globe and Mail today. It's about a study being released by Professor Lynn McDonald, and it's under a headline that says “Retired widows poorest”. The women's community, the feminist community of this country, has been absolutely outraged at the lack of discussion about women and about women as poor when they become older.

I was in Beijing. I was an observer on the government delegation. I was running around the international community bragging about this country and about the kinds of things we were saying in Beijing. Well, clearly, no gender analysis was ever meant to be.

I try to figure out where the government's coming from with its suggestion that women are in the workforce more and will therefore be contributing on some sort of equal basis. Either the government, the bureaucrats who are probably running the show here, have not done their research, or what they're putting forward is that this government clearly has developed an incredibly sexist attitude and doesn't care for women. Unfortunately, I can make greater arguments for the latter.

The Chairman: Thank you, Ms. Riche. Just as a point of information, the gender analysis was in fact tabled with the committee.

Ms. Nancy Riche: Since when?

• 0920

The Chairman: This was—

Ms. Nancy Riche: A week ago.

The Chairman: Yes, that's right.

Ms. Nancy Riche: I bet it supports the information paper, just like the UI one—

The Chairman: Okay.

Ms. Nancy Riche: I'd like to see it. I'd like to get a copy.

The Chairman: We'll make sure you get a copy.

Ms. Nancy Riche: But you see—

The Chairman: I'm going to get into the question and answer session.

Ms. Nancy Riche: To do a gender analysis after everybody screams about doing a gender analysis after the decisions have been made...I will have a look.

The Chairman: Okay. We'll now proceed to the question and answer session.

Ms. Ablonczy.

Mrs. Diane Ablonczy (Calgary—Nose Hill, Ref.): Thank you, Mr. Chairman.

Thank you for being here. I know you speak for and represent a great many Canadians who are affected by these changes, so we'll take your submissions very seriously.

I was particularly interested in the summary of your analysis of the bill, particularly the content problems you noted. You talked about the risks in the revised financing arrangements, about the investment board, which you describe as problematic, and about the issue of accountability. These are all important issues. I would be interested in having you expand on those three areas of concern.

Mr. Bob Baldwin (National Director, Social and Economic Policy Department, Canadian Labour Congress): With regard to the investment board, there are two key problems from our perspective, one of which reflects the problems of enlarging the size of the fund. It is our view that enlarging the size of the fund is going to lead to substantial misunderstandings about what actually provides the financial foundation for the Canada Pension Plan.

To be a little more exact, the bill moves us one small step in the direction of fuller funding. The viability of the plan is still going to depend primarily on income and employment growth through time. Yet if you look at the objects of the board, the only specific object of the board that's mentioned is maximizing returns on investment. In our brief we've actually proposed a method of redefining the objects of the board so that it's clearly recognized in the objects of the board that buoyant employment and income growth are what provide the real financial foundation for the Canada Pension Plan.

The other concern we have follows again, I think, from this misunderstanding about the world we've moved into. If you look at the provisions of Bill C-2 that relate to the composition of the board of directors, we see specific reference to the desirability of including people who are.... I can't remember the exact words in the bill, but it's something like people who are knowledgeable or people who are knowledgeable on the subject of investment.

The reality is that the interests of the contributors and beneficiaries to the CPP extend well beyond an interest in maximizing rates of return on financial investments. They include things like having a job through the period prior to retirement. Yet the only type of person who appears to be specifically sought after as a member of the board of directors is an investment professional. We think that's wrong. We think the references to the board of directors should make it clear that the director should represent the diversity that exists among the contributors and beneficiaries.

So those are the main things—

Mrs. Diane Ablonczy: Could you be more explicit about that? Should they be drawn from different sectors of society?

Mr. Bob Baldwin: I would say yes. The wording in the existing Canada Pension Plan with respect to the make-up of the Canada Pension Plan Advisory Board says, for example, that the members should be representative of employers, employees, and the self-employed.

I think in this day and age it's probably appropriate to make reference to other aspects of diversity that should be recognized as well, including gender balance and the diverse racial and ethnic composition of the population. I just think it should be clear in the bill that we're looking not just for financial experts but for a board that represents the diversity of the Canadian people.

Mrs. Diane Ablonczy: On the issue of accountability, how could it be more satisfactorily structured?

Mr. Bob Baldwin: Again, I guess I'll say in fairness that these reviews are new things. Certainly, having been an advocate for these reviews for many years we find that we're seeing things we never expected to see. For example, our proposal that every quinquennial or triennial review of the CPP, if that's what we move to, should be accompanied by some assessment of the retirement income prospects of Canadians, and must include gender balance, is an important step in advancing accountability around these reviews. In Canada we've had three years of discussions of CPP expenditure with absolutely no discussion of the retirement income situation of older Canadians, which is surely the other half of the equation.

• 0925

We've also proposed that any proposed change to the Canada Pension Plan should not only be accompanied by the actuarial reports currently provided for by the CPP, but again, should be accompanied by impact analyses on groups that would be affected by changes to the CPP.

These are important steps in making the whole process more open and accountable. Also, as we say in the brief and as Nancy said in her opening remarks, having an open parliamentary hearing process before those federal-provincial discussions begin is very important. People have to have an opportunity to say what ought to be on the agenda. Right now there's no such opportunity.

Those are a number of the things. In our formal brief you'll note that we have a section specifically on stewardship and accountability that raises these issues and several others as well.

Mrs. Diane Ablonczy: Thank you.

Thank you, Mr. Chairman.

The Chairman: Thank you, Ms. Ablonczy.

Mr. Nystrom.

Mr. Lorne Nystrom (Qu'Appelle, NDP): Thank you very much, Mr. Chairman.

I want to welcome Nancy Riche and Bob Baldwin to the committee.

It's refreshing to hear you this morning. We had the Fraser Institute last night, and there's a bit of a contrast in the presentation, which I really appreciate.

First I want to ask a question about the investment fund and what you think of the idea of going to a five- or six-year funded plan. Maybe Mr. Baldwin would answer that.

Second, I have a question to Nancy Riche. We got a so-called gender analysis last week, and the frustrating thing is that the government had prepared this way back in February 1997, and they just gave it to our committee here last week. We had that major delay.

Ms. Nancy Riche: It's probably embarrassing.

Mr. Lorne Nystrom: Yes. But even in the gender analysis, we see on page 5, for example, that the projected CPP contributions in the year 2030 will drop by 20.2% for women and will drop by 21.9% for men. So the gap will widen a bit in terms of the contributions, and the men will get a better break than the women.

When you get to the benefits side of it, again, projecting the benefit expenditures in the year 2030, we see men will have an 8.9% drop in their benefits and women will have a 9.7% drop. So with the CPP now, even as it's constituted, women are getting a worse break than men, but that will even widen a bit in the next 30 to 35 years.

Those are my two questions. Do you want to comment on the investment fund and the widening discrimination against women in terms of how the amendments are going to be constructed, let alone against low-income people in general?

Ms. Nancy Riche: I'll start and then Bob might pick it up.

Let me start with the investment fund. It was interesting to see Minister Martin's response to the Ernst & Young presentation, or whoever made that presentation before you. One of our fears, as we note in our brief, is if we go to this, then we are far from doing what Minister Martin talks about in terms of maintaining a CPP for future generations. We'll be left to the vagaries of the market, if you like.

If we go the way Ernst & Young and the right-wing think-tanks would suggest, to invest totally or much more in foreign investments, we're removing from the country. As we say, we don't support it being fully funded—there will be some mix—but basically this social insurance program we have, called CPP, is on contributions from those who will in turn receive it back, like the UI. We want to maintain that over the investment. Bob may want to come back in on that.

On the gender analysis stuff, I'm sure part of that is the fact that women live longer. I always find this a fascinating argument: if you live longer, you can live for less. This is what actuaries have been saying about women and pensions as long as I've known them. Because men will die early, we have to give them a lot more money so they can live well and die early. Because women live longer, we'll give them fewer dollars.

• 0930

That's part of it, but there's a link that has to be made in the current situation for women. One, we're hardly improving the financial situation for women. Two, 80,000 women would be better off if the government would pay the pay equity. They'd do a lot better even down the road, just to shop. But third is why women don't do as well, and some of it has to do with being out of the workforce to care for children and increasingly to care for elderly dependent people.

We've been called the sandwich generation. Why women are more and more having to stay home to look after the elderly is in some part due to the cuts in social programs that have been created by the CHST. So here we have this bizarre situation where, based on one policy initiative, we're taking women out of the workforce, or forcing them out of the workforce, which doesn't allow them to contribute, and based on another policy initiative, we're not going to correct it in any way. So women have been stuck in an incredible situation when you put all the policy stuff together.

In the initial discussion on pensions and CPP, as I understand it—and I'm hardly an expert—the concern for women as single, elderly people in this country was a majority priority of the discussions. Somehow or other it fell off the table.

I have my own political theory on this. Women have fallen off the agenda for this government, quite honestly, and I guess the polls are showing that they're not a high item out there. So the gender analysis is probably true, but I'd need to read it.

I'm very concerned about policy initiatives being absolutely completed before the gender analysis is done. The whole reason for the gender analysis is to make it part of the final package, so if in fact doing the gender analysis shows that policy initiative will have disproportionate effect on women, then you do a different policy paper. It's not enough. You may disagree.

I understood the Beijing reasoning. I understood the grandstanding. I understand that it's not mandatory for the government to even comply with it.

Do you want to talk about the investment stuff some more?

Mr. Bob Baldwin: If you don't mind, I just wanted to add two things about the gender issue.

Mr. Nancy Riche: Sure.

Mr. Bob Baldwin: Apropos the article in the Globe and Mail this morning, one of the issues that should be on the agenda for the next round of CPP discussions is whether it is appropriate to extend the notion of the child-rearing drop-out to other care-giving situations that particularly women contributors to the CPP are involved in, and this speaks directly to the issue raised in Lynn McDonald's study.

I'll look forward to looking at the gender impact analysis, too. My guess would be that if significant benefit losses are being shown for men, it's not a random sample of men that are experiencing those benefit losses; it will be men with disabilities, given the nature of the changes being made to the programs. That's something people may want to look at.

On the investment side, ever since the CLC came to understand the direction in which the government was heading on CPP funding, we've been expressing mixed feelings about it, and we're still expressing mixed feelings about it in our submission. It's really important for people to understand that it is a mixed situation.

There is some promise, but it's been overstated that the fuller funding will reduce the contribution rate to the CPP over the long term. I'd also concede that I think many Canadians believe fuller funding will help preserve the CPP through time, and people's feelings about the future of the plan are not unimportant, but on the other side of the ledger, there are some downsides to what we're getting into that aren't adequately canvassed.

I mentioned one of them earlier, which is just a simple misunderstanding about what actually provides the financial viability to the CPP. It's a misunderstanding that's actually reflected in Bill C-2 itself, where all the emphasis is placed on returns on investment, when in fact the viability of this plan still depends on buoyant income and employment growth.

We also know, somewhat more materially, that in the near future, the effect of building up this fund will be to reduce income and employment growth. That was actually conceded in the information paper. The information paper suggested in fact that we may have to lower interest rates to compensate for the negative effect of building up the fund. Members of this committee might want to raise with the government how they want to offset the negatives effects of building up the fund.

It is likely going to be true, too, that the building up of the fund is going to tremendously increase the pressure to increase the foreign property limit for pension fund investments. I'm very happy that the finance minister is saying what he's saying right now, but the pressure is going to be immense over the next period of time.

• 0935

I think there's an illusion that over the long term the investment fund will contribute to increased savings investment and economic growth. That's not going to happen, at least based on most of the empirical evidence that's around today.

One aspect of this that's gotten no attention to date is the fact that in the real world, where returns on investment will vary significantly through time, there will be periods of time when the investment fund is a source of negative savings in our society.

It's a reality that has totally escaped notice in the discussion. Finally, I'll say once again that I think the net advantage in terms of lowering the contribution rate that will come from building up this fund size is being quite overstated to date.

As I say, it's a very mixed situation we're getting into. It's not a one-sided gain at all.

[Translation]

The Chairman: Mr. Dumas, do you have a question?

Mr. Maurice Dumas (Argenteuil—Papineau, BQ): Yes. First of all, Mr. Chairman, I would like to welcome Ms. Riche et Mr. Baldwin.

At the end of your intervention, alluding to Beijing, you referred to a sexist government. Although my question would perhaps be more suited to a Status of Women Committee, could you describe your thinking on the subject of the present government, that you refer to as sexist?

[English]

Ms. Nancy Riche: I can go through a long list.

First of all, let's go back to Beijing, which was the Fourth World Conference on Women and, as I said, agreements that are not binding on anybody. However, it is an opportunity for the government to take a stand on whatever the summit is: the World Summit for Social Development; Rio, which I guess doesn't happen any more; human rights; and then the Fourth World Conference on Women in Beijing.

Canada in fact was a leading player in Beijing. The first one was the call for sanctions on war crimes against women. Our government certainly led in terms of labour rights for women during the Beijing discussions, which, as I said, I was going around bragging about. I was very pleased with the position our government took.

One of the things they put forward was the idea of a gender impact analysis on any future policy or legislation that the government would introduce. Basically, what that means is to look and see if there will be a disproportionate effect on women in a particular policy or legislative initiative. The only other place I know they've done it—and I could be wrong, as I was wrong on this one, because they may have done it on all sorts of stuff—is they did it on UI. I was terribly distressed because what it appeared to me happened was that for all these major cuts to UI, particularly on seasonal workers, who are disproportionately women in Atlantic Canada, they said it had an equal impact on men and women. I think that was wrong, and it appeared as if the government was doing a gender impact analysis that proved their point. That's all. It was just a party line and it was very discouraging and disheartening.

We have seen the fight on pay equity with the government's own employees. Just last week the Canadian Labour Congress's standing committee on women's issues made an attempt over a number of weeks to try to meet with the ministers responsible for the status of women—federal, provincial and territorial ministers.

A year ago the National Action Committee on the Status of Women and the Canadian Labour Congress did a five-week women's march against poverty. We had 15 demands. We met with the Secretary of State responsible for the Status of Women and the Minister of Finance. We have yet, almost two years later, to even receive an acknowledgement of the meeting, let alone a response to the request for money for violence against women.

Now we have the pension. Immediately after that information paper came out, all the pension experts said this will disproportionately affect women; you haven't paid attention to the concerns of women in this document. Where is the gender analysis? We now find it was done in February. I can reach no other conclusion but that this government is sexist, which is to say, anti-women. I use those terms as strongly as I can, because somehow or other this government has made a decision that women don't count, they're not worth as much as men; there is no disproportion effect in any policy decision, and we therefore don't have to look at them.

• 0940

As I said earlier, to suggest that women are equal to men in the changes to CPP is to suggest that women are going into the workforce in stronger numbers—in fact, they're leaving. It is to suggest that there's equal pay for work of equal value. It is to suggest that we're not seeing women as we just talked about—looking after elderly dependents and looking after children more because of lack of child care, so they're out of the workforce for periods of time. I can reach no other conclusion.

The Chairman: Mr. Jones.

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

Why do you feel future benefits shouldn't be funded? You said that any future benefits don't necessarily have to be funded, and that's one of the principles. Why are you saying that?

Ms. Nancy Riche: We didn't say totally not; we said there could be a mix. Bob can jump in here, but the principle of the social insurance program is that those who will receive pay in. So it's a pay-go system—is that correct?—as opposed to fully funded.

The other piece of it is that if you go fully funded and depend totally on investments, on the markets, it is not going to be even. I know people bow down to the altar of it on a regular basis in this country, but it is not stable. We will take chances. It is too big a risk when the government says its main reason for reform of CPP is to make sure there are benefits there for future generations. If that's the case, then we would suggest that it's a far greater risk to depend totally on something fully funded than some mix of funding and pay-go.

Bob may like to add to that.

Mr. Bob Baldwin: There is a specific provision in the bill that says any benefit improvement has to be fully funded. First of all, it's important to realize that the existing benefit program and financing arrangements provided for in Bill C-2 would amount to about 6% of full funding, according to the sixteenth actuarial report. So on the one hand, you have a financing program that only takes a very small step in the direction of full funding, yet you're putting into the act a requirement saying that any new improvement to the plan has to be fully funded, not 6%-funded like the rest of it. That will become an important practical barrier to making timely improvements to the Canada Pension Plan.

Say, for the sake of example, you decided to raise the benefit rate from 25% to 30% or 35%. With that provision in place you'd have to do one of two things, both of which are undesirable. One, you'd have to phase that new benefit in over a very long period of time—forty years or so—in order to avoid a bump in the contribution rate. Or you could phase it in more quickly, but in order to do that you'd have to bump up the contribution rate quite abruptly in the near term in order to amortize your unfunded liability, and then after a period of years drop it back down.

We're saying, first, that it's inconsistent with the general financing provisions of the CPP that are in Bill C-2, and second, that it's a practical barrier to improvements to the plan.

The Chairman: Thank you, Mr. Jones.

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Our time is running out, so if you'll indulge me, maybe we can just have some brief answers. I have five separate questions.

First, do you support the principle that today's CPP beneficiaries should not be impacted by the changes being proposed, whatever they are?

Ms. Nancy Riche: We don't think either they or the ones in the future should be impacted negatively.

Mr. Paul Szabo: Do you feel it is a better situation to invest in the broader marketplace, whether it be through an investment board or otherwise, than to continue with the current basis by which the investments are made with the provinces?

Ms. Nancy Riche: The latter, but I think we could discuss a mix.

Mr. Paul Szabo: There is something better than what we're doing now?

Ms. Nancy Riche: Well, we're not doing as badly as we're being told.

• 0945

Mr. Paul Szabo: With regard to intergenerational equity, do you feel it is appropriate to move away from the proposed increases in rates, which were proposed at I think 10.2% in 2015 and higher later on, and smooth out that curve so that today's workers start paying higher rates before they would otherwise do it? In other words, do you think we should front-end more of the cost? Do you support that?

Mr. Bob Baldwin: First of all, we've got a long research paper on intergenerational issues associated with the CPP that I'd like to give you.

Mr. Paul Szabo: All right. I'll read it.

Mr. Bob Baldwin: But the short answer is, the issue is quite trivial, one way or the other.

Mr. Paul Szabo: Okay.

Mr. Bob Baldwin: I'd love to elaborate on that some time.

Mr. Paul Szabo: The consultation paper came out and there were cross-Canada consultations with all interested parties. David Walker, MP, headed that up. I assume you participated in the process. I wonder if you asked about the status of gender analysis at that time.

Ms. Nancy Riche: I didn't participate, but the CLC did.

Did you?

Mr. Bob Baldwin: The answer is yes.

Mr. Paul Szabo: Did they assure you it would be done?

Mr. Bob Baldwin: I don't recall getting any specific assurance on that.

Mr. Paul Szabo: Okay. The second-last question is, do you feel that the need to get fuller funding for the CPP is better achieved by increasing the rates on pensionable earnings as opposed to maybe using the general tax system to generate those funds? Which theory or philosophy would you prefer?

Ms. Nancy Riche: The former.

Mr. Bob Baldwin: The former, yes.

Mr. Paul Szabo: The rate?

Ms. Nancy Riche: Yes.

Mr. Paul Szabo: Okay. This is the final question, Mr. Chairman.

Mr. Nystrom raised the issue of gender analysis and gender equity. I wonder if you could tell me whether you were aware that under the current CPP system, women get $2.62 out for every $1 they put in, and men get $1.34. In other words, women get twice as much today as men do.

Were you also aware that under the proposed system women, instead of getting $2.62, will be reduced way down to $2.56, a 6¢ reduction. Men will be increased from $1.34 to $1.36. In other words, the changes being proposed have a marginal impact on the difference between them. It does not, as Mr. Nystrom says, widen the gap, but it does in fact narrow the gap. Your assumption, I believe, has been that women make less than men and are therefore disadvantaged. In fact, in the current CPP, they get two times more out of the plan than men do.

Ms. Nancy Riche: I'm going to let Bob answer, but this is not the current reading that I've been doing on this, and I'm sure you'll hear more on this later.

Mr. Bob Baldwin: I am assuming that the numbers you cited come directly from the—

Mr. Paul Szabo: Gender analysis.

Mr. Bob Baldwin: —gender analysis, which we look forward to receiving and commenting on fully. I can't vouch for the numbers you give, which come from the analysis. I would say first, it doesn't surprise me at all that if you look at benefits per dollar contributed, a variety of reasons come readily to mind why returns to women's contributions will be greater than men's.

Ms. Nancy Riche: Their salaries are so low.

Mr. Bob Baldwin: Well, it's because they live longer and because they take advantage of the child-rearing drop-out—there are a number of things.

So I'm not surprised at the general conclusion, but I can't speak to the numbers. If you get us the analysis, we'll be glad to critique it for you.

The Chairman: Mr. Valeri, do you have a final question?

Mr. Tony Valeri (Stoney Creek, Lib.): I just have some comments, Mr. Chairman.

With respect to the investment board, essentially the requirement to meet regional or economic policy objectives was something that was rejected during the public policy consultations and was really incompatible with the interests of plan members. Given the fact that you participated in that public consultation, I'm surprised that you didn't pick that up, but that's essentially what was coming through.

I have a couple of points, and then perhaps you can comment on that.

The other point about requesting that the board have a cross-section of representation—essentially there's nothing in the legislation that does not permit that cross-section to actually take place with respect to the board. Nothing in the legislation stringently says that they must be pension professionals or pension experts. So in fact I think that objection you have would be dealt with in the legislation.

• 0950

Thirdly, again, there's nothing in the legislation that prevents any labour representatives from sitting on the CPP board. The foremost consideration of any appointment to that board is essentially that they be the best person for the job and have the interests of the plan members first and foremost in their minds.

Lastly, with respect to the comment in your presentation about how benefit improvements should not be fully funded and that they do not require provincial approval, in fact, that was part of the provincial-federal agreement. The provinces pushed very hard for that to be part of that agreement because they did not want the unfunded liability to in any way increase if there were benefit improvements made. That's an incorrect point you've included in your brief.

Lastly, on the gender analysis point, the gender analysis was done during the public consultations and was in fact taken into consideration and considered quite seriously during that policy development, so I would dispute that point. We'll certainly make that document available to you.

Obviously we look forward to the comments you will provide once you have an opportunity to review that document.

Ms. Nancy Riche: Bob was involved in the consultations so I'll let him respond. But I do want to say that in terms of the gender impact analysis and the story you're putting in it today, when this paper was initially released there was an outcry in this country about gender impact analysis. I consider myself fairly well informed on this issue. Pensions are not in my area, as you have probably figured out—I'm filling in this morning—but I certainly would have seen or heard that there was a gender impact analysis.

Mr. Bob Baldwin: Again on the analysis, I take the point that apparently the analysis was done some months go. I find it kind of remarkable that it's only found its way into the public domain within the last couple of weeks in the context of hearings on Bill C-2.

With regard to consultations on the idea of the CPP investment fund, there was one consultation hearing in Toronto that focused specifically on that issue. There was one labour person at that consultation. Virtually everybody who was there was a financial professional. As my labour colleague who had to fill in for us said—because we were at a convention at the time—he was the only person at the meeting who didn't have a conflict of interest on the question of investing in the CPP investment fund.

With regard to what's in the best interests of the beneficiaries, I want to go back again to the point that my worry is that the existence of this fund is leading people to talk about the financial viability of the Canada Pension Plan as if it depends primarily on returns on financial investments, and that's not where the security of the plan lies. To rule out considerations that regional investment is irrelevant is silly, because what you need to make the plan work is buoyant employment and income growth.

Mr. Tony Valeri: I think the point being made now, and the point that was made during the consultation, is that they did not want regional economic development issues driving the agenda for the investment of the fund.

Mr. Bob Baldwin: Right.

Mr. Tony Valeri: That in fact could work against the interests of the plan members, solely for economic development purposes. I think that was the point.

Mr. Bob Baldwin: But it's equally problematic if you construct the interests of the plan members so narrowly as to misunderstand their need for a good employment history in order to get a decent benefit out of the Canada Pension Plan.

We've suggested wording for the plan that I think is consistent with the need to make sure the returns on investment are consistent with what you'd expect in a workplace pension. But I think you have to couple that notion with the clear statement that the main object is to promote employment and income growth, because that's where the financial viability of the plan rests. As I say, we have some proposed language in the brief for you to look at.

I take your point, too—and again we acknowledge it in the brief—that there's nothing in the language regarding the board of directors of the plan that precludes recognizing the diversity of the Canadian population. But it is true that only two specific references to the kind of person who might be a board member are made. One is a reference to regional balance in the board of directors and the other is a reference to expertise. All I'm saying is that you could well have coupled those notions with notions of representing the diversity of the contributors and beneficiaries for a signal of where you want to go.

Mr. Tony Valeri: Fair enough.

The Chairman: Thank you, Mr. Valeri.

• 0955

Thank you, Mr. Baldwin and Ms. Riche. On behalf of the committee, I'd like to express our sincerest gratitude for your presentation.

Ms. Nancy Riche: Where do we get the gender impact analysis?

The Chairman: We'll get it to you. The clerk will take care of that.

Ms. Nancy Riche: Thank you.

The Chairman: I'm going to suspend for two minutes and we'll be back with the representative from the Canadian Centre for Policy Alternatives, Ms. Monica Townson.

• 0955

• 0959

The Chairman: I'd like to call the meeting to order and welcome Ms. Monica Townson from the Canadian Centre for Policy Alternatives. We of course look forward to your comments on Bill C-2. You have approximately 10 to 15 minutes to make a presentation and then we'll proceed to a question and answer session.

Ms. Monica Townson (Economist and Pension Expert, Canadian Centre for Policy Alternatives): Thank you very much.

I think all committee members have a copy of my report called “Protecting Public Pensions”, which is being released this morning by the Canadian Centre for Policy Alternatives. In my comments I have some page references to this report. This is not a brief. I was only invited to appear here yesterday afternoon, so obviously there was no time to make a brief, but there is a significant section in this report that deals with Bill C-2 and with the CPP changes. I'm going to be referring to that report in my comments today.

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The changes to the Canada Pension Plan that you have before you now are being made without any consideration of the impact on the incomes of future seniors. They are being made without any consideration of how these changes will interact with other elements of the retirement income system, including the proposed new seniors' benefit and the tax-assisted private retirement income arrangements of RRSPs and workplace pension plans.

They are being made without any credible gender impact analysis, even though the federal government is officially committed to undertaking such an analysis of all its policies as they are developed. They are not being made as part of any comprehensive strategy for retirement incomes because apparently there isn't one.

These changes are being made strictly to reduce the costs of the program regardless of the consequences for future seniors. The overall objective seems to be to reduce the role of public pensions in Canada's retirement income system, and the government apparently assumes that people will be able to make up the difference for themselves. All indications are that this is not so. Few Canadians contribute regularly to RRSPs and less than half of employed Canadians have a workplace pension plan.

Changes in public pensions are being made without any acknowledgement of labour market trends either. More than three-quarters of all jobs “created” in the last little while have been in the category of self-employment. More and more workers now find themselves in non-standard jobs such as part-time work, temporary or contract work, part-year jobs, own account self-employment, or multiple jobs where people have to work at a number of different jobs to make ends meet. Today 40% of women's jobs and 27% of men's jobs are non-standard. These workers will not have workplace pension plans because they don't have a permanent relationship with an employer. Low-paying, insecure jobs make it virtually impossible to save for retirement on your own.

What will the impact of these pension changes be on these workers? It would appear that the government hasn't even thought about it. The government claimed the CPP was “unfair” and “unsustainable”. It produced no evidence to support either of those claims. The real issue for the CPP was whether contribution rates in the year 2030, when the baby boomers have retired, would have been unacceptably high.

In his fifteenth actuarial report, the chief actuary presented a scenario that was called scenario B, which incidentally was not even placed before the public for their consideration. It projected that combined contribution rates would have reached 13.91% of contributory earnings in the year 2030.

The chief actuary was also asked by the National Council of Welfare to do some estimates to see what would happen to contribution rates if the ceiling on contributory earnings were expanded to twice the average wage instead of once the average wage. What he found was that contribution rates in the year 2030 could have been reduced to 10.56% of contributory earnings in that year. In other words, expanding the ceiling on contributory earnings would have allowed rates to be roughly one-quarter lower over time than rates under the current system. That option was also not placed before the public for consideration.

The government said that if nothing were done, the cost of Canada's public pensions as a percentage of gross domestic product would have climbed to 8% in the year 2030. What it forgot to mention of course was that this would still have been less than OECD countries were spending on public pensions in the year 1991, when public pensions in OECD countries averaged 9.2% of GDP.

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The benefit reductions that are proposed in Bill C-2 will have their biggest impact on persons with disabilities and women. The Canadian Centre for Policy Alternatives does not believe that these cuts are necessary.

Let me just focus on some of the changes now being implemented through Bill C-2. In the short time available to me, I won't have time to go over all these proposals—I'm just going to highlight some of them—but they are all addressed in some detail in the report you have in front of you.

I will give you page references as we go along here.

I want first to talk about the investment fund, which is discussed in the report on pages 37-41. Even the Globe and Mail's Report on Business has said that the creation of this fund puts Bay Street in line for “a big financial windfall”.

Will it increase savings? The World Bank and others say there's no evidence that funding of public pensions does this. More to the point, will it guarantee that CPP pensions are secure? There's no evidence of that either.

This fund is going to be worth about five years' worth of benefits when it's fully in place. That means the security of the CPP will still depend on growth in employment and incomes.

As we all know, especially from recent experience, returns on financial assets are notoriously volatile. If the key objective is to keep the combined contribution rate steady at 9.9% of contributory earnings, what will happen during periods when returns on the investment fund turn out to be lower than anticipated? Will there then be pressure to increase the contribution rate again, to cut the benefits even further, or even to get rid of the CPP completely?

The legislation, as you know, also provides for the CPP to be reviewed every three years, so this whole issue is going to open up with depressing regularity, I predict.

There are a number of important, but unanswered, questions on the investment fund.

I wonder what subclause 10(4) of the bill means when it says there must be:

a sufficient number of directors with proven financial ability

There should be specific provisions for representatives of labour and other groups of beneficiaries to be represented on the investment board as they would be on the board of trustees of a registered pension plan.

What about ethical investment criteria? How will shareholder voting rights associated with the fund's holdings be exercised? We have no answers on those questions either.

Consider the contribution rate increase, which is discussed in my report on pages 41 and 42. That, as we all know, is going to go up by 73% roughly over the next six years, but there appears to have been no consideration of the impact of rapidly increasing contribution rates on incomes and short-term employment prospects for younger workers, about whom the government professes to be so concerned.

Sharply increased contribution rates will also have an adverse impact on low-income workers, many of whom are women, so I think we need an impact analysis of this. That should be conducted, and appropriate ways to address these concerns should be found.

The impact of higher contribution rates on non-standard workers, particularly those who are self-employed and those who hold multiple jobs, should also be reviewed.

Freezing the year's basic exemption, which is discussed in my report on pages 43 and 51, has the biggest impact on those with the lowest earnings.

There was an interesting suggestion actually in the 1996 information paper. It proposed the possibility of getting rid of the YBE completely and compensating lower-income earners by a special tax credit. That option seems to have been lost in the shuffle. It wasn't even mentioned in the final document, “Securing the Canada Pension Plan”. I think it would be worth revisiting that idea.

Another option would be the proposal from Quebec that suggests that the YBE be varied with income so that higher-income earners are required to contribute on earnings from the first dollar.

Quebec's proposal, which I believe has already been implemented in the QPP, would impose that system on top of the freeze. An alternative of course would be to implement it instead of the freeze, which would give you a graduated exemption so that lower-income workers are protected and higher-income workers contribute on earnings from the first dollar.

• 1010

Another issue that's particularly important for women is the reduction in combined pensions, which is discussed in my report on pages 44 and 45 and on page 52. Women account for between 80% and 90% of those who receive their own retirement or disability pension and a survivor pension as well. There are already limits on these combined benefits, and the average amount that women are currently receiving is way below the current maximums. Restricting these benefits even further is clearly a measure aimed directly at women, and I don't think there's any justification for it.

Reducing the retirement pension, which is discussed in my report on pages 45 and 46, will occur because the bill proposes shifting to a new basis for calculating the retirement pension, which, as the government acknowledges, will effectively lower the benefit, the retirement pension. But in periods when wages are increasing more rapidly, the reduction in that benefit will be more significant than the government documents imply. Again, this will have the biggest impact on those who must count on the CPP for a significant portion of their retirement income. Women are likely to be particularly affected by this change as well.

Canada needs a much more thoughtful approach to pension policy, especially in relation to public pensions. We need a comprehensive and coherent retirement income strategy. Originally we were promised that in 1994, when there was supposed to be an aging paper. We never got that. But above all, we need to refocus the debate away from simply cutting costs to addressing seriously the future retirement income needs of Canada's aging population.

The Chairman: Thank you very much for your comments. Now we will move to the question and answer session.

Mrs. Ablonczy.

Mrs. Diane Ablonczy: Thank you, Mr. Chairman, and thank you for this presentation. We regret that you had so little time to prepare, but you gave a formidable presentation, so I don't think we suffered from that, although you may have.

I guess the key concern that I heard from your presentation is that the objective of this change to the CPP seems to have been one of reduction of costs, and that a cost-benefit analysis on the users was not very clearly thought through. Is that a fair summary of what you said?

Ms. Monica Townson: Yes. I think it's also important to emphasize that these changes are being made in a piecemeal fashion. For example, cuts in the CPP have not taken into account what's happening with the seniors' benefit. They have not taken into account how the CPP, for example, is integrated with workplace pension plans. What will be the impact there?

It's my view and the view of the CCPA that we should have had a much more thoughtful approach to this, where we looked at all parts of the system and where the emphasis would have been on how we provide adequate incomes for seniors in the future, given that our population is aging—not how do we get out of the commitments that we made to them in the past and how do we cut back the cost of these various pieces.

Mrs. Diane Ablonczy: That's interesting to me, because only a couple of witnesses have actually taken that kind of broader view, which I agree is important. Because it sounds like you've done some analysis or thought about the proposed seniors' benefit changes, I wonder if you could enlighten us as to what your view is of how these proposed seniors' benefit changes will impact on the viability or the role of the CPP payments for seniors.

Ms. Monica Townson: About half of this report in fact deals with the seniors' benefits, so when you have a chance to look at it, it will put a position in more detail. For example, a lot of people think of the seniors' benefit as something that's an anti-poverty measure. What many people don't realize is that because everybody got this benefit, it also played an important role in replacing pre-retirement income at retirement. So somebody who's earning at the average wage, for example, old age security, under the current system, would give them about 13% of their pre-retirement earnings. The usual rule of thumb that financial planners use is that you need about 70% to preserve your standard of living in retirement. So if you could count on getting 13% from OAS—and I'm talking about somebody earning the average wage—you could count on getting another 25% from CPP. The rest you'd have to find from your private savings.

• 1015

By cutting back OAS and by making it an income tested benefit, there's now no guarantee that you'll get anything. It's particularly significant for women because women's earnings are so much lower than men's and women's incomes in retirement are so much lower than men's. Whether or not women get a benefit will depend entirely on their spousal partner's income, and I'm obviously talking about married women. Most women are married when they enter retirement.

The government has said, “Oh, no, women will still get cheques in their own names”. That's not the point. The point is that in order to determine their entitlement, they will have to take into account their spouse's income.

So if you are a woman planning for your retirement in the future, how do you know how much you are going to have to save from your own savings? The CPP is being cut and you can no longer count on getting the seniors' benefit to replace your income. It introduces a huge element of uncertainty and it also reduces the replacement that you'll get from the combination of the two key public pensions.

Mrs. Diane Ablonczy: Thank you very much.

The Chairman: Thank you, Mrs. Ablonczy.

[Translation]

Mr. Dumas, do you have a question?

Mr. Maurice Dumas: Madam, I scanned the document you submitted. The titles of some chapters are shocking. I regret that we received no French version. Obviously, you said at the outset, you were somewhat rushed when preparing the document. Can we hope that the Canadian Centre for Policy Alternatives will give us a French version? It could be very useful for older Quebeckers who do not speak English.

[English]

Ms. Monica Townson: We have our executive director here. I'm not sure if he can. We certainly have a press release in French, and the report is being released today. Certainly, if we have the resources I'm sure we could make a French copy available. At this point, I can't say for sure that we will.

[Translation]

Mr. Maurice Dumas: Thank you.

[English]

The Chairman: Mr. Jones, no questions?

Mr. Nystrom.

Mr. Lorne Nystrom: First of all, I want to welcome Monica Townson to the committee this morning and I want to say I really appreciate your report. It's very thorough and extensive.

The government did a so-called gender analysis back in February 1997, about eight or nine months ago, and only let us on the committee know last week that this had been done. They held it confidentially until that time.

Have you had a chance to look at the gender analysis? If you have, what is your opinion of it?

Ms. Monica Townson: Yes, I have looked at it. I find this quite mysterious because in all the hearings we've had, everybody that I'm aware of—certainly women's groups and others—has raised the lack of gender analysis. Nobody said that this had actually been done. So where it came from, who knows?

But I can only imagine that the government chose not to release it because it's such an embarrassment. I find the analysis absolutely appalling.

Mr. Lorne Nystrom: I wonder if you could explain why it's an embarrassment. Can you give us your opinion?

Ms. Monica Townson: Most of the report takes the position that we've galloped in to save the CPP and that's great for women because we all know women count on the CPP.

That's not what I call a gender analysis. I actually did a gender analysis myself with Status of Women Canada way back when. They did not release it. Women had to get it through access to information.

So I don't know what's going on here.

The point of this analysis...first of all, as I said, most of it is taken up by what appears to be a kind of propaganda exercise saying that the changes made to the CPP are great and therefore we've saved it for women.

Second, they're claiming that women get more out of the CPP than men because women live longer than men and therefore they're going to get survivor benefits. That too, in my opinion, is not a gender analysis. We should be looking at women as contributors to the CPP and not just as surviving spouses. Many of those who get surviving spouse benefits are not going to be contributors at all because they'll be full-time homemakers.

There are also a number of statements at the beginning of the report that I find absolutely unbelievable. They're an attempt to justify cutting back women's benefits, like combined pensions and so on. They make statements like, “the lifetime earnings patterns of men and women are becoming more alike”. Women's earnings are now 65% of men's, so that's still an awful long way to go.

They also say that women won't be dropping out of the labour force so much because they're not having as many children. Women are already leaving the labour force to care for elderly and other dependent relatives because of government cutbacks in social services. That's a trend that will continue. That is not taken into account either.

• 1020

They cite a lot of pension reforms that were made in private pension plans. They neglect to mention that most women in the workforce don't have a workplace pension plan for the reasons I was talking about earlier on.

They say men's labour market participation patterns are becoming more like women's. Well, that's not true either. If this is what they're basing a gender analysis on, I find it quite shocking, as a matter of fact.

The other point I would like to make is that the federal government was committed to doing a gender analysis of all its policies because of the Beijing agreement. As those policies are developed, if that's the case, then how come no analysis was done for the information paper that was released in February 1996? Almost all the proposals in that paper would have had an adverse impact on women.

For example, they suggested limiting the indexing of CPP retirement pensions. In a very sort of disingenuous way, they then said this proposal would of course have the biggest impact on those who live the longest. They didn't happen to mention that those, of course, are women.

Gender analysis should have been done right at the beginning, and not as an afterthought. This is dated February 1997. That was the point at which the government announced what it was going to do. It should have been done much before then, and it should have been done in a comprehensive way, not in this kind of propaganda format.

Mr. Lorne Nystrom: We didn't see it for eight months. We saw it just the week of Halloween.

Ms. Monica Townson: Exactly, and I'm not aware of any women's groups that have seen it. Why wasn't it made public if it was there, if it was done, and if they thought it was credible?

Mr. Lorne Nystrom: Perhaps one of the government members could respond to that question.

The Chairman: You're not asking a question of a government member obviously. You're asking questions to the witnesses, right?

Mr. Lorne Nystrom: That's right.

The Chairman: Okay. Thank you, Mr. Nystrom.

Mrs. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman. I have a couple of questions.

Ms. Townson, you mentioned Quebec's year's basic exemption. It's the same as the one proposed in this CPP revision. There's also a proposal that with the year's basic exemption, other models would be looked at, at track two.

Ms. Monica Townson: Yes, that's what I was actually referring to. You're absolutely right. Quebec will freeze the YBE in the same way that the CPP will, but in track two they're talking about a graduated YBE. That's what I'm suggesting should be considered for the CPP instead of the freeze. I think it would be more progressive. It would be a way of getting contribution revenue from higher-income earners while still protecting lower-income earners.

As I mentioned in my presentation, the other option—which was in fact in the 1996 information paper but doesn't seem to have been discussed subsequent to that—was to require everyone to contribute from the first dollar of earnings, but to compensate lower-income earners through a tax credit. I thought that was quite an interesting suggestion, but it doesn't seem to have been followed up.

In other words, there were other options—there still are other options—that could be considered and that would be more progressive and more helpful for lower-income earners.

Mrs. Karen Redman: You raise many interesting points. I look forward to reading your brief completely. Obviously, I'm just skimming it as you're speaking.

You talk about a holistic approach. Some of the compelling reasons to look at CPP reform are to look at the realities of the aging population and the pressure that will be on the tax base as more baby boomers retire, placing more demands on the CPP.

I found your page 3 discussion really interesting. You talked about other countries having 9.2% of their GDP going to their public pension plans. If I work through that scenario in my mind...I guess I'm wondering if you would then advocate that, rather than moving to more of a pay-as-you-go system or having less of an unfunded liability, thus passing on the burden of financing this to future generations.

Ms. Monica Townson: You have raised a number of points in your comments. One is that there will be pressure on the tax base as the baby boomers retire. I would dispute that. Seniors pay taxes as well, and if the baby boomers are going to have these great pensions that everybody thinks they are going to have, they're going to be paying taxes on those pensions and on their investment income.

Secondly, there has been work done indicating that the cost of public pensions has been significantly overestimated because it doesn't take into account the different indexing regimes of the tax system and the pension system. As you know, OAS and CPP retirement pensions are fully indexed to inflation. They're both taxable under the current system. The tax system is only indexed to the extent that inflation exceeds 3%. So while the total amount going to seniors through these two public pension programs is going to increase with an aging population, the proportion that the government recruits through income taxes will increase even more.

• 1025

There's a very interesting study done by Brian Murphy and Michael Wolfson at Statistics Canada, which I refer to in my report, that talks about this in much more depth.

The final point I guess I'd make—and I may have missed some of your questions, and if so please feel free to repeat them. You talked about a pay-as-you-go system and requiring this generation to pay for the pensions of the older generation as they increase. The chief actuary's scenario B suggested that if we continued on a basic pay-as-you-go system—as I mentioned in my presentation, there's more detail in the report—joint contribution rates would have been about 13.9% by the year 2030. His scenario B indicated that they would reach a peak of 14.4% in the year 2100, which is 103 years from now, and then they would level off. If people thought that contribution rate in 35 years' time would be too high, because that's what we're talking about, there are other options that could be explored from moderating those. One of them, as I talked about here, would be to raise the ceiling on contributory earnings.

It's very interesting that in the U.S., for social security, while our combined contribution rate this year is 5.85% of contributory earnings up to $35,800, the U.S. contributes to social security 12.4% of contributory earnings up to a ceiling of about $62,000 U.S., which is equivalent to $86,000 Canadian. People are going to say yes, but U.S. social security is actually like our OAS and CPP combined, and that's true. Actuaries have calculated that to compensate for that and to make the contribution rate comparable, you would have to add about 4% to the Canadian rate to make it comparable with the U.S. social security. That would mean that in 1987 then, in Canada, we're contributing about 9.85% while the U.S. is contributing 12.4%, and we're contributing only on earnings up to about half of what the U.S. is.

I think we have to put this debate in context. We have to really seriously consider whether that would have been a bad thing or not. I think unfortunately this debate has been clouded, and there's so much misinformation that the general public doesn't understand how this plan is funded. They really seem to think there's a pot of money from which their benefits are paid and that pot is running out and we've got to do something immediately, otherwise there'll be no money left. That isn't true. In fact, the legislation provided for the contribution rate to be increased automatically by a 15-year formula if the federal and provincial governments haven't agreed. Most people don't understand that either.

This is all dealt with in much more detail in my report.

I think one of the serious problems in this debate has been the very extensive sort of misinformation and myth that was out there, because people didn't understand how this worked.

The Chairman: Thank you very much, Ms. Redman.

Thank you very much, Ms. Townson. We really appreciate your presentation. I also thank you for providing us with a copy of your report.

Ms. Monica Townson: Thank you.

The Chairman: We'll take a five-minute break and we'll be back with Monsieur Bernard Dussault from the Office of the Superintendent of Financial Institutions Canada.

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• 1037

The Chairman: I'd like to call the meeting to order and welcome Mr. Bernard Dussault, chief actuary from the Office of the Superintendent of Financial Institutions Canada.

You have approximately 10 to 15 minutes to make your presentation and thereafter we will proceed to a question and answer session.

Welcome.

Mr. Bernard Dussault (Chief Actuary, Office of the Superintendent of Financial Institutions Canada): Good morning, everybody. I might not speak as long as 15 minutes, so it will probably give you more time for questions. I expect there may be a lot of them and 45 minutes might not be too much time.

The main thing I want to talk about in my introduction is what was published in the 15th actuarial report. I don't know whether each of you had a chance to get a copy of this report before this morning, but I will assume nobody has. I will give you just a few details and leave you time for questions.

The main outcome of the 16th actuarial report that was prepared on the CPP in respect of the effect Bill C-2 would have on the long-term projections is shown on page 18 of the report.

The main message is that the application of the statistic rate of 9.9% starting in 2003 providing the ramp of contributions from 1997 to 2002 would also apply. This ramp is a schedule of contribution rates that increase much more rapidly than before.

The main message is in the last column entitled “Account Expenditures Ratio”. We can see there that in the long run the present ratio of the account to the expenditures will go from about 2% to ultimately reach a ratio of about 4.3%. This ratio is not stable because nothing is really stable in actual life. Ultimately, projections are based on stable assumptions, but before we get to the ultimate stable situation, the fund-benefit ratio gradually gets to 4.3%, and reaches an even bigger value in 2022 of about 4.85% before it does down to about 4.3% in 2040 and stabilizes at this level afterwards.

• 1040

The only factor for 2040 is that among the numerous demographic and economic assumptions we have to make for those projections, there is one that is never stable and that's the one with respect to mortality improvements. We assume that mortality improvements would hold forever.

I think that's the main message we can get from the report. It's important to understand that as required by the CPP Act, these projections have been made by using the same data, methods, and assumptions of the previous report, the 15th actuarial report, which was a report prepared by making a full review and revision of data, methods, and assumptions.

The 16th report, because it uses the data, methods, and assumptions of another report prepared three or four years ago, is not one showing the most current view of what the effect of the 9.9% would be.

At page 11 of the report I talk briefly about that in the section on the effect of economic and demographic developments after 1993. Today I feel that we could have mentioned more details in that respect. We say briefly there that we have made an update of the experience and the effects on projections. We do that all the time on a day-to-day basis. Currently our review and revision tells us that the projections of this report would not be materially affected by the review.

However, some of you must have seen some figures in The Globe and Mail this morning indicating that under the current review the fund would, in 2006 or 2007, be much lower than what you see in this report. This is true, but at the same time the expenditures, benefits, and expenses would also be much lower because the disability benefits have been reduced a lot from what was projected in the 15th report.

This is why I was in a position to say that even by updating the experience, the 9.9% rate would still be at a level that would keep the plan sustainable. That's what our current projections do.

Somewhere in the introduction of the report I explain that as required by the act we will have to prepare another report at the end of 1997. This report might be ready in the fall of 1998. It will take into account the last report, the current review we made, plus any other developments brought to our attention by then.

That's the main introduction. I was asked just two days ago to be prepared to answer some questions for Mr. Jones. This was a very last-minute request. I have all the answers. The only thing that was not prepared when I got here five minutes before 10.30 this morning is that I have 12 series of documents of which the first 7 series have not yet been copied. They might arrive in a few minutes.

Maybe Mr. Jones—I don't know if he's here—could go through his questions or maybe I could go through them. I have a copy of them here. I don't know exactly how to proceed with that.

The Chairman: Thank you, Mr. Dussault. In reference to those questions, written responses can be passed on to the clerk, who will pass them on to Mr. Jones.

We'll now start with our questions.

Mrs. Ablonczy.

Mrs. Diane Ablonczy: I wonder, Mr. Chairman, if I might have a copy of those documents as well.

The Chairman: They'll be distributed to every member.

Mrs. Diane Ablonczy: Mr. Dussault, I guess you're the guy on the hot seat, with all the answers on the actuarial projections. You made reference to the fact that the investment projections have now changed quite considerably and I understand that's because assumptions have changed. Is that correct?

• 1045

Mr. Bernard Dussault: It's mainly because the experience is not the same as what was projected in 1993. We do not intend to change, and have not changed, the long-term assumptions in the review. But what was projected for the short term in 1993 for 1994-95-96, especially how employment earnings would increase over the four years, has been much less.

The economic downturn that started in the early 1990s surprised a lot of economic actuaries in 1990, 1992, and 1994. We always thought the downturn was terminated and was not that severe. All the news we got over the years until 1995-96 was always worse than what we had projected. Some like to say predicted, but in our case we don't predict, we just make projections that are as realistic as possible. Nobody can predict correctly, so we try to be as close as possible, but experience tells us how good our assumptions and projections were.

Mrs. Diane Ablonczy: I guess the corollary of that is when this plan was first put into place Canadians were told their contributions would never exceed 5.5%. Now we've been told the projections say it will never exceed 9.9%. I guess the question all Canadians have in their minds is, how reliable is that assurance?

Mr. Bernard Dussault: We consider the 9.9% contribution rate and the projected fund-benefit ratio of about 4.3% to be fully reliable in terms of the data, the assumptions, and the methodology that were used.

We test our methodology constantly by applying it to past experience to see if we can simulate correctly the past experience of this work. The assumptions are definitely not correct because, as you may understand easily, we can't predict the future. So we determine our assumptions based on a realistic and what we consider reasonable basis, but we know in advance they are not correct. We hope that on average they will be correct, and experience over the last 30 years proves that assumptions can easily be off track.

As you said, in 1966 it was projected that the long-term pay-go rate would be 5.5%. With this report we now show 11%. A lot of factors have contributed to that. An important one is the increase in benefit provisions, but it's not the only one. The assumptions regarding fertility and employment earnings have been quite different from the experience we have observed since 1966.

Just a few years after the first report was published on the CPP in 1964, the fertility rate dropped from 3.5% to 2%. I don't know anybody who predicted that, but it was corrected in the actuarial reports in 1969.

The increase in employment earnings on the day the plan was implemented was at a level comparable to interest rates—both were at about 4%. But as the science of economics has developed, we have used models whereby interest is higher than earnings and earnings higher than inflation. We think this should hold for the future, but not necessarily.

Mrs. Diane Ablonczy: I just wanted to question you about page 14 of your report, where you talk about rates of return on CPP investment for Canadians born at different times. The bottom line is that for people who are about 10 years old today and for people born after that, the return they are going to receive on their CPP investments is less than 2%.

Mr. Bernard Dussault: Yes, that's the real return.

Mrs. Diane Ablonczy: Does that ever go up under these projections?

Mr. Bernard Dussault: No. You see the 1.9% and 1.8% there, but we did not show further figures because after those years of birth, the assumptions become stable, except for the mortality improvements, but they have a very small impact.

• 1050

So that's the ultimate constant value we get using our assumptions and projections.

Mrs. Diane Ablonczy: My last question is about the reliability of these assumptions. The fact that Canadians are planning on the basis of those assumptions is very important. There's been some suggestion that, for example, the 9.9% contribution rate was chosen because it wasn't 10%, or above 10%.

It's important, I guess, that the assumptions you're putting into reports are as free of government pressure as possible. I wonder if you could tell the committee what would need to be done to make sure your office is as independent from government as possible.

Mr. Bernard Dussault: I don't know exactly how to answer that. I can answer only with respect to my own experience as the guy holding the chief actuary position.

Nowhere is it written in black and white the extent of the chief actuary's independence, but in my case, I have been the chief actuary since January 1992. I had worked on CPP projections since 1983. I have always acted quite independently. I can tell you, it has embarrassed some people. Maybe I have acted too independently, but I've done my job as a professional respecting the recommendations of the Canadian Institute of Actuaries.

That's the best answer I can give. I think I got the message clearly, unless there are nuances I missed.

Mrs. Diane Ablonczy: What I meant was, when you structure some tables to say we only are going to pay a 9.9% rate of return, were you given instructions that this had to be the maximum rate of return?

Mr. Bernard Dussault: This is easy to answer: definitely not. It will probably not be a secret to you that I have to talk to a lot of people to prepare those reports. Whether some people who interacted with me could be considered pressures, I can't say, but I don't think I am influenced by pressures. One way you could observe that is by looking at the reports we've prepared since I've become the chief actuary. The long-term assumptions have not changed.

One reason for that—it's not only to show that we're not influenced—is that we have to work with the long term. If you change your mind every three years, people will think you can't make up your mind. I made up my mind in 1992, and nothing so far indicates to me that I should make some changes. I could, but it must be understood that I can't change only one assumption. A lot, if not all, of the assumptions are interrelated.

Recently I developed a theory, which is not proven but seems to be quite liked by those involved in making projections, on the interrelationship between demographic and economic assumptions. A lot of people know the internal consistency regarding economic assumptions. I referred quickly to it earlier by saying that our model is that interest rates should be about 3% higher than inflation and that earnings should be about 1% higher than inflation in terms of increases.

The theory I have developed recently is in respect of the internal consistency between increases in earnings and declines in mortality. My theory is that improvements in mortality cannot materialize if they are not associated with increases in earnings. If you look at the experience of the 20th century, the average employment earnings have increased by about 1.5%. That's true for the last 75 years. Mortality has declined, on average, in aggregate, all ages for all of Canada, both sexes combined, by about 1%. We have made projections applying those results to show what effect they would have on the CPP. It happens that mortality declines in the 20th century had the same effect as increases in earnings productivity on the CPP.

• 1055

The assumptions we used for the 21st century are 4.5%, or 1% of real productivity for earnings. For mortality declines, rather than using the 1% of the 20th century, we used just 0.5% of 1% on the basis of recent studies we made of the CPP mortality. These assumptions have been selected to be internally consistent so as to produce a neutral effect on CPP projections.

Mrs. Diane Ablonczy: So in your view people aren't living a lot longer than they used to?

Mr. Bernard Dussault: They are living longer, but the pace of improvement is not as large as what it has been in the 20th century. Rather than assuming a 1% decline annually, we assume 0.5% of a 1% decline. The study of the CPP mortality over the last 15 years is supportive of that. This study is based on data that are likely more reliable than those of the Statistics Canada life tables.

The census and the three-year death survey that are conducted for the Canada life tables are very fine, but the CPP data are administrative data. You keep track of those. With the five-year surveys connected with the census there is no suivi of that; it's just one shot. So we think for this reason the CPP data are more reliable. If they were not reliable to some extent, then the rates we get would be even higher, which means that the projections could produce an even lower cost.

Mrs. Diane Ablonczy: So your 0.5% of a 1% reduction in mortality amounts to people living longer. How much on average?

Mr. Bernard Dussault: With this assumption, the life expectancy at age 65 is about 14, 15 years more for men and about 18, 19 years for females. By the year 2000, this would have increased by about five years each. Males would have reached 18, 19 years and females 23, 24 years.

Mrs. Diane Ablonczy: How interesting.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mrs. Ablonczy.

Monsieur Dumas.

Mr. Maurice Dumas: No questions, merci.

The Chairman: Mr. Jones.

Mr. Jim Jones: Did you do a report or commission a report on aging? If you have, can you table that report?

Mr. Bernard Dussault: What would that be, a report on aging?

Mr. Jim Jones: The changes in demographics, the aging of the population....

Mr. Bernard Dussault: No, we have not. If ever we had to, it would normally be quite easy for us to do. To prepare our economic projections, we first have to develop demographic projections. These are explained in some detail in the 15th actuarial report. If anyone here would like to have a copy, I have just one with me, but this can be provided.

Mr. Jim Jones: That report there?

Mr. Bernard Dussault: That's the 15th, rather than the 16th actuarial report. It was presented at the end of 1993. In appendix B, which contains about 60 pages, there are several lines to explain how we do our projections. Some results are there, for instance, how the age differential issue will evolve in the future from what it is now, what it was before, and what we project it to be in 2030. But we have not prepared specific papers on aging. The mandate of the chief actuary is almost exclusively in respect of preparing actuarial reports that are tabled in the House of Commons and transmitted to the Minister of Finance.

Mr. Jim Jones: What's the projected size of this fund in the year 2010?

Mr. Bernard Dussault: On the basis of the most recent report?

Mr. Jim Jones: Yes.

Mr. Bernard Dussault: It is shown in table 2 on page 18. The account would be $189 billion. As I mentioned earlier in the introduction, this is on the basis of the data method and assumptions of the 15th report.

A current review shows lower figures. I'm sorry I don't have the table showing our revised projections, but it could be made available very quickly. You can get an idea by what was published in the Globe and Mail.

• 1100

Just from my recollection, in 2006 or 2007 we project a fund of $135 billion. Our revision is with respect to a fund that would be a little less than $100 billion, to give you an idea of how much effect the slower pace of the recovery of the economy has on the fund in the short term.

Mr. Jim Jones: Here it says 2006 is $118 billion.

Mr. Bernard Dussault: Where is that?

Mr. Jim Jones: On page 18.

Mr. Bernard Dussault: Okay. What's the figure you're mentioning?

Mr. Jim Jones: It's $118,702.

Mr. Bernard Dussault: Okay. I was looking at the end of 2007, because that's a figure we have used a lot in recent weeks, $135 billion. Our revised projection shows something in the neighbourhood of $100 billion; you get $35 billion less.

Mr. Jim Jones: Thank you.

The Chairman: Thank you, Mr. Dussault.

Mr. Szabo.

Mr. Paul Szabo: Thank you, Mr. Chairman.

Thank you, Mr. Dussault, for being here.

If I entered the labour force at the beginning of 1966, when the CPP was introduced, and retired in 1997, I would get about an $8,800 CPP annual pension. Could you give me an idea of what the value of my contributions into the plan were over those 31 years?

Mr. Bernard Dussault: I could, but I don't think I can do it in five seconds here, so—

Mr. Paul Szabo: I added them up. It's roughly $10,200. Are we talking about the $10,000 range?

Mr. Bernard Dussault: Maybe.

Mr. Paul Szabo: If you'll accept that, subject to a check—

Mr. Bernard Dussault: I'm sure you're getting to a point that is more than just looking at absolute dollars.

Mr. Paul Szabo: Sure. Of course, the employer right from the start has matched that contribution, so we actually have double the amount in some sort of a pool. During that period we have interest or investment income accumulating and compounding. If we had these contributions going in over this 30-year period and compounding, etc., can you guesstimate how much it would be worth if I retire on January 1, 1997?

Mr. Bernard Dussault: In absolute terms, no, but I think I can answer your question quite correctly in related terms. As page 14 indicates, people born in 1911—some of them, of course, are already retired and have been retired for some years—are expected to get a return of 22.5%. That's on a real basis. That's a high return. This is a projection, but mostly the figure is based on actual developments.

As we said earlier, for people born in the future, the return is only 1.8%. So it's not a secret for anybody that in 1966, or nowadays, if you set aside money in a private fund, you could relatively easily get a higher return from what's shown here. But the point with the CPP is that everybody would get the 1.8%.

Mr. Paul Szabo: Okay.

Mr. Bernard Dussault: In the private sector, on average, the rate could be higher, but not necessarily everybody would get it. Some would get more, some would get less.

There's another point. If all of the 10 billion to 12 billion CPP contributors tomorrow started investing their money, the markets would not be in a position to offer a 4% real return.

Mr. Paul Szabo: I'm trying to get an idea of what pool of funds would be available to fund my lifetime pension benefits. I'm totally ignoring the insurance components such as the disability and that sort of thing.

Another actuary came before us and quickly did a calculation, saying it would be less than $100,000. But let's assume it's $100,000. My final question to you is, if I had $100,000 on January 1, 1997, what is the maximum lifetime annuity that I could possibly receive? Give me a ballpark figure.

Mr. Bernard Dussault: You're 65—

• 1105

Mr. Paul Szabo: Yes. Assume I retire, I paid the maximum, and I have $100,000 today. How much can I get for a lifetime annuity if, for instance, I went to an insurance company and just bought it? How much would $100,000 buy for me?

Mr. Bernard Dussault: I can give you a ballpark figure that's very loose. If you divide by 10, it's $10,000 a year.

Mr. Paul Szabo: So if I say to you that I could have taken my contributions over my working life and instead of putting it into the CPP invested in an RRSP and got a generous return, $24,000 a year rather than just this $8,800, you would suggest that this is not possible.

Mr. Bernard Dussault: No, I'm not suggesting that. I'm saying that CPP does, on a floor basis—because the CPP covers 25% of average earnings—this job of a lower rate of return of 1.8% for 10 million people, maybe even more with those who are retired. Definitely on an individual basis you can do better than that and you can do worse. What the CPP does is something on average.

Mr. Paul Szabo: With the insurance components.

Just to clarify, you said that $100,000 today could purchase me a lifetime annuity of about $10,000 a year—roughly?

Mr. Bernard Dussault: It could be $12,000 or $8,000. It's a ballpark figure.

Mr. Paul Szabo: Yes, but around $10,000 or $15,000. You would not be able to purchase a $24,000-a-year annuity for the $100,000.

Mr. Bernard Dussault: For the CPP?

Mr. Paul Szabo: No. If I gave you $100,000, could you go out and buy a lifetime annuity of $24,000 a year for the rest of your life?

Mr. Bernard Dussault: I don't know. I would have to make a calculation.

Mr. Paul Szabo: Would you do that, then, later?

Mr. Bernard Dussault: Okay.

Mr. Paul Szabo: It's important.

If I may, Mr. Chairman, let me just ask a last question.

Have you followed the major groups' comments on this whole review?

Mr. Bernard Dussault: No.

Mr. Paul Szabo: And you're not going to comment.

Mr. Bernard Dussault: No.

Now, on your question of whether it is possible to get a $25,000-a-year pension with a $100,000 deposit, I don't think so. You would get much less than that.

Mr. Paul Szabo: I know as an actuary you're trying to be neutral—you're at arm's length, etc., and you're not going to deal with this—but as a taxpayer, not as the chief actuary, and I assume you have a family, etc., and are concerned about future generations, do you feel that the approach that's been presented in Bill C-2 is an appropriate solution—

The Chairman: Mr. Szabo, I rule that question out of order. He's not here as a taxpayer, he's here as chief actuary.

Mr. Paul Szabo: Understood. Thank you.

The Chairman: Any further questions?

Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): Thank you.

I want to ask you a couple of things about assumptions. My impression is that actuaries are rather conservative—with a small “c”, of course—and that they generally have a similar outlook through their training. Are there great variations in the actuarial science?

Mr. Bernard Dussault: Actuaries, as human beings, are not conservative, per se—

Ms. Paddy Torsney: I'm not talking about their private lives.

Mr. Bernard Dussault: —with a lower-case “c”, but in doing their jobs, especially for private sector pension plans, they are pressed to be, and have to be, conservative in their projections. The actuarial reports they prepare on pension plans are to ensure the safety of those pension plans. They have to be conservative in that way. There are a lot of rules in that respect.

For the CPP chief actuary, whoever is there, whether it's me or the previous one or the next one, what has always been done is somewhat different from what is being done for the private sector. We state that as clearly as possible in our report. The 16th report is just an addendum to the 15th one, but in the 15th one we say very clearly that our assumptions are determined on a reasonable and realistic basis. There's no margin for adverse deviation or safety. We attempt to be as realistic as possible.

• 1110

Ms. Paddy Torsney: Just to clarify, would private sector pension plans or RRSP adviser-type actuaries have different projections from yours?

Mr. Bernard Dussault: Yes, they do, and they are also under obligation to show in what respect they are different. If they use margins, they have to disclose their margins and the effect they have explicitly.

Ms. Paddy Torsney: You mentioned earlier that assumptions were made about birth rates but they declined quite dramatically in the 1960s and that sort of threw all the tables off. Certainly baby boomers have access to much richer food and their life expectancies could somehow be effected. At the same time, we have children lacking in proper nutrition, and maybe that could effect the numbers. We have medical advances that are certainly changing the numbers.

What are some of the things that would throw your numbers off?

Mr. Bernard Dussault: On the demographic side I don't see anything, like a lot of people involved in projections. After 30 years of low birth rates we don't think they will change. For mortality, even if we were 50% wrong, with our improvements in mortality it would not effect the results dramatically. If it did it would only be in the long term because the effects of mortality improvement are gradual and very slow.

On the economic side, the CPP is mostly a pay-as-you-go plan and the earnings base and the return base for the CPP are driven by employment earnings. The economy and the effect it has on jobs is the main driving factor. I know I don't have to explain how volatile earnings are. In the past 15 years there's been no increase in real earnings. There's been some increase in average earnings, but over the last 15 years inflation has been on average as high as the increase in earnings. Since the CPP is mainly an earnings-related plan, this is the driving factor together with inflation. We determine our assumptions on the internal consistent basis. We don't look at the earnings in isolation; we always look at them in association with the rate of increase in prices.

Ms. Paddy Torsney: I think you identified that we can expect women to live until 88.

Mr. Bernard Dussault: Presently it's about 85, once you have reached age 65; at birth it's less than that.

Ms. Paddy Torsney: If you make it to 65 you get this bonus.

Mr. Bernard Dussault: Yes.

Ms. Paddy Torsney: You clearly made the distinction between men and women because of mortality rates. I don't see in your analysis any references to the differing impacts on women. You talk about death benefits and disability benefits in general and the impact of combined rates and everything else, but you don't actually present an analysis that clearly stipulates the differences for men and women. It doesn't say, for instance, that 80% of death benefits are paid to women.

Mr. Bernard Dussault: That's right. We don't and we could. We have all the figures. There are a lot of things we could put in our reports if we wanted to show figures by sex and a lot of factors. The main reason is because we are asked to show bottom-line figures—the contribution rate and the fund rate. We are asked to produce macro-figures, but if there's a need for more micro-figures we have no objections to that.

Ms. Paddy Torsney: The differences are quite profound, are they not?

Mr. Bernard Dussault: Yes. In the 16th report there's almost nothing, because it's been done on the basis of the 15th report. In the 15th report there are a lot of figures by sex, but maybe not as many as you're talking about. We show mortality rates separately by age and sex. Fertility rates are shown for only one sex.

The Chairman: Thank you, Ms. Torsney.

Mr. Dussault, thank you very much for a very thoughtful presentation. We are certainly going to benefit a great deal from all the information you have provided us. Thank you.

Mr. Bernard Dussault: You're welcome.

The Chairman: I'm going to suspend for approximately two to three minutes and we will be back with the representative from the C.D. Howe Institute, Mr. William Robson, policy analyst.

• 1115

• 1119

The Chairman: I call this meeting to order and welcome Mr. William Robson from the C.D. Howe Institute. Thank you very much for taking the time to appear in front of our committee. As you know, we're studying Bill C-2, An Act to establish the Canada Pension Plan Investment Board and to amend the Canada Pension Plan and Old Age Security Act and to make consequential amendments to other acts. You have approximately 10 to 15 minutes and then we'll proceed to a question and answer session.

Welcome.

• 1120

Mr. William Robson (Policy Analyst, C.D. Howe Institute): Thank you very much for the invitation to appear to discuss this legislation. I now hear that I may have 15 minutes. I planned for 10, but I'm going to take one extra minute to comment—after having heard the previous presentation—on the value that the chief actuary provides to all of us with the work he does on the Canada Pension Plan. I know the numbers he produces have been of enormous service to people of all descriptions who take an interest in this issue, and so since the question of the role of his office came up, I did want to say that for those of us who make a minor living studying the Canada Pension Plan, it's tremendously valuable.

I was told you would appreciate my keeping my prepared comments to 10 minutes. I will proceed therefore without delay and I will spend three minutes providing some context for my views on the CPP, three minutes commenting on some specific aspects of the reform package, and then three minutes speculating about the CPP's evolution in the wake of the reforms. I will use the rest of the remaining minute—that's nine out of 10—by saying in advance that I think these reforms are a major step, moving the Canada Pension Plan from a situation where it was unfair and unsustainable to a situation where it will contribute to Canadians' retirement security, and also, I think, to national prosperity.

However, they are only one step. I don't think this is the end. I think financial and political pressures will ultimately force further reforms, and in fact I expect that certainly within my working lifetime we will see a system of personal retirement accounts in this country. I expect that in fact debate is going to heat up the moment this legislation passes, if it passes.

First on background, then, let me address for a moment the need for reform, because I know that even the need for reform is contentious in this situation. I have a number of reasons for being unhappy about the CPP as it stands right now. It is, as you know, fundamentally a pay-as-you-go plan in which contributions that come in in the morning flow out as benefits in the afternoon.

When the plan was born in the mid-1960s, this unfunded arrangement looked workable because of an unusual circumstance. On the one hand, for about two decades following the Second World War we saw extremely prudent fiscal policies on the part of the major developed countries of the world, and one of the consequences of this was that we had very low real interest rates. On the other hand, we had a combination of technological catch-up and a huge expansion in international flows of goods, services, and ideas that helped to give us very rapid economic growth. When economic growth exceeds the rate at which investments or debts can compound, as it did in the mid-1960s, a lot of things look possible. Among them, sizeable permanent government deficits look possible, because you think the tax base is always going to grow faster than the interest on your debt is going to compound.

Another very closely related thing that looked possible was promises for big public pensions. The idea here was that future workers would willingly pay the bill because they in turn would expect to do better when they entered the plan than they would have been able to do by making ordinary pension contributions into an ordinary funded pension plan. The problem with this situation was that it contained the seeds of its own destruction. As soon as those possibilities were acted on, they began to disappear.

Around the world, governments began to build up large public debts and large unfunded liabilities, and the effect of those, as people began to look forward and think about the security of promises, was, among other things, that real interest rates started to rise. Partly because of the rise in taxes that was needed to service those obligations, growth slowed, and now we are back to what I would submit is a historically normal situation where returns on securities are higher than economic growth rates.

Under those circumstances, pay-as-you-go plans like the Canada Pension Plan become unsustainable. They're like Ponzi games or pyramid schemes, because they can't, over the long run, provide returns that are superior to what you can get from real investments. For a while you can prop them up by coercing new participants in, if you're using the power of the state; you can prop it up that way. You can coerce them in and also you can charge ever-higher contribution rates.

• 1125

But by now we've reached a situation where a typical young person who is entering the Canada Pension Plan this year—and this person would have to, untypically, for what I am about to say to be true, believe that the benefits the plan promises will actually be paid—can still only expect a real return on contributions that's less than half of what would be available outside it.

If you compare the benefit package this person is promised at age 65 to what the same money invested in another funded plan could provide, it falls short of about two years' worth of covered earnings for that person at age 65—so in today's money, over $70,000.

With the passage of time this situation is getting worse. When you look at the CPP's treatment of the voting-age population, even if people believe the promises the CPP is making—and polling data show that young people don't—I can see the day, and it's not very far in the future, when a voting coalition will emerge to dramatically overhaul or even abolish the Canada Pension Plan.

In the absence of faith in its promises, that event might not have been very many years away, and I therefore commend Parliament and I commend the agreeing provinces for moving to reform the Canada Pension Plan before that happened.

Let me then move to a brief assessment of the reforms.

First is fuller funding. The key to these reforms is the rapid ramping up of contributions thanks to higher rates and also thanks to the freezing of the year's basic exemption. What this means is that older participants will finance a larger share of their own retirement benefits, and that lowers the burden on those who come after them. This change does more to reduce the Canada Pension Plan's tilt against younger participants than any other change that was on the table during the reform discussions.

The reform package's assumption of 3.8% average real returns on the money going into the plan looks reasonable, and I also expect that over time the growth of assets in the plan will raise the currently low confidence of young people that they will actually see something for their contributions. Particularly once you allow for that boost in confidence, the pure tax component of the CPP premium hike is less than the total hike. Although there will be some negative long-run effects on job creation from this change, I don't think they're as big as the hike makes them look at first, because some of what's there does reflect a benefit that people will get.

On the fiduciary side, the Canada Pension Plan Investment Board, it's worth commenting that a growing pool of assets is also going to attract other kinds of attention. A lot of people are going to have a lot of good ideas about purposes for this money that are not related to providing good pensions to the participants in the plan. If you look around the world, you will easily see that the record of governments managing provident funds of this type is terrible.

I regret therefore that it has already been announced that the 20% foreign property limit is going to strictly apply to Canada Pension Plan investments, because that indicates clearly that in one key respect, it's not the interests of the participants in the plan that's being put first.

That said, however, with regard to the rest of the institutional structure being put in place by this bill, I follow David Slater in a publication for the C.D. Howe Institute recently in commending its provisions for the Canada Pension Plan Investment Board. A good institutional structure doesn't substitute for vigilance when it comes to misuse of the funds, but it helps enormously.

Another key provision of this bill that I support strongly is the provision that would require future benefit changes to be funded. As the pool of assets grows, it is going to naturally make it easier for people who want new benefits—new benefits that would tilt the plan further against the young, as they tend to do. They will look affordable. The bill's provision that would require increased or new benefits to be accompanied by both permanent and temporary contribution increases to cover their costs is a very good provision. In fact I would commend it as a useful precedent when this committee turns its attention to possible increases in spending in the regular federal budget.

Let me now look ahead briefly and spend my final three minutes talking about why this legislation will provide not a long-lasting settlement, but a breathing space.

I have said already that not all the higher premiums we will pay under the CPP are pure tax. Nevertheless, higher rates and a bigger base are going to have a negative impact on jobs.

This is going to have very disproportionate effects on different people in the workforce. People in integrated public sector pension plans won't notice much. People who are self-employed, who often don't even get to deduct the full value of their contributions on personal income tax, are going to be affected a lot.

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As this increase in contributions puts the costs of the plan front and centre in front of people's faces, it's going to intensify the debate over whether we're getting full value for our money.

Thinking I was being prescient, I noted in my written remarks, prepared yesterday, that because the plan is now further under water than the chief actuary's projections showed, and because inflation is lower and is going to remain lower than the 3.5% rate that's assumed in the reform package, the 9.9% contribution rate is not going to fund the plan as completely as we'd hoped. I see now that I've been scooped on that. Something from the Department of Finance yesterday has already confirmed what I thought of as a courageous prediction.

However, I will just remark that as these developments go forward, the debate over replacing the CPP with a system of personal retirement accounts is going to intensify. Jim Pesando—and here I'm putting in a plug for another C.D. Howe Institute publication—has recently argued that if the increase in premiums were earmarked for individual accounts, that would help to link contributions and benefits more tightly in people's minds and would reduce the job-killing effects of the premium increase. That's a good argument.

Also, if the premium increase were to be earmarked for individual accounts, it would clear the way for us to pay off some of the unfunded liabilities in the Canada Pension Plan by a better revenue source than the payroll tax.

In my view there is one very strong argument against personal accounts, and that is their higher administrative fees. I want to close by addressing that point.

We recently heard that Human Resources Development has cancelled the very expensive contracts to automate benefit delivery. I thought this was an opportune wedge in for me to comment that the CPP's administration is not unblemished. If you ask your constituents about their recent experience with CPP statements or with its representatives over the phone, you will probably find that most of them will compare its customer service rather badly with that of private pension providers.

I would strongly urge in this connection that the regular ministerial reports to Parliament and to the public that are mentioned in the bill should contain information about backlogs in and accuracy of the CPP statements to its contributors.

This is a speculative statement on my part, and I would be delighted to be proved wrong, but I would like to mention the experience of the new private managers of the Ontario teachers' pension system. When that was turned over, they found a startlingly high proportion of the records to be materially inaccurate. It is reasonable to suppose that the same is true of the Canada Pension Plan.

If we had a large-scale system of personal retirement accounts in this country, we could achieve lower costs than, for example, are available in the current RRSP market, but we could also achieve higher quality than is provided by the current CPP.

I allocated none of my 10 minutes for a conclusion, so I'll be very brief. I support this bill. I commend the government and the agreeing provinces for moving ahead with much needed reforms. But if the bill passes, I would urge the members of this committee not to dispose of their files on the Canada Pension Plan debate right away, because you will probably need them again soon.

Thank you very much.

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

We'll begin now with questions.

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

I appreciate your presentation, especially your support for reforms urging that we start looking at moving toward individually owned and privately managed pension accounts for Canadians.

One of the aspects of Bill C-2 that has been under-examined is this whole idea of the CPP investment fund. I noticed that on page 2 of your presentation you alluded to that. You specifically say, “A glance around the world shows that the record of such government-managed provident funds is bad.” I'd be interested in the facts on which you base that statement, and if you have any studies in that regard, I'd appreciate having them. Could you expand on that?

Mr. William Robson: The best study on this is one put out by the World Bank in 1994, which examines pension systems around the world. It provides some good surveys of what has been done with funds of this kind.

As I say, the record around the world on average is awful. I think we will do much better than the average. Canada does tend to manage its public affairs a good deal better than most countries around the world. In fact, I'd put us in the very top rank when it comes to such things. I think we will be equal to our past record when it comes to the management of the Canada Pension Plan funds.

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However, that said, it's clear that the same forces that have acted to make the record of these plans around the world poor in general will apply here. Once the money piles up, it is normal for people to look at it and see it as a possible substitute for things that more properly ought to be funded by tax revenue or, perhaps more properly, not to be funded at all. It is very frequently the case that the best interest of the participants is not the first consideration in the minds of people who look at this money.

I won't cite a lot of specific examples. I will refer you to the World Bank study.

In the plans for the Canada Pension Plan Investment Board, I think an institutional structure has been put in place that gives us a certain amount of insulation against those forces. When I predict that the debate over individual retirement accounts is going to heat up, I think one of the key ingredients in that debate is going to be the fact that once money starts to appear in this account, there will be people who will insist that we invest it in certain ways, or not in other ways, or that we take that money and pay it out to some worthy group or other. I think it is going to be a very serious battle for us to make sure it is the interest of the contributors that is served by the actions of the investment board. Over time, I think a lot of people will argue that a system of individual accounts will in fact provide even better insulation against that sort of trouble.

Mrs. Diane Ablonczy: I will look at the report that you mentioned, Mr. Robson. I notice also that you refer to the concern that under this plan, CPP is just not sustainable in terms of young people's confidence in it in the long term, or even the short term. You mentioned that in twenty years or less, there is going to be significant unrest about the level of investment and return. Of course, the chief actuary was just here, and he confirmed the figures in his report showing that for people who are ten years old or younger now, the real rate of return on this lifetime investment will be less than 2%.

I wonder whether you think the possibility of a “sure” pension—as you say, young people don't believe it is sure anyway—of $8,600-and-some from when you retire until you die would be worth the fact that you are getting so little return on your investment. If the investment was managed privately, as we just talked about, what would be a realistic rate of return that young people could expect?

Mr. William Robson: I think the rate of return being used in these projections is a real rate of return of 3.8%—4% in round numbers—and is quite reasonable. In fact, you can buy federal government real return bonds right now that yield exactly that. It's as risk free an investment as you can make, and it pays more than twice what the Canada Pension Plan will pay.

By the way, I should also add something that I didn't include in my calculations. If you are above the bottom personal income tax rate, you don't get a deduction for your Canada Pension Plan contributions, you merely get a credit. That means that to the extent that Canada Pension Plan premiums are taxed, you are paying tax on tax. As I mentioned earlier, I think that's particularly very unfair to people who are self-employed. It's not in the purview of this committee as it looks at Bill C-2, but I think it's an additional problem.

I think the rate of return offered on the Canada Pension Plan is too low to attract much support. As for whether it's sustainable or not, I think the reform package helps to make it sustainable by reducing its overall cost, so even though you're getting a bad return as a young person going into the plan today, at least you're getting a bad return on not quite as big an amount of money, as was previously the case. Someone born over the next few years in an unreformed plan would have lost an amount equal to about five years' worth of covered earnings at age 65. That's a huge penalty, and I think it's one that would motivate people more readily to do something about the plan.

The situation you allude to is improved by this bill, but it's still not very good. One of the long-term things I think we need to think about in order to reduce that problem is to look at some of the obligations the Canada Pension Plan now has, particularly in the disability area and some of the unfunded liability that exists, and ask whether we couldn't fund it in a better way.

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Because I'm not you, I would recommend a rise in consumption taxes to help us get over that hump, but I realize that right at this precise moment, this probably wouldn't be a very attractive alternative from a political point of view. Nevertheless, it would probably be fairer than almost anything else we can think of. Certainly, I think it's fairer than doing it through the payroll tax.

Mr. Lorne Nystrom: I'd like to ask you a couple of questions on your prediction that there will be a debate in this country about private plans in the future. How do you handle the transition if we go into the private RRSP, the super RRSP plan of an unfunded liability of some $600 billion?

It has been said that we may have to double the GST. A GST of 14% would be kind of hard to sell politically, I'm quite sure, even for the Liberal party. Or you would have to radically increase income taxes, corporation taxes. Or you would do a combination of all three? What are your thoughts about how that transition would be handled if indeed the government were to go down that direction at some time?

Mr. William Robson: Some time ago I wrote a piece in which I talked about the possibility of a rather messy two-stage transition. I think this step is a key step along that road, because one of the things that it's doing is putting money into the plan. When there's no money in the plan, that transition is agonizing, because as you just pointed out, somebody has to pay twice for a period of time. Once there's money in the plan, then the wait of that unfunded obligation begins to be a bit less. As the years go by and money builds up in the plan, that's part of the answer: there will be more money there.

The second part of the answer is that we do have to raise some other taxes. As I mentioned, I think consumption taxes are a good way to do it.

Finally, though, as a deficit hawk, it pains me to say this, but I think you can make a good case for funding part of the transition by borrowing in the regular budget. It's true that borrowing in the regular budget shifts the burden right back onto the young people, from whom you were trying to take it off, but sometimes it's worth making an investment of that kind in getting rid of a bad policy.

The problem with the Canada Pension Plan structure as it exists right now is that it's open to a lot of forces that will, if we don't watch out, push it back into the same kind of intergenerational tilt that I think was intolerable in the existing plan. I think it has been certainly the experience of Chile, which is the great-grandparent of all such schemes, that they did do a lot of borrowing in the above-line, normal, government budget in order to finance that transition. In the long run, if you ask them whether it was worth running up that extra debt in order to get over that hump, I think the answer would be yes.

Mr. Lorne Nystrom: I wanted to ask you also about the fairness of going into private super RRSPs. What about the lowest one-third of the population in terms of income? I represent a riding that has probably the second- or third-lowest income, on average, in the province of Saskatchewan. The average family income there is $35,000 per year. This is family, not individual, income.

Say you have a super RRSP, a privately managed plan, for all individuals across the country. It may be very good for someone making $50,000, $60,000, or more than $100,000 a year. In fact it would be very good. But what about the people who are making just the minimum wage, or just above minimum wage? Doesn't that make our society one in which instead of having more of a move toward an equality of condition, we move farther away from that, as you have more disparities between the rich and the poor? If people are not making much money, they have a hard time even putting food on the table, paying the rent, and providing clothes for the kids, let alone putting money into RRSPs. When we look at all the RRSP statistics, they're mainly used by people who are in the wealthier one-third of our society, which is normal and natural. Now if you get rid of the Canada Pension Plan, which is a universal, fully indexed plan, and move to RRSPs, aren't they going to create more disparities in the country?

Mr. William Robson: Two preliminary comments. First, the Canada Pension Plan, by its very nature, does not cover the poorest in our society, because you need to have a paying job in order to get benefits under the Canada Pension Plan.

Mr. Lorne Nystrom: No, I'm talking about the working poor, the people who make a low income.

Mr. William Robson: Okay. But in terms of overall income distribution, that's an important point. The Canada Pension Plan is for those who work. The poorest of the poor typically don't have the sort of employment history that would make you a full-fledged member of the Canada Pension Plan.

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The other thing to mention is that the Canada Pension Plan provides a horrible return on the money that goes into it, and if you're a poor person, that is a bigger burden on you than it is for a richer person. The Canada Pension Plan is capped off at roughly the average earnings. Up to the average earnings you are contributing to a plan that, as I said, if you're just entering it today, is going to pay you at retirement a benefit package that on average is worth about two years less of covered earnings—so $70,000 in today's money—than you could have if you had put the same money outside.

If you're a lower-income working person, that is a much bigger burden on you proportionately than it is if you're a wealthy one. If you're above the cap, then you're into the private RRSP market and your retirement is going to be proportionately less dependent on a plan that pays a lousy return. So it's not quite as clear-cut as that.

The final thing I would observe about what you're saying is that there's a lot of redistribution that goes on within the Canada Pension Plan. One of the difficulties with conducting a lot of redistribution through a program dressed up to look like a social insurance program is that when you are taxing some people a lot relative to the benefits they receive, that destroys jobs. It also drives people into the underground economy, and sometimes it even drives them across the border.

The redistribution that goes on inside the Canada Pension Plan involves taking from some people and giving to others, and if we focus only on the people who are receiving, we naturally miss a large part of the problem with the plan right now, which is that it's a very heavy payroll tax that is destroying jobs and adding to a tax burden that I think is a little too high in this country.

We have a redistributive program—we have more than one—that's very pertinent to this discussion. We have a steeply graduated personal income tax, and we also have a system of benefits to the elderly that is explicitly geared to income. It seems to me that if you want to redistribute to the elderly and you want to make special provision to those who are going to be destitute in old age, which is clearly the bleakest kind of destitution, you should do it through the programs that are designed to redistribute and not try to enlist what is called a pension plan, and in a lot of respects resembles a pension plan, in the service of that redistribution. In the process of doing that, you end up making the Canada Pension Plan itself less sustainable by harnessing it in the service of an objective it's not really all that well designed to fulfil.

I would argue that the service of redistribution is one whereby you harness the personal income tax and elderly benefits in order to achieve that redistribution and that the Canada Pension Plan should be run as a pension plan.

The Chairman: Thank you, Mr. Robson.

Mr. Bachand.

[Translation]

Mr. André Bachand (Richmond—Arthabaska, PC): You begin by saying that the forecast yield will not be what it should be because of the drop in interest rates and the rate of inflation. I would like to remind you, and you know better than I, that actuaries do regular revisions and that if, next year, the interest rate or the rate of inflation were to shoot up, on a 20-year basis, we should be able to catch up.

Three key points that you raised interest me. First, when you said this could kill jobs, you did not say how many jobs could be lost, or how we could—after all we would still have to keep the fund solvent—offset the effect of the level of employment, nor what measures could be taken to normalize the situation. I would like your views on the subject.

[English]

Mr. William Robson: If I may, I'll address your points on inflation first. The reason that inflation makes a difference to the projections...there are two key things that happen if inflation is lower. First of all, because the maximum pension, if the bill is passed, is now going to be averaged on a five-year basis rather than a three-year basis, that lowers the value of the average pension by approximately one year's worth of increase. When inflation is high, that's a more powerful tool for reducing benefits than when inflation is low.

I don't like using inflation to erode benefits. I don't like the fact that our personal income tax is not fully indexed. I don't like the use of inflation to inflict hidden taxes, so when I commented on inflation being lower and that affecting the projections adversely, I was not meaning to suggest for one moment that higher inflation would be better.

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The other related point is inflation helps the projections because the higher inflation is, the more rapidly the freezing of the year's basic exemption increases the base on which contributions are levied. It is, if you like, a way of harnessing inflation in the service of an invisible tax increase.

With lower inflation, that effect is going to be less pronounced. Once again, that affects the projections, but I wouldn't recommend higher inflation on that basis.

The job-killing question is an enormously complicated one. There is certainly no consensus among economists as to how payroll taxes affect jobs, because the short-run effects and the long-run effects are quite different.

In the long run, the consensus is that basically payroll taxes come out of your paycheque. In the short run, though, there are all sorts of reasons why that doesn't happen. Wage contracts exist, employers have cashflow constraints, and when you start to dip into that pool of payments from the employer to the employee, and take more out, it's probably going to affect jobs.

I think in the short run this was the best way of doing it. I would emphasize the point again that particularly if the increase of funds in the plan increases the confidence of young people that they will receive benefits, then part of the CPP premium increase becomes simply like a contribution you make to receive any other kind of retirement benefit or, say, unemployment insurance benefit or what have you. That's not an issue. The big problem is the extent to which some of it is just pure tax. That probably is going to kill jobs.

In the short run, this was clearly the way we had to do it. In the longer run, as I've said, I think there is a better way of doing it.

I would finance part of the unfunded liability with a higher consumption tax, but at the moment I don't regard that as much of a politically popular suggestion. I will continue to repeat it in the hope that it might some day become a little more palatable.

[Translation]

Mr. André Bachand: The surprising thing is that the solution I am asking for to stop people losing their jobs, you tell me that we should transform a tax increase for the CPP into another form of tax. This would be a tax on top of a tax. Should we not let people know that we have to keep the coffers filled, but that we are going to give them some relief so that people remain confident about the economy? As you know, to consumers, the economy is largely what goes on in peoples' heads.

I would like to go on because time is short. You refer to 20% foreign investment in the Canada Pension Plan. Would you make the same recommendation for private plans?

[English]

Mr. William Robson: First, on the taxes, I think the message that we're more fully funding the plan is one that should go out there, because it's very important. In my view it does increase the chances that a young Canadian paying into the plan today will see something.

I think in the case of Quebec the fact that there's a fund there has had a good effect on people's perceptions that they are paying money for a benefit they will receive.

I will only mention in passing, because it's not directly pertinent to the bill, that if you're worried about the short-run impacts of these higher taxes on jobs, there are other things that can be done with EI premiums, and after a couple of years have gone by, I would hope with the lower rate of personal income tax as well.

On the foreign investment rule, I would like to see it disappear. I don't think it serves much purpose. One of the things that bothers me about it is that if you're a big pension fund manager, it's very easy and inexpensive for you to get around it with derivatives. If you're a small guy, small pension, investing in mutual funds, you can get around it, but you'll pay 1.5% to 2% annually to do it.

The impact of that rule falls very disproportionately on the smaller person who finds himself or herself really restricted by it. If you're in a big pension fund, like the Canada Pension Plan Investment Board or like the Ontario teachers, you can get around it with derivatives, and it actually doesn't materially affect your return.

[Translation]

Mr. André Bachand: Mr. Chairman, I don't know if I have time to ask one final quick question.

You spoke of Quebec. Quebec has the Caisse de dépôt et placement du Québec, which makes investments, lost money in the Bre-X affair and is an important presence on the Toronto Stock Exchange.

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Many people are starting to be afraid of the institutional power of the body that will manage the CPP; hundreds of billions of dollars is the sort of figure mentioned. Imagine the positive, but also the negative, power available to the person who is at the controls of such a body. You mentioned it, but gave no details. Would you be prepared to give us further details on how the management of these funds should work? Are we talking about reflecting the methods of the Caisse de dépôt? Some people have mentioned joint management with the provinces, so that these amounts could be used for development in various parts of Canada and act as an economic lever. You have not gone into any detail about your thoughts in this regard. You told us to be careful, but what structure do you prefer?

[English]

Mr. William Robson: The structure that is envisioned in Bill C-2 answers to the purpose pretty well. It is clear that it is in the interests of the participants in the plan in the sense that they get good pensions for the money they pay in, which is supposed to be their primary objective. In short, in an imperfect world this is as good as we can get when it comes to designing these things at this point.

The Chairman: Thank you, Mr. Robson and Monsieur Bachand.

Mr. Szabo.

Mr. Paul Szabo: Thank you for coming, Mr. Robson. Most Canadians who are involved in the management of the fiscal affairs of Canada, or investment, look to the C.D. Howe Institute for perspectives. I think the good reputation is well earned.

I was born in 1948, for instance. The chief actuary's report shows that the real rate of return for me will be 5.4% under the current plan and will reduce by half a percentage point to 4.9%. If you look further down the table to those who are born in the year 2012, their return under the current plan would only be 1.5%, but would actually rise to 1.8% instead of dropping.

The intergenerational equity issue certainly does come in here. It's pretty hard when you are three-quarters of the way through your working life and contributions are historic to unravel that because the rate increases would either have to be much higher for some people or would reduce in the future to actually get intergenerational equity. So I would ask you whether this steady state rate of 9.9% will bring everybody from here forward on everything that happens and perspectively put them on an equal footing.

Is there anything else you would recommend that should be done to accelerate or to more effectively deal with the intergenerational equity problem?

Mr. William Robson: The only very powerful thing that I can think of is something that I've already mentioned. That would be to take part of the unfunded liability in the Canada Pension Plan and fund it with a consumption tax. As you will notice in this table, only people who are actually in the plan are affected by this change. Of course, the largest returns are paid out to people who are already retired.

If we decided we wanted to try to reach back and undo some of the intergenerational tilt that the Canada Pension Plan has already produced, the most straightforward way of doing it that I can think of would be to put some of the unfunded liability into the regular federal budget. Perhaps if provinces decide that one by one they would like to follow Quebec out the door and establish their own and finance it through consumption taxes, that's one way of doing it.

Mr. Paul Szabo: If you follow that approach through, it would basically either require increases in taxes or decreases in expenditure cuts, all of which affect all Canadians. Therefore, the partial resolution of the unfunded liability or the intergenerational discrimination would in fact be borne by existing CPP beneficiaries.

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So you would be open to touching today's seniors in terms of their situation.

Mr. William Robson: Yes, I would, but through consumption taxes. I don't find it attractive to think of trying to do it with any kind of age differentiated premiums or, for example, by going after existing benefits to the elderly. Although the two populations overlap, the problem is that benefits provided to the elderly on the basis of income are clearly geared to need. The CPP only affects you if you worked.

I wanted to address another point you made in the first part of the question in terms of what we could do to prevent going forward. These sorts of plans, even in the private-sector-defined benefit plans, are always vulnerable to people who are almost on their way out, who are enriching the benefits for themselves just before they go. You see this with early retirement packages all the time. It happens in the private sector too.

If you don't like the possibility that we have an institutional structure here that allows this sort of thing to happen, I may be failing in my imagination, but it seems to me that personal retirement accounts are the best way of guarding against that. As long as the existing institutional structure is there, that dynamic is always going to be in play. It exists in the private sector too. It's not just a public sector problem.

This type of plan always presents temptations for those who are about to receive and enrich themselves at the expense of those coming later.

Mr. Paul Szabo: Finally, all of the discussion we've had on your statements seems to have set the insurance components of the benefits off to the side: the disability, the survivor, the death benefit, etc. We were told that the total costs of the CPP benefits are 6%: 4.3% is the pension, 1.7% is the survivor and disability and death, and 0.1% is the administration. That says to me that the 1.7% that is attributable to the insurance component should be added to the real return that has been calculated by the chief actuary, the 1.8%, for instance, for the person who was born in 2012. This real return on an amended basis, this 1.8%, is the return of the pension benefits relative to what they put in but does not attribute any value to the insurance aspects of the Canada Pension Plan.

Would you comment on that.

Mr. William Robson: Bernard Dussault would be the more appropriate person. I don't believe that's correct, though. I believe the returns that are shown in his report are for all benefits. When I talked about a benefit package at age 65 I was also including all benefits, not just retirement benefits but the survivor and disability benefits and so on.

These projections and the numbers I mentioned are based on the experience of a typical composite average participant, a person whose experience is in every respect—including, unfortunately, being both sexes at once—typical of a participant going through the plan, including disability benefits, drop-out provisions, and all the rest of those things.

So I believe those numbers are factored in there.

Mr. Paul Szabo: Thank you.

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

Mr. Robson, thank you very much for your input. Certainly you've brought some useful information to our attention and we'll be using it as we study Bill C-2.

Mr. William Robson: Thank you.

The Chairman: The meeting is adjourned.