FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 18, 1997

• 0902

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.): I call this meeting to order.

Welcome back, Mr. Slater. You were here with us yesterday and we found your presentation quite insightful. We look forward to your presentation today as well.

There is no need to remind anybody here that we are dealing with 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. We are seeking input from Canadians as to the ways and means in which we may in fact improve this piece of legislation.

Mr. Slater, you know how we operate in this committee. You have 10 to 15 minutes to make a presentation and thereafter we will proceed to a question-and-answer session.

Mr. David W. Slater (Individual Presentation): Thank you, Mr. Chairman. I again welcome the opportunity to try to assist the committee. I'm a genuine pensioner, probably one of the rarities you see before you. I keep fully employed at mostly non-paying jobs—as my wife says, “far too fully employed”.

I want to correct one thing. Yesterday I was billed as representing the C.D. Howe Institute. They've published a couple of papers for me but I'm not a member of that institute and am not on their payroll.

I'd like to do three things today. First, I want to place the Canada Pension Plan proposals into the broader setting of the retirement income system as a whole. Secondly, I want to indicate some of the problems with the proposals and measures. And thirdly, I would hope to put before you what I think is maybe a more useful setting for considering the issues of alleged tax grabs, low rates of return and fairness issues.

I will begin with some basics, which I'll skip over fairly quickly.

• 0905

I start from the premise that the primary responsibility of Canadians for elders' income continues to lie with individuals and their families, not with governments. However, government and government-assisted programs are major, indeed vital, parts of the system. The taxation of income and wealth is also an important influence on the system.

One of the main reasons for government involvement is to cope with the potential poverty of elders. For any number of reasons, many Canadians are unable to provide for their retirement on their own. The OAS system and the seniors system to replace it are primarily based on the motivation of dealing with the poverty problem.

The other main reason for government involvement is to ameliorate the inadequate provision for elderhood by most people during their working lives. Myopia about the provision for future needs is a nearly universal feature of industrial-commercial societies. This reason is important for the CPP and for the RPP and RRSP programs. It is also an important consideration in the taxation of income and wealth. Nevertheless, that doesn't undermine the fundamental point about individual responsibilities.

Government and government-assisted retirement programs impose burdens in one form or another on some Canadians in order to make transfers to other Canadians as pensions, disability benefits, and so on. There is no free lunch in the system. The means and willingness of Canadians to finance such transfers are limited.

The retirement and other benefits of each decade of Canadians have to be met mostly out of the national income generated in that decade. The pensions and other benefits that will go to the decade beginning in 2001 will largely have to come out of the national income generated in that decade. This is so whether the system is totally or partially funded or unfunded, government or private or mixed. Pre-funding might ease the transfer by enlarging the future decade's national income, and it may strengthen the moral and political claims for such transfers. If the proportion of the working population receiving such transfers is increasing and the proportion of the working population is falling for any given program of benefits, a larger percentage of each decade's national income will have to be transferred to the elders.

You are familiar with the long-term trend of the increasing numbers of elders compared with numbers of workers. On the top of that long-term trend, over 20 years or so, there is the reverse of the baby boom, an unusually large increase in the number of elders per workers. These long-term trends are one of the main reasons why the changes have to be made to the Canadian retirement income system, not just the CPP. Other strategic factors driving the changes are the prospects of not-so-high productivity growth, relatively high real interest rates, and the fact that the government's debt is such that it can't assume many more burdens on that account.

I prefer to think of Canada's retirement income system as being composed of four interdependent blocks, not just three. At present the main blocks are the OAS-GIS system, the CPP and QPP, RPPs and RRSPs, and other sources of retirement income.

I think the system has been designed as a mixed governmental and private system. It is a system more or less deliberately designed as such. Although there are flaws and inconsistencies in the system, as has been pointed out again recently in the ACPM paper, the overall structure is desirable and the details are fixable, in my opinion.

While it is proposed by the Canadian government that the fundamental rationale and structure of the system be maintained, every block is on the agenda for change, and therefore so is the system as a whole. The seniors benefit is proposed to replace the OAS-GIS system. The CPP changes are before you. The tax relief for RPP and RRSP programs is to be reduced. The age of withdrawals is to be reduced. Other conditions for use of the RRSPs have changed. It looks to me as if tax and governmental treatment of other wealth and sources of retirement income are also in the works. If not, they should be.

• 0910

As I have written elsewhere, the retirement income of less well-off Canadians appears to be mainly protected by these combined changes, though some serious anomalies and flaws persist. However, in nearly every respect, the retirement system provisions for upper-middle income Canadians will be squeezed. Their provision for retirement will be reduced or their current taxation will be increased. This is so for each bloc of the system, and even more so for the system as a whole, because of its interdependencies.

For the Canada Pension Plan, benefits will be reduced a little and contributions will be increased, and as we talked about yesterday, there will be the build-up of an investment fund.

All future contributors to the CPP, under the new proposals, will make larger contributions than the value of the benefits they will receive from future employment. The supplementary contributions will partially reduce the unfunded liabilities of the program, which have arisen from insufficient financing of accumulated future benefit entitlements arising from past employment. I'll talk more about this in a moment.

I have analysed the replacement of the OAS and GIS by the seniors benefit in my February 1997 Howe Commentary paper. Essentially the change is intended to protect, even slightly improve, the transfers to lower-income Canadians while reducing the benefits to middle- and upper-income Canadians. In aggregate, the losers are to lose more than the gainers gain, so that the net cost to the federal budget will be reduced. The benefits of those receiving them now or soon will be grandparented.

While I found attractions to the changed program, several anomalies and problems should be addressed. The proposed improvement and benefits for the lowest-income Canadians are small. High replacement ratios of low incomes are still low incomes. The adequacy of income of an individual after death of a spouse should be examined further. The fairness of basing the benefits on family rather than individual income is challengeable. The tax treatment of low-income receivers of seniors benefits is generous compared with the working poor.

The principal flaw, however, of the proposals is the severe taxbacks that will arise if people save for retirement outside the seniors program. The resulting income will reduce the seniors benefit and also be subject to incremental progressive income tax, even for people with rather modest other incomes.

The lowest marginal tax bracket in this country, federal and provincial together, taking surtax into account and so on, is about 27%. If you lose 27% of an increment of income and you lose 20% of your seniors benefits, that's a taxback, for the lowest-income people who are paying taxes, of 47%. At the upper end, the top marginal rate in this country has been, in Ontario, around 53% or 54%. If you take 20% off the seniors benefit and a marginal tax rate of 53%, you have a taxback of 73%.

The resulting savings disincentives that will arise are severe. The grandparenting provisions will produce inordinately large differences in net income, depending on the luck of being on one side or the other of the qualifying date.

The CPP changes are widely endorsed, and I strongly support them. Taking the direct and indirect effects together, they will reduce benefits and increase costs to participants, except for those now receiving CPP benefits—like me. I will deal with the issues of tax grab and so on in a moment.

To round out the story, it will be recalled that the March 1996 budget proposals reduced the government “assistance”—that is, tax relief on both contributions and investment earnings—for RPP and RRSP programs, but improved their use in some other respects. After a transition period, the limits for income tax relief for contributions to both RPPs and RRSPs are to be reduced to about 2 times average income, instead of the previous 2.5 times and earlier 3 times or more. Also, RRSPs will have to be collapsed into cash, annuity or RRIF programs by age 69 instead of 71. However, the unused pension adjustment room for participation in RRSP programs is to be carried forward during a person's whole working life, rather than the five-year carry-forward that now exists.

• 0915

The average and marginal taxation of other savings and wealth programs has also become more severe during the last decade in Canada through the imposition of surtaxes and because of the inflation bracket creep of the progressive income tax system. The reduction in provincial income taxes is a partial offset in some provinces. Canadian marginal income tax rates are not only high, they apply at much lower thresholds of income than those rates found in some other countries, such as the United States. Both of those things have to be taken into account in assessing the burden of the marginal tax rates.

In nearly every respect, the changes that are proposed to this package put a squeeze on the preparation for...and prospective retirement income of those Canadians who have little more than middle incomes. Canadians preparing for retirement can offset these squeezes on their public and publicly assisted pensions by saving more outside of the public system, but at a cost of higher current taxes and lower current consumption. It should be recognized, moreover, that the moderately upper-income taxpayers pay the bulk of the personal income taxes of this country, and at high marginal rates.

To turn to this tax grab question, as I see it, it is certain that Canadians are going to have to pay more for their CPP and other benefits than they now pay in some form of contributions and taxes—and why this is so will be indicated in a moment. Two kinds of issues arise, then. First, who is to pay, when, under what circumstances, and how? And second, are some methods of payment better than others with respect to economic growth and efficiency in the country, and with respect to the fairness of the division of the additional burden?

Stand-alone allegations about tax grabs by the federal treasury from the young are misleading, inflammatory rhetoric, but important issues of taxation and contributions do have to be met. To understand the problems for the CPP, divide the benefits from the CPP program into two parts. Part A is the entitlement to future benefits on the basis of past service and contributions to the program up to today. Part B is those that will arise from future service and contributions. Part A includes pensions now being paid and benefits now being paid, and the accumulated rights to future benefits that are not yet in pay.

With part B, the future benefits from future participation, a number of possibilities exist for its financing on a pay-go basis or partial or pre-funding basis. It would be possible to have the participants in part B benefits fully paying for their benefits, generation by generation. The starting point for determining the contribution rates would be the entry age for normal rates. Depending on the demographic trends, rates of investment returns and part B funds, contribution rates could be higher or lower. In general, the contribution rates necessary to meet the part B benefits would be 5% to 7% of the contribution and entitlement base, depending on the design of the program. The important point is that the programs could be self-financing at contribution rates less than the 9.9% rate proposed for the CPP.

What about part A benefits? They have to be paid unless they're repudiated partially or wholly. They are obligations of the federal government, though not legally enforceable contractual ones. The present value of these liabilities is several hundreds of billions of dollars—various estimates are between $400 billion and $650 billion—and the assets of the fund are about $40 billion. The difference between the liabilities and the assets is the unfunded liability. Over the next thirty to fifty years, the benefits will have to be paid by the federal government. Taxes or contributions will have to be obtained by the federal government in the future in order to pay these obligations, in addition to the costs and benefits under the part B program, as I call it.

The unfunded liability arose from the fact that Canadians now drawing CPP benefits—or holding accumulated but as yet undrawn benefits since the start of the program—have not been required to make contributions equal to the cost of the benefits. They were accumulating. For the earliest cohorts, who are now drawing benefits, the underpayment was grotesquely large. I've done the calculations in my own case, and clearly the bonus I've been getting out of the CPP is disgraceful, I think.

• 0920

How heavy will be the burden of meeting these part A obligations? It depends on the growth of the national income and the rates of future investment returns. The more rapid is the growth of future national income, personal incomes and tax base, the smaller will be the relative weight of the burden. If you've got a bigger national income, bigger tax base, a given dollar amount of burden that has to be paid in the future, which is already determined, will be relatively that much less.

Hitherto it was thought that the growth of the population and workforce and growth dividends of the program would permit the meeting of the unfunded liabilities with little or no additional contributions or taxes, but that expectation has been unrealistic for more than two decades. In addition, the high rate of return on any investment fund's accumulated program...the smaller will be the size of the future benefit. The size of the fund in a very low pre-funded program would not yield enough resources, even at higher real rates, to make much difference to the easing of the future part A obligations.

The bottom line is that meeting part A obligations of the CPP will require additional contributions or additional government revenue from sources other than those that are required to finance the part B benefits. Somebody will have to pay more, in some way, at some time.

Setting the CPP contributions rate at 9%, whereas the part B costs would be 7.5% or less, depending on the richness of the program, imposes part of the costs of the part A obligations on all future contributors to the program. The middle-aged, the young and the yet to be born will be making a partial contribution to the resources required to meet the accumulated part A obligations.

However, under the proposed contribution rates, they will not be sufficient to meet the total costs even if the investment fund has accumulated relatively high real rates of return. Governments will have to devote tax revenue toward meeting a large part of the obligation. Governments meeting these obligations by issuing long-term bonds would have to service the debt, so that the burden would nevertheless fall on taxpayers.

If excess contributions, as I call them, to the CPP—that is, contributions in excess of the cost of benefits from future service—are not made toward meeting some of the part A costs, then more of the burden will fall on other parts of the federal budget. Other sources of government revenue will have to be used, or other services reduced. Income taxes will have to be higher than they would otherwise be, or sales tax will be higher, or taxes could be imposed on wealth or transfer of estates.

It's pay now or pay later, make larger contributions and pay less in taxes or vice versa. But pay Canadians must in order to meet the part A obligations.

Therefore, one issue concerns the effect on future national income of various possible contribution and tax methods to meet the part A costs.

Jim Pesando, in a very good paper, argues that the excess contributions under the CPP proposals would be a type of payroll tax, which might have adverse employment and productivity effects. If excess CPP contributions are not to be made, what other taxes are to be used and/or other expenditures to be forgone? Would they be better for the economy than increased contributions?

In an earlier paper Pesando recommended increasing personal income taxes. I could envisage alternatives such as an earmarked surtax on personal income for two or three decades, perhaps with an increase in consumption taxes or the introduction of a wealth or estate tax.

I'm not an expert in taxation, but it's not immediately clear to me that early increases in contribution rates, as has been proposed, would be worse for the economy than the alternatives.

The other issue concerns the distribution of the additional burdens of dealing with the part A problem. The government's proposals place some of the burden of increasing the pre-funding ratio on all persons who would make future contributions, near-old, middle-aged and young. If some other combination of contributions, tax and forgone services is to be used, would less of the burden fall on the young? If so, more will be placed on the near-old and middle-aged participants. Under the proposals, only part of the burden of the part A costs will fall on contributions; much will fall on other forms of taxation anyway. What will be the fairness of these other changes in taxation?

• 0925

Fairness is in the eye of the beholders. I would have preferred a different solution to the part A problem, involving partial de-indexing of CPP benefits, later age of drawing full benefits, and probably a differential contribution for young and middle-aged. But my preferences would have complicated the system and altered the distribution of benefits in ways that others would regard as unfair.

Finally, as The Economist has argued in reviewing financing alternatives for the U.S. social security system, the issue is not so much the old placing undue burden on the young as it is a question of the distribution between the well-off and poor members of society. The Economist has a view that the American proposals are really about the distribution between well-off and better-off people. It may be that the issue of the burdens on well-off and poorer people in Canada would be less severe than in the United States because our system is not so tilted toward the better-off, but the issue should be considered.

I finish with two more points. One is about the low implicit rate of return for future participants in the CPP.

Much has been made of the low rate of return that future participants in the CPP will receive, compared with the high rates of return they could earn on private investment of their contributions. The sixteenth actuarial report projects an implicit real rate of return of 1.9% per year for those born in 1998 and 1.8% for those born in 2012. There has been widespread misunderstanding and misinterpretation of these projections.

First, returns from the CPP are not just retirement income but also benefits for disability, death benefits, spousal and dependant benefits. These returns should include a proper allowance for these contingencies and benefits. Some analysts have done so—for example, Bill Robson of the C.D. Howe Institute—but most have not. Insurance against these contingencies would be required by most Canadians if they did not have them within the CPP.

The internal rate of returns projected for the CPP are low because not all of the contributions will flow into paying for pension and other benefits arising from future service—that's my part B. Some of the contributions, the “excess over the cost of future benefits,” is to be used to meet part of the unfunded liability problem inherited from the past. The excess is not producing future benefits earned by future participation. Thus, they do not produce future benefits commensurate with the CPP contribution rates. As a result, the projected real rates of returns for the total future contributions to the CPP are dragged down to these low rates. If the part A problem was being met in some other way, resulting in much lower contribution rates to meet future part B benefits, the implicit rate of return on the CPP would be much higher.

However, if part A burdens were entirely met by higher other taxation or smaller other government services or some combination of the two, the net returns from private investment of CPP contributions by individuals would have to be discounted for these factors. Net of the increased taxation, they would be less than suggested by many for private pension investment.

In addition, it is widely acknowledged that the administrative and distribution costs of private investment programs are much higher than those of the CPP.

My final point is a word about intergenerational equity. Many complaints have been made that the CPP proposals place unfair burdens on the young in order to make transfer to the old and near old in Canada. There is no doubt that the proposals will place some additional burdens on the young, but is this unfair?

The CPP benefits are a vital part of our retirement system. If they did not exist, the first year of the system would have to be enlarged at the expense of taxpayers in general, including the young. For reasons set out above, all Canadians will bear some increased burdens to fix up the CPP. What they don't pay by contributions they will pay through other taxes and reductions in other services, including those to the young. In general, social transfers from the young to the old are often evaluated too narrowly, and those in the CPP particularly so.

• 0930

As Helliwell, Osberg and Baldwin argued persuasively at last spring's Statistics Canada conference, intergenerational equity has to include the whole complement of social activities. This generation's young have received the benefits of the whole public infrastructure that they've inherited but not paid for. They've benefited from heavily subsidized post-secondary education. They've benefited from the health care system, which is based on investments of the past and for which they pay little.

I could go on and on, but I think the point's been made.

The older generation of Canadians paid their dues through the burdens of the Great Depression, World War II, and the reconstruction of Canada after the war. Is it unfair that they have received a bonus thus far from the CPP, a bonus that will soon disappear?

I personally have benefited beyond my due from the CPP, but I continue to pay my dues in higher taxes for many services for which I receive no benefits at all. This is part of the Canadian social contract that I believe has served Canadians well and that I am willing to support.

Thank you, Mr. Chairman.

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

We will now proceed to the question-and-answer session, starting with Mrs. Ablonczy.

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

Thank you, Mr. Slater. We appreciate having someone of your expertise to give us input into the committee. I would like to take the time I have with you to talk about this business of intergenerational equity.

I have been very critical, as I think you know, of the aspects of this plan with regard to equity and with regard to the burden on our young people. As the finance minister is fond of pointing out, the unfunded liability of this plan is $600 billion. I suggest to you and to Canadians that this is a second national debt.

I appreciate your perspective that, all things considered, placing the bulk of the burden for this second national debt on young people, young Canadians, may not be unfair. However, I do not agree with that opinion. Our children, remember, also inherit the first national debt of $600 billion. Now we are essentially saying to them they must also bear the burden of the second national debt, the $600 billion unfunded liability in the Canada Pension Plan.

To offset that there's an argument, one that you have made, that they receive “heavily subsidized post-secondary education and infrastructure”. I think they would argue that the post-secondary education they've received is certainly not nearly as heavily subsidized as was their parents'.

As you know, tuition fees have gone up, and the burden of student loan debt on students is increasing. However, that's a small part of the picture. I simply point out that they would argue that their subsidization is not as heavy.

I wonder what you tell your grandchildren when you say that it's fair somehow that they inherit a first national debt of $600 billion and a second national debt that they will pay the lion's share of, even with the increased premiums of some of us who are older, who will be paying increased premiums for a minuscule period of time compared with the extent of the unfunded liability. They will pay most of it. As well, of course, they have to pay for the health care costs of the baby boomers who are soon going to put increasing demands on that system.

I'm curious as to how, when you talk to your grandchildren, you justify placing that kind of burden on their shoulders, saying, “That's the way it is, and it's fair to you”.

• 0935

Mr. David Slater: I haven't argued this with my grandchildren but I have with my children, with my daughters.

The starting point, of course—and I think we would agree on this—is that what the children and grandchildren will pay for the future earned benefits is a reasonable burden on them. That doesn't get into dealing with this unfunded liability at all. It's only the excess over the costs of the future benefits they're going to get that's going into dealing with the unfunded liability, and it's only going to do it partially.

The point is that the debt is there. Somebody's going to have to pay it. If young people are going to pay none of it, then all the rest of us are going to pay more of it, through higher taxes or reduced government services or something else.

So the issue is not about putting a burden on the young; it is whether an unfair proportion of that burden is being placed on the young.

When I fixed up the Nova Scotia teachers' pension program a number of years ago, it was in bad shape. The Government of Nova Scotia and the taxpayers of Nova Scotia could not afford to pay all of the unfunded liabilities. Besides, the government's responsibility was a little ambiguous. So the deal we did there was in fact to share the burden of the unfunded liability between the existing pension receivers, those who would be contributing, and those who hadn't started into the thing at all.

We did it, and one of the means was partial de-indexing of the benefits, so that the former teachers drawing pensions paid part of that burden by accepting a lower indexing of their pensions. And the retired teachers voted for that arrangement. They thought it was a fair way of sharing this burden. They recognized that the government and the taxpayers, who on the whole had an average income that was less than the teachers had...it was unacceptable to place all that burden on the taxpayers, young or old.

When I talk to my daughters, I tell them they're going to be paying part of this, only part, and others are going to be paying more. And I tell them that if they pay less, others are going to have to pay even more.

What we have to do is find ways of meeting the problem that are a reasonable balance in the sharing of the problem. The problem is there; it won't go away.

Mrs. Diane Ablonczy: I appreciate that, and I agree with you. We do have to find a reasonable balance.

But what I'm saying is that this is certainly not a reasonable balance. It puts no burden on present recipients of the fund. It puts very little burden on people who will soon be receiving benefits because they will only be paying increased premiums for a small period of time. The bulk of this second national debt is going to fall squarely on people who aren't even working yet or who aren't even born yet.

Mr. David Slater: Depending on how big the investment fund becomes before the baby boomers start retiring, let's say, that fund could amount to a couple of hundred billion dollars.

Mrs. Diane Ablonczy: Which would be what percent of the unfunded liability?

Mr. David Slater: A third, depending on how you count the unfunded liability. The federal actuary counts it as $650 billion, but I think the considered opinion of many of the outstanding actuaries in the country is that the discount rate he has used is too low. He should use a higher discount rate. The unfunded liability may be as low as $400 billion. It could be as high as the $650 billion that he's talking about, but $650 billion looks to me like a bit of an exaggeration.

• 0940

The point, of course, is that it does mean the near retirees, who are going to retire beginning in 2010, 2012, and so on, under these proposals are going to be meeting at least a third of the cost of the unfunded liability. That much is not going to fall on your grandchildren. It's going to be, in a sense, taken care of.

As I've indicated publicly—I'm on the record as saying this—I would prefer to have had some of the burden placed on those receiving the pensions at present, such as myself, and I would prefer to have had more of the burden placed on the near retirees. My suggestion of partial de-indexing of the benefits would in fact accomplish exactly that. But the government has not accepted that as a way of dealing with the issue.

Mrs. Diane Ablonczy: I want to make a final point. The unfunded liability does not stay at $600 billion even if you don't accept that. It keeps growing, and in fact in about 10 years it will reach $1,000 billion. It keeps growing. So this fund will not fund 30% of that unfunded liability even if it grows at the rate the government says it will, and we have no reason to believe they are actually going to be able to pull that off.

Mr. David Slater: I don't know where those numbers come from.

Mrs. Diane Ablonczy: They come from the chief actuary himself. He has conceded that.

However, I do appreciate your comments about ways in which we can be fairer intergenerationally and more equitable in spreading this liability. I think we all know this is what I call a “big elephant” and it's pretty insatiable.

I'm concerned about fairness. I do want to look my grandchildren in the eye in 20 years and say what we did was right, it was proper, it was fair, it wasn't just “we don't want to have to hurt anybody today, and you guys can't vote now, you don't know what is going on, so we're going to dump it on you”, because sooner or later they will be voting and they will not be impressed.

Mr. David Slater: I understand.

Mrs. Diane Ablonczy: Thank you, sir. I appreciate it.

[Translation]

Mr. Pierre de Savoye (Portneuf, BQ): Mr. Slater, do you have interpretation? Can you hear me well?

[English]

Mr. David Slater: My French has deteriorated.

[Translation]

My French is not good.

[English]

Mr. Pierre de Savoye: That's all right.

[Translation]

Mr. Slater, you present us with a very interesting study, a very interesting point of view on the mechanisms involved in the management of the Canada Pension Plan. You refer to Parts A and B. Part B is relatively straightforward and easy to understand. Part A offers several possible avenues.

At the end of the last small document you provided us with, you mention which approach is the best and maybe the least damaging to Canadian employment and productivity. Could you indicate to us which approach in your opinion would be the least damaging, because ultimately, what is fair and just is what will work best? According to you, what would work best?

[English]

Mr. David Slater: I think the solution requires more than one kind of attack. I personally believe a proposal that involves the building up of an investment fund is a very important and desirable part of the solution. It will have the great attraction, if it's done well, of establishing a sense of credibility for the program more widely among Canadians, and I think it's consistent with the growth interests in the country. One of the problems all over world nowadays is that savings rates are relatively low.

• 0945

In and of themselves, I think the proposals, which would include building up an investment fund, are desirable in terms of saving, in the long run, rates of interest and growth and productivity.

I think that under current circumstances, to meet a piece of this problem by increasing personal income taxes perhaps with a surtax is highly questionable. We do have very high marginal tax rates in this country; you get the federal and the provincial rates put together and they do apply to really quite low income levels.

There was a wonderful comparison done recently by a distinguished chartered accountant in which he compared the income and the taxes and the burdens and so on of, let's say, somebody living in Houston or Dallas with somebody living in Toronto and so on, and one of the things that really comes out very clearly there is that not only are marginal tax rates very high but they apply at levels of income much lower than in the United States.

I would certainly be reluctant in recommending adding a surtax onto the existing income taxes as a way of beating this problem. If we could somehow get the rates and the marginal rates down a bit, it would be another matter, but I think there would be even less acceptability to that solution than putting the contribution rates up.

Then you're faced with a surtax on the sales taxes, introducing a wealth or estate tax, things of that sort. There are no easy solutions to this, as it turns out. There are no easy solutions to getting the national debt down. There will be no easy solutions there; there will be no easy solutions here.

To repeat myself, I do believe that increasing contributions and building up an investment fund is an important and well-warranted part of the solution.

[Translation]

The Chairman: Thank you, Mr. de Savoye.

[English]

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, Mr. Chairman. Thank you, Mr. Slater.

I'm fascinated by your insights. It's nice nuts and bolts stuff. As a philosophy of taxation, to say that every taxpayer should benefit from every program throughout their entire lives would be unrealistic and yet, as you point out in the very last sentence in your presentation, although you didn't pay for CPP you pay high taxes today and pay for services you don't get. It still reflects the fact that on balance and throughout our lives we may not always be treated equally but we're treated equally on balance.

So this idea of high taxes really is a reflection of how much I pay for basic government services, and any additional tax really is reflective of the service level I get.

So maybe my first very quick question, because I do have a more relevant question about the CPP, is if you personally were going to reduce taxes, which therefore would result in reducing some services, what service would you want to reduce?

• 0950

Mr. David Slater: Oh, well...

Mr. Paul Szabo: It's a tough one. Let's move on.

You gave some tax rate numbers earlier, and you linked in the seniors benefit. I appreciate that it's hard to totally throw that out.

As a member of Parliament, I make about $64,000 a year. If I took the total of federal and provincial taxes that I pay on that $64,000, it comes out to be about 40%. The highest combined federal and provincial marginal tax rate is 53%. Of course, the explanation for the differential is that the first part of my income is at a low rate, the middle part of my income is at the middle rate, and the last part is at the high rate.

On the 73% clawback, if I had taken the seniors benefit, had made it taxable, had put it into income, and then did the tax return, what would be the highest marginal tax rate that I would pay on the seniors benefit?

Mr. David Slater: Your seniors benefit—

Mr. Paul Szabo: What if I just made it taxable instead of non-taxable? It would be 53%, because that's the highest marginal rate in Canada. So how is it that you could suggest that the seniors benefit, as proposed, has an effective clawback rate of 73%, when the highest possible marginal tax rate is in fact 53% and results in the same in-pocket to the taxpayer?

Mr. David Slater: The proposal as it now stands is not a taxable seniors benefit.

Mr. Paul Szabo: I understand.

Mr. David Slater: The proposal is one that is not taxable, and is one in which you lose essentially 20% of your seniors benefit per dollar of additional income.

Mr. Paul Szabo: But you understand that—

Mr. David Slater: Let's put it this way. There's a range of income in which people will lose the 20% and pay the top marginal rate. If you have income beyond that, then once you've lost all your seniors benefit, that's all there is to it. Thereafter, only the marginal tax rate comes off.

Mr. Paul Szabo: But I think you would agree that the reason we could get such high numbers, and the reason we can play with the numbers, is that you would take the tax implications as a percent of a non-taxable amount. That's why it comes out to 73%.

Mr. David Slater: Just simply do the calculation for people's different incomes.

Mr. Paul Szabo: With regard to the unfunded liability, this is what I really wanted to ask you. I think this is an important issue that everybody has to understand clearly, and I think we need your opinion here.

In a corporate pension plan, my understanding is that there is no certitude that there's going to be any guaranteed future funding. That's why corporations cannot carry an unfunded liability; they have to address it on a current basis. We do not have full funding in the Canada Pension Plan system, as would be required in a private sector situation.

I want to see if you agree, so please give me your opinion. Is it because we have mandatory contributions under the Canada Pension Plan system that there is a certitude that, as long as Canada exists and as long as there are workers—forgetting about the rate that has to be paid—there will be contributions there that are guaranteed, that unquestionably will be there unless you decide to totally terminate the plan and make resolution of the accrued benefits for future beneficiaries? Is it your opinion that it is or is not appropriate to have the unfunded liability because of the pay-as-you-go basis? If not, when did the unfunded liability that was created right from day one—and it was a good thing then—become a bad thing, and why?

Mr. David Slater: It used to be an acceptable idea to the actuaries for public sector pension programs—teachers, firemen, all those sorts of people—to be not fully funded. The argument was that governments have indefinitely long lives and corporations don't. Governments have taxing power and borrowing power that private corporations don't have, including the power to print money through the central bank. You therefore find any number of opinions that would make that point on the evaluation of public sector pension plans twenty years ago.

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That point is no longer acceptable even in public sector pension plans, because it's recognized that while governments have an indefinitely long life they don't have great piles of unused taxing capacity or great piles of unused debt-increasing capacity. That won't go. Many of the public sector pension plans that were partially funded for many years have now virtually all moved on to a fully funded basis or are approaching a fully funded basis.

The Canada Pension Plan, as Paul Samuelson wrote a long time ago, had a neat kind of intergenerational trick to it. The thought was that this generation of pension recipients would be supported by the contributions of the time. You didn't need to fund the thing, but this generation's people paying into it would in turn expect to be able to draw the pension out of the people who were working when they became retired. If the rates of population growth that established the balance between the numbers of workers and the numbers of retirees were stable, that scheme could continue to work, particularly if the rates of growth of the productivity were high enough.

Since the establishment of the Canada Pension Plan we've had a shift from the situation where there were six or seven workers per retired person to the prospect ahead of us of three or fewer workers per retired person. To maintain the benefits—not increase the benefits in relative terms—the contribution base would have to increase. It's driven by that demographic fact.

The other thing is that when the Canada Pension Plan was established, people thought real interest rates would continue to be 2% or 2.5% or something like that and the rate of productivity growth in the economy would be 2.5%, and therefore the national income in the future was going to be larger because of the population growth, growth of the workforce, increased productivity and low interest rates. The pricing, if you like, of the Canada Pension Plan was based upon that premise. Every one of those premises is now different.

The growth in population has slowed down, the productivity growth is less, real interest rates are higher; and it simply would be impossible, even if you didn't have the unfunded liability at all, to meet the Canada Pension Plan on the basis of premium rates that were initially established, or even on the rates that were established when the 25-year rolling schedule of increases was introduced.

The Chairman: Thank you, Mr. Szabo.

Thank you, Mr. Slater. You gave us a very thoughtful presentation. On behalf of the committee I'd like to thank you.

Mr. David Slater: Thank you, Mr. Chairman. I've been worrying about these things for a long time. These are difficult issues, as your first questioner raised. There is no easy answer to this fairness question. I think anybody who says increased contributions are not the answer has to say what they suggest as an alternative.

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The Chairman: Thank you.

I would now like to welcome the representatives from the Caledon Institute of Social Policy, Mr. Ken Battle and Ms. Sherri Torjman.

You have been to enough of these meetings to know how we proceed. You have approximately 10 minutes to make your presentation and give us an overview of the major points. Then we will proceed to a question-and-answer session. Welcome.

Mr. Ken Battle (Caledon Institute of Social Policy): Thank you for inviting us to appear.

Today we want to focus probably much more narrowly than David Slater did—although we didn't hear all of his testimony—on some particular aspects of the Canada Pension Plan changes that concern us. We have a broad interest in this area, of course, but in terms of our work, we have chosen to focus on the impact of the changes on people with below-average incomes. We think there are some issues there which, although they've had some mention, have not really had the kind of analysis they merit. That's the area we've been working on.

I apologize for not getting a written brief to you. We are in the process of putting together this material that we have been working on for over a year now, on and off. This morning we will share some of the key findings with you.

Given your time constraints, I am going to skip the first part of my presentation. Basically we go over some ground that may be old ground for experts but is something I don't think we should forget.

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The importance of the Canada Pension Plan and Quebec Pension Plan for people with low and modest incomes is much more significant than it is for Canadians in general, and that's often forgotten in the debate over pension reform. The Canada Pension Plan is a crucial form of retirement income that makes up a very important part of the income of people with below-average earnings.

The pension system we think of, Canada's mixed private-public pension system—which actually, according to the World Bank, is the model one should have—is quite alien to the majority of Canadians. The majority of Canadians don't participate, other than marginally, in the third private pension tier: employer-sponsored pension plans and RRSPs. It is for that reason that public pensions and the reform of public pensions are so important.

There has been some progress in the coverage of private pension plans among women, though a decline among men, but still the minority of Canadians in the workforce are covered by the private parts of the pension system.

In thinking of the current round of CPP reforms...and I emphasize current round. It's not finished. There's more yet to be done, but the kinds of changes that have been put in place are pretty fundamental in the evolution of the Canada pension.

Our approach to the changes is as follows, and let me quickly summarize it. Again, keep in mind that our particular concern is how these changes are going to impact on people with below-average earnings. By below-average earnings, we're using the YMPE of approximately $34,000. Since we're talking about CPP, that's the range of people we're talking about.

Of female contributors to the Canada Pension Plan, 79% are below the YMPE, and 47% are below half the YMPE. In fact even the majority of male contributors, about 53%, have earnings below the YMPE. And young people of course overwhelmingly have earnings below the YMPE. So when we're talking about the impact of the CPP changes on contributors with below-average earnings, we're not talking about a marginal group. We're talking about the majority of Canadians, just to make it clear.

The financing changes are much more fundamental than the benefit changes. Basically the benefit changes, all of them being restrictions, were fairly mild compared to what they could have been in view of what was on the table during the negotiating phase.

We have supported the move to partial funding of the Canada Pension Plan. The reason we've supported it is that we hope it will maintain and preserve the fiscal and political stability of the Canada Pension Plan over the long term, because that pension plan is so fundamentally important to the majority of Canadians, especially those with lower incomes. So we have endorsed that move.

The impact, though, on low-income contributors is the thing that worries us, and here we divide our concerns into two phases. In the long run, the move to partial funding not only will benefit lower-income contributors by virtue of the fact that it will make sure the CPP is still there for them; it will also benefit them to the extent that they will pay lower contributions over the long run than they would if we kept the pay-go system, with its contribution rates more gradually but inexorably rising even higher.

When you look at the impact of the future financing of the CPP on people with lower incomes, lower earnings, a partial funding system—assuming we are able to maintain a steady state rate, as the government has promised—will have a less onerous burden on them than the current system.

The problem, though—and it's not an inconsequential problem—is what happens during the transition over the next seven years from the pay-go to the partial funding system. That's the nub of our analysis on the impact of the contribution rate changes.

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Basically what happens is the burden of the more rapid increase, the more rapid ramp-up, in contributions is much heavier on lower-income Canadians. There are two reasons for that. One is simply the structure of the Canada Pension Plan, which pays ascending premiums, reaches a flat rate level, and then stays flat. So when one looks at the weight of contributions as a percentage of income, it's higher for lower-income people and lower for higher-income people.

The other change that has been made is the freezing of the year's basic exemption, the YBE, the income threshold below which people don't have to pay contributions, even though for pension terms they do get benefits on the full range of income. It's a form of progressivity in the CPP structure.

The move to freeze that—although understandable from a financing point of view, because it's a stealthy move that people don't understand, and of all the changes that were being contemplated to the CPP, both on financing and benefit, it was actually worth the most—is an extremely regressive move. That's the nub of our analysis.

I'm trying to jump ahead here.

If you'll look, in the graphs I handed out, at figure 4, we'll go through a couple of these fairly quickly. Figure 4 is showing the relative burden of the Canada Pension Plan contributions this year on employees—it's double for self-employed; we're focusing on employees—at different earning levels.

In all of these graphs we show both gross and net, and the reason for this will become evident later in that the solution we see to the burden on low-income people comes through the CPP contributions credit. In all of the analysis, we don't just show gross contributions; we show contributions net of the federal and provincial income tax savings that come as a result of the tax credit for CPP and QPP contributions. It's very important that we look at net, because that's the actual end-of-the-year burden on people.

As I was saying earlier, you can see that under the current system—well, 1997 is the first year of the move to partial funding—the burden is higher on people below the YMPE of $35,000, and it becomes much less for higher-income people. It's simply a function of the denominator.

If you'll turn to figure 5 on the next page, what we're showing is the contributions as they will be, as they were in 1996 under the old system, and as they will be in 2003, which is the year when, if all goes according to plan, we'll have reached the steady state rate. It also shows the contributions as they would have been under the pay-go system and as they are projected to be under the partial funding system.

The black bars are showing the contributions as they were last year. The middle bars, the shaded bars, are showing them as they would have been in 2003 under the current system. The hatched bars on the top are showing what they will be under partial funding. The message is very simple: there will be substantially larger premiums by the year 2003 under partial funding than there would be under pay-go. That's not news.

If you look at figure 6, that's the second part of our argument. I'm flipping forward to the year 2030, the long run. The picture here becomes reversed. Yes, compared to 1996, contributions will be substantially higher, but they would have been much higher under the pay-go system than they will be under the partial funding steady state rate.

If you'll turn to figure 7, I'm coming back to 2003, because we want to focus on these next seven years, where there is this rapid ramp-up in contributions. Again, the black bars are showing last year's contributions as a percentage of earnings, the shaded bars are showing what the burden would have been under the pay-go system, and the top bars are showing what the burden will be under the new system. It's obvious that again we get pretty much the same pattern of the distribution of benefits, but again we're looking at a pretty large increase. Either net contributions...

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I'll be very fair. We've factored in the tax credit that people get. If you look at somebody, for example, earning $25,000, their contributions last year were about 1.6% of their earnings. Those will go to over 3%; they're virtually doubling.

If you will look at figure 8, what we're doing here is quantifying the increase in contributions between 1996 under the old system and 2003 when the new system will be phased in. In dollar terms you can see that in absolute terms the contribution rate increases rise until average income and then they remain flat.

But if you will look at the next figure, figure 9, which looks at them in percentage terms, we get a very different picture—and quite a shocking picture, in our view. Because of the combination of the rapid contribution rate increases and the decision to freeze the year's basic exemption, in percentage terms the increased burden on low-income contributors is much higher than it is on everybody else. Somebody earning as low as $5,000 will see a 170% increase in their after-tax contributions.

Finally in this series, if you will look at figure 10, again we're trying to measure the relative burden of the contribution rate increase over the next seven years. Figure 10 is showing the increase in contributions as a percentage of earnings if we had kept the current system in the black bars but what it will be under the shaded bars under the new system. You can see that in relative terms there is no question that people with below-average earnings are going to bear the largest weight of the increase.

We now have an even more regressive problem because of the decision to freeze the YBE, which effectively means that over time it shrinks in value and the relative weight of contributions gets pushed further down the earning scale.

What does all of this mean? What should we do? There are a couple of amendments that you might want to consider that we've been thinking about.

One obvious one would be to rescind the decision to freeze the year's basic exemption; in other words, to maintain the current system. I don't think there's much hope of that happening, because the decision to freeze the YBE, while socially unjust, is fiscally very clever, because it's going to reap increasing benefits to the government as the years go by, in the sense that future contribution rates under the new system as they're being projected will be less than they would have had to be if we'd kept the YBE.

So we recognize that there's a trade-off here between the whole issue of funding, the intergenerational issue, which I'm sure you've talked about, and the burden on contributors, the different income groups. There's a conflict here really of objectives, of concerns.

What else could we do, though, if we didn't do something about the year's basic exemption?

The most obvious area that we think is plausible because it builds upon an existing system is the system of tax relief for CPP contributions. What we recommend here—I don't have a model, but we've been sort of tinkering ourselves—is to take the tax credit for CPP contributions that already exists and reconfigure it so that it will be a more progressive tax credit.

In other words, it would provide a larger proportionate amount of tax relief from the CPP burden on people with lower earnings, and so on up, and it could be a graduated system.

We haven't done any costing on this yet, but I don't think it would be phenomenally costly, because the contributions on lower-earning workers are smaller in absolute terms. I think it would be a fair reform of an existing program. We don't have to bring in a new administrative system; that system already exists.

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There is a third option I'll mention briefly to you without going into it. We've done some analysis of it. It's a suggestion about the Quebec Pension Plan, which has, as you know, the same structure as the Canada Pension Plan. It was a suggestion to have a graduated year's basic exemption. In other words, the YBE would be the existing amount for people with very low earnings and it would get smaller until it would disappear at the level of the YMPE.

On the surface this might seem plausible, in the sense that it obviously reverses the problem of the regressivity, but when you look at it in practice it only partly makes up for the problem of the frozen YBE. Ironically, the same proposal was to have a frozen YBE in Quebec but make it proportional. It's a kind of strange mixture there.

So it doesn't really solve the problem of a rising burden. Unless somebody can come up with another idea, we think the obvious solution is to look at the system of tax relief, because we're certainly not arguing that we don't want to go forward with a more rapid increase in contributions. We think it's essential for the future political and fiscal health and life of the CPP.

We looked at the impact of benefit changes, which, although relatively modest compared with what they could have been, as I said, are all regressive. Every one of them is going to impact more heavily on lower-income recipients, for the simple reason that they have lower incomes and the CPP is a far more important part of their retirement income. But what we want to focus on is the vexatious issue of disability benefits.

Ms. Sherri Torjman (Vice-President, Caledon Institute of Social Policy): Thank you very much. I'll just focus on some of the proposed changes to the disability benefit and describe that benefit very briefly.

Typically what we've heard is that Canadians don't realize the Canada Pension Plan not only is a retirement plan but also provides protection in the event of severe and long-term disability. It's actually a serious problem that people don't realize this protection is there. It's a very important protection. What we know about the private pension system is that many people have difficulty getting coverage if they have certain pre-existing conditions, or they have to pay inordinate contributions if in fact they have had any history of any kind of illness or disease.

The Canada Pension Plan provides coverage for all Canadians. It's not simply a benefit for special needs or for a special interest group, it's protection for everybody. We think that's a very important protection and it must be defended.

At the same time, though, we recognize there have been problems with the disability benefit in the sense that the caseloads have risen rapidly over the past ten years. In particular, especially between 1985 and 1995 there was more than a doubling of the disability benefit caseload. We feel, however, that it's very important to be clear that there were some very important reasons why this caseload went up so dramatically.

One of the reasons had to do with the fact that members of Parliament themselves felt there had to be some substantial changes to the Canada Pension Plan in order to improve both the adequacy of that benefit—the disability benefit—and the coverage. Some specific legislative amendments were passed in 1987 and 1992 and they had the effect of opening up the plan, making it somewhat more generous, extending its coverage.

There was also a very important development in 1993, in which the Auditor General issued a report indicating that Canadians generally didn't understand the Canada Pension Plan or how it worked and didn't know the benefits to which they were entitled, especially the disability benefit. He encouraged the program to go out and to do some advertising, to speak to some provincial programs to find out whether there were individuals in those programs who should have qualified for the Canada Pension Plan. So discussions were held with provincial welfare systems, with provincial workers' compensation systems, and with private insurers. Well, lo and behold, the caseloads went up as a result of that.

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I think what's important to bear in mind is the fact that there were some very specific historical reasons for that caseload rise. When we look at what's happening overall, in fact, the intent was to open up the program to a certain extent. Right now there have been a number of measures taken since 1994 to tighten up the caseloads to make sure that the definition, the way in which disability is being interpreted throughout the country, is more consistent and there are some more stringent appeal procedures in place.

My understanding from having looked at the figures, the caseload data and the information that's been provided from the department, is that in fact a great number of procedures are in place to begin to look at easing off that caseload. In fact, it has been declining, and we have some figures in here to show you that the caseload has been declining and is expected to at least stay fairly stable. I say that because I think there's been a lot of hysteria about the disability benefit in particular, and a lot of it is based on lack of information or at least lack of an historical context as to why the caseloads did rise.

There are some important harmonization efforts under way right now that I want to share with you in a minute, but I wanted to comment on the two key changes being proposed with respect to the disability benefit itself that are in your package. The first has to do with changing the contributory requirements to the plan. Right now, workers are eligible for disability benefit if they've made contributions to the CPP for two out of the past three years or five out of the past ten years. The proposed changes will require workers now to have made contributions for four out of the past six years. In other words, people will have to contribute for longer periods of time before they will be eligible for a disability benefit.

We understand the need to ensure that people are making adequate contributions before they derive any benefits from the plan. Our primary concern with this proposal has to do with the fact that we had never seen any impact data on the effect of this proposed change. I think it's absolutely crucial that before approving any kind of measure that could have a serious impact on a very large number of Canadians there is some analysis of the impact data. And we know it has been carried out; it hasn't been made public. I hope it could be made available to members of the finance committee, who could at least look at the impact of this proposed measure.

The second change to the disability benefit will be in the retirement benefit to which disability beneficiaries are entitled. Right now, if you're on a disability benefit when you turn 65 your retirement benefit is based on the average wage at the time you turn 65. The change will mean that your retirement benefit will be based on the average wage at the time of disablement and will be price-indexed. For many people this could mean a substantial drop in their benefits. Current beneficiaries will not be affected, but the future system, as compared to what it was, will mean a big gap for many people in terms of the value of the benefit. It's not just people at the retirement age who will be affected.

The current disability benefit consists of two components. There is a flat rate component that everybody gets regardless of their earnings and then there is an earnings-related component, and that earnings-related component is calculated as 75% of the retirement benefit. If that retirement benefit drops, so will the earnings-related component, and so will the whole disability benefit.

Our concern, once again, is that we've not seen any impact data on the effect of this proposed change. It could be quite serious. We're concerned about it and yet we're being asked to comment and to make recommendations in the absence of data that we know is available. It's difficult to make informed decisions in this vacuum. All we can say is that we are very concerned about it.

My final point has to do with the fact that it's important that members of Parliament be aware that at the officials level there are a lot of discussions under way right now between the federal government and provincial governments in terms of trying to consolidate some of the disparate programs for disability, trying to do joint assessments and trying to work out some of the administrative difficulties that have in fact contributed to rising costs. I think that's some good news and you should be aware of it.

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With respect to proposed changes, we would like to see more information and certainly would hold off support for those proposed changes until we do see that data.

Thanks very much.

The Chairman: Thanks very much, Ms. Torjman.

We now move to the question-and-answer session. We'll start with Mrs. Ablonczy.

Mrs. Diane Ablonczy: First of all, Mr. Chairman, I think we should deal with the point raised by the witness that there is analysis data available on the impact of changes to the disability benefit and that this committee should have that, study it, and take it into account in delivering our report.

The Chairman: Okay.

Mrs. Diane Ablonczy: So I would ask that it be provided to the committee forthwith.

The Chairman: Yes, that's duly noted. Your question...?

Mrs. Diane Ablonczy: I appreciate your presentation. It's unfortunate that my colleagues in the NDP aren't here, because one of their concerns about alternatives is the impact on the poor. As other witnesses have noted, the impact of these changes do fall very heavily on lower-income Canadians—and not just the contributions, but I would suggest to you that because the return on investment, particularly for younger contributors, is going to be so low, it too falls very heavily on lower-income Canadians. I'd ask you to comment on that to see if you have done an analysis of that particular aspect.

The figure I'm particularly interested in is this figure 7, where you talk about the CPP contributions as a percentage of earnings under the old system and going to the new system.

One of the things the finance minister has been quite vocal about is that without these changes the contribution rates have to go up to 13% or 14%. In fact, he falsely and repeatedly attributes 13% to Reform's proposals, but that's perhaps a different issue.

As your figure points out, in actual fact these changes increase the contribution more than would have been the case under the old system. So I'd like you to comment on why we need to move to the new system, or what's the benefit of moving to the new system, if in fact the required contributions under the new system so far exceed the projected required contributions under the old. I know there must be a good reason, but I think Canadians would want to hear that.

Mr. Ken Battle: You had two questions. The first one is a very good one. We haven't looked at that issue and we will. So thank you for that suggestion.

On your second question, I guess basically the answer is that the more rapid increase in the contribution rate, substantially more rapid than it would be under the current system, is seen as required in order to build up a surplus that can then be invested more broadly than the CPP has been historically, and that this fund indeed will earn some earnings that can be ploughed back in to keep contribution rates lower. And in a sense, the very existence of the fund itself will respond to concerns of so many Canadians who really either don't understand the nature of the pay-as-you-go system or just don't buy that it's relevant to their economic conditions of today and tomorrow. So I guess the answer is that this is the price you have to pay to build up the fund in order to “save the CPP.”

As to how much one would have to build, you're quite right. By looking at the year 2003, that's the year in which we're supposed to reach that steady state. I think 9.9% is the projection. I don't have it in here, but we have it in our notes.

I think the year where they kind of cross, where the pay-as-you-go system would exceed the 9.9%, is in the next decade of the next century somewhere. I could be wrong; I can't remember.

Then, of course, the contribution rate under the old system keeps going up and the new one is supposed to stay flat. I suppose—

Mrs. Diane Ablonczy: I guess the operative word is “supposed to,” because a number of witnesses have indicated there's no guarantee of that.

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Mr. Ken Battle: Well, this is the point. One concern that has been raised by others is “steady state, steady state.” If it's not, then of course we're being misled. I guess there are some legitimate concerns about whether we can project that kind of thing: Is steady state forever?

Nothing is forever, as we know, in politics and public life. So I guess that's a legitimate question. I can't answer that myself, not being an expert in such matters, but I think it is a legitimate concern.

However, there's another thing I would say in terms of relative burden. You pointed out that one has to look at the burden in different ways, not just the contribution rate. Another argument could be made, of course, that the more rapid ramp-up in contributions lessens to some extent the intergenerational bad-bargain criticism of the CPP, because it is forcing current contributors to fund more of the pension than they would have under the old system. That's certainly an important argument for partial funding.

Mrs. Diane Ablonczy: If I might, Mr. Chairman, I have a question on the disability figures that Ms. Torjman spoke about.

I understand we have a situation here where a lot—not a lot...well, I don't know; I'll ask you if it's a lot—where a number of other disability coverages are actually assumed by the Canada Pension Plan disability program simply because there's a feeling it's publicly funded and we'll be willing to take this on. I wonder if you could comment on to what extent the benefit of disability coverage to Canadians really is there with the CPP, or whether that benefit would be there anyway but it's just being assumed by the CPP.

Ms. Sherri Torjman: I think you're asking a very important question with respect to CPP disability coverage.

One of the issues that has concerned us with respect to the disability benefit is whether it is acting as what we call a first payer, or as a second payer, with respect to disability.

In Quebec it works somewhat differently. The QPP disability acts as a second payer, and the other systems that are intended for specific disability-related purposes come into play in the first instance.

So if you have a work-related injury in Quebec, for example, you go first to the Workers' Compensation Board, as you would do here. But in Canada the Canada Pension Plan basically stacks benefits so that you can get workers' compensation and you can get Canada Pension Plan disability benefits. In Quebec there's a far more harmonized system where we don't have that sort of double pay.

One of the arguments we have made in some of our materials is that we really should look at specific programs paying benefits in the first instance. So automobile insurance pays first; private insurance pays first; criminal injuries compensation, for example, and workers' compensation pay first; and disability coverage comes second. So in effect, that comes into play when the other pieces are not available, and we think that will in some way help with the double pay system we have and with some of the cracks that there are in the system and the stacking we see in benefits.

Mrs. Diane Ablonczy: There's no legal impediment to that change. It would simply be a policy shift.

Ms. Sherri Torjman: Right, exactly.

One of the important things I mentioned to you is that there are some efforts currently under way at the federal-provincial officials level to deal with this problem of what they're calling harmonization, to ensure that there's not the stacking that's going on, or the double coverage, that in effect there's a group of officials who are coming together and determining the eligibility of certain individuals so that if in fact there is a different system other than CPP that should be paying, then that system will become first payer. So I think a lot of that sorting out is actually going on at the administrative level.

Mrs. Diane Ablonczy: Thank you very much.

The Chairman: Thank you, Mrs. Ablonczy.

Ms. Torsney, this is your final question.

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

I want to ask about specific scenarios. I realize the information hasn't been made available to you, but with regard to the retirement benefit and the combination, can we get some numbers attached to that?

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For instance, right now let's say you're disabled at 40 years old. You get a disability cheque then until you're 65, at which point under the current system you switch to the average wage 25 years later. In the new system you're saying that it changes—and it's clearly written—to the average wage from when you were disabled.

Ms. Sherri Torjman: Exactly—at time of disablement, with price indexing.

Ms. Paddy Torsney: Okay—with price indexing. Do you have any information on how wages have grown compared to price indexing over a period of, let's say—I guess it would be future projections, because they've sort of slowed off, haven't they? Do you have any idea how that's being done?

Mr. Ken Battle: Just roughly speaking from memory, wages have been pretty much flat since the mid-1970s. That's the famous stagnation of wages kind of thing. They've gone up and down. Unfortunately there has been a change in the way we measure the average wage in Canada. There's sort of inconsistent data, but basically wages have not gone higher than inflation, whereas in earlier decades, in the pay-go years when the CPP was created in the 1960s, wages were outpacing inflation.

Ms. Paddy Torsney: So under the new system, you could actually do better if prices were increasing.

Ms. Sherri Torjman: This is what we see—potentially you could. We don't know. We don't have the data.

Ms. Paddy Torsney: Okay. But you do have data on projections for wage growth moving forward.

Mr. Ken Battle: The superintendent of insurance, in doing the actuarial projections for the CPP, has an assumption there of economic indicators, which includes wages. I can't remember what the assumption is, but it's there—an official government projection. There would be private sector forecasts as well—Conference Board of Canada, for example. But it's a pretty iffy area, and as you know, with all projections, the further out you project the more iffy they get.

Ms. Paddy Torsney: Absolutely.

You also talked about the third possible change, other than a tax change, to deal with the year's basic exemption. Can you elaborate a little bit further on that?

Mr. Ken Battle: Yes, I wasn't being very clear on that one. We're actually talking about two different things here. The year's basic exemption issue—although I think it's really important for the relative burden—actually can be dealt with. We have the YBE issue and then the increase in contributions, the two of them together. The tax credit reform that I'm talking about actually could handle both, in the sense that it would just make up more for low-income people.

But the third proposal that would be made in Quebec was to say that instead of a YBE that is a constant amount, it would vary by income. It's kind of an inverse one. You'd have a full YBE if you had a certain income, and it would get smaller as you go up.

I've done a little bit of analysis of it, but I don't think it really solves the issue, which is why I haven't really pushed it here. I don't think it's really an adequate or a practical option. We were just looking at what different ideas had been put forward.

One of the things I want to do is to see how other countries handle the issue of the regressivity of the burden of public pensions. I don't know, and it's something we want to look around at, to see if there are some other ideas we could exploit in looking at Canada's. Keep in mind that the contribution levels in Canada are quite low, compared to some other systems like social security in the United States and certainly in the European countries. It's important to remember how modest the CPP is.

Ms. Paddy Torsney: In terms of benefits?

Mr. Ken Battle: In terms of benefits. I mean, the maximum is 25% of average income. It's a very modest program compared to programs in other countries.

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Ms. Paddy Torsney: Do you have any comments about some of the track-two issues that are open for discussion? You did open up the subject by saying this isn't the end of the changes. Also, are there additional things that you think we should be looking at? Is there an opportunity to in fact look at this issue of a changing YBE based on your income, even though we'd right now be writing a system that would suggest that it would freeze?

Mr. Ken Battle: That's a good point. I think this whole issue of the burden of the benefit doesn't have to be over and done with now so that we can't do anything more in the future.

Amongst the other issues, the notion of partial pensions is very intriguing to us. We haven't done work on this, so I'm just saying it's really worth exploring. It has to make sense both socially and fiscally, given the world we're in now.

On the whole issue that I just mentioned about the relatively modest size of the CPP, it's heresy these days... Here we are talking about trying to “save” a modest plan. The whole notion of bringing in a larger plan talked about by many people in the early 1980s would now appear to be sort of like Alice in Wonderland, but the British Columbia government certainly didn't think so during the current round of CPP reform. There are options that one could look at that would actually expand the CPP in future, but that would of course cost more. We would be looking at a heavier burden, and it's pretty hard to sell that these days.

If you want to have a larger public pension program, you have to pay for it, so one might instead look at some ways of perhaps modestly expanding it. A very simple way would be to raise the YMPE, perhaps not enormously but somewhat. That would increase pensions modestly. It would increase contributions more for higher-income people as well.

So I think there are other options out there that we can look at. As Sherri said, on the disability front, there is so much going on now that could be done and that could be very useful, even without the level of a major restructuring of the program. I think that's sort of an ongoing response.

Ms. Sherri Torjman: I'm just picking up on your point with respect to partial pensions. They're certainly something we've looked at with respect to the disability benefit. There are people who can do some work, but right now the program requires that you're either off or on. It's very black and white, but we all know the world is far more grey than that. We think the program can take a look at varying capabilities and can begin to provide some partial benefits. We think that would be far more appropriate under current circumstances in which people can do some work and can earn some income.

Ms. Paddy Torsney: I'm not sure how my time is, but the three charts on CPP seem a bit confusing to me. Things ramp up quite a bit in the first two, but the third chart suggests things are fairly stable. Do we have time for them to give a bit more explanation?

The Chairman: We'll find the time.

Mr. Ken Battle: Which ones?

Ms. Paddy Torsney: The last three charts. They're not actually numbered.

Mr. Ken Battle: These are the disability ones. Sorry, but we haven't talked about them.

Sherri, why don't you speak on those?

Ms. Paddy Torsney: It's the third one that confuses me, given the first two.

Ms. Sherri Torjman: It's the disability benefit expenditure as a percentage of CPP.

Ms. Paddy Torsney: Right, and it stays fairly flat.

Ms. Sherri Torjman: Yes, exactly, and that's primarily a function of the disability expenditure relative to the entire program. Your entire program is basically growing, and what this shows is that your disability expenditures as a percentage of that program, as a proportion of the total expenditure, have stayed fairly flat.

In absolute terms, they have gone up in real terms over the years, primarily because of the caseload increases to which I earlier referred. But in proportion or relation to the entire expenditure in the program, they have stayed fairly constant over the years. We thought that was an interesting piece of information for you to have.

Mr. Ken Battle: The other important reason we did the chart was to show how relatively small a percentage disability is in terms of CPP expenditures. We just wanted to put the issue into perspective so that you know what we're talking about here.

Ms. Sherri Torjman: It's 16%.

Mr. Ken Battle: It doesn't take away from the need to look at rising expenditures. It's just to say that we shouldn't... Some people have the impression that CPP disability is bringing the plan to ruin. Do you remember all the media coverage when—

Ms. Paddy Torsney: So if we were to look at a chart for total CPP benefits as compared to the first two charts that you've given us on disability, the whole chart for CPP benefits would have a similar curve.

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Mr. Ken Battle: We actually have all of that information. I'm sorry I didn't bring it. I'll send it to you. We have charts of everything you could think of with the CPP.

Ms. Paddy Torsney: If you take the first two, it looks like what you said earlier, which is that people think it's all ramping up and that's the whole point of the program.

Mr. Ken Battle: Yes, exactly.

Ms. Sherri Torjman: I'd like to table a small commentary that I brought with us today called History/Histeria. It is just some brief history as to the basic changes that took place over the years with respect to 1987, explaining some of the reasons for the rise in caseloads. It's for your information.

Mr. Ken Battle: We'll send along to the committee chair and the members quite a large package of analysis of trends we did. I'm glad you reminded me. There's a lot of information that hasn't been seen, and that gives you a broad view of the CPP.

Ms. Paddy Torsney: Thank you.

The Chairman: Are you basically saying that people who applied, let's say, for CPP in 1980 and were rejected may in fact have qualified if they had applied in 1990?

Ms. Sherri Torjman: I'm sorry; is that for the disability benefit?

The Chairman: That's right.

Ms. Sherri Torjman: If they had applied in 1980 they may have been rejected in 1990—is that the question?

The Chairman: No. If they were rejected in 1980 or in the 1970s—

Ms. Sherri Torjman: Absolutely. They may have been accepted in 1990. Conversely, they could have been accepted in 1990 but refused in 1996.

There are serious problems with respect to eligibility, and I think one of the benefits of the current harmonization efforts that are under way has to do with ensuring a consistent interpretation of the definition of disability throughout the country and in different jurisdictions. So I think part of that problem as to who's getting on and the interpretation of the definition will be tightened up somewhat, will at least be made more consistent.

The Chairman: When you look at the 1980s, if you put it into its proper context, there's a lot of restructuring going on in our economy, whether it was because of the free trade deal or globalization, downsizing. I find it kind of ironic that at the same time all these disability issues arose.

Ms. Sherri Torjman: That's right.

Actually, you're raising a very important point with respect to explaining the caseload rise, because in 1989 there was a departmental directive from Human Resources Development indicating that there could be a more generous interpretation of disability to include factors such as age and the rate of unemployment in the region. That has been rescinded. That is no longer the case, and in 1995 there was a directive to no longer interpret disability in that way.

That having been said, this was entirely consistent with what was going on in the rest of the world. European countries were having the same caseload increases around the same time, and it was simply a problem of having massive restructuring and having to find a way to deal with the problems that we are experiencing with respect to older workers.

So there was a serious structural unemployment issue reflected in the program. My understanding is that that has been corrected, and will be certainly.

Ms. Paddy Torsney: Just to clarify, you said that a person who applied in 1980 could have been refused then but accepted in 1990. Do you mean a person with the same case history? The same individual couldn't have applied, because if they hadn't been contributing they wouldn't have been allowed.

The Chairman: Well, provided they met the requirements.

Because of the more generous outlook of the 1980s, I still believe that there are people who probably applied in the 1970s and got rejected that were accepted in the 1980s.

Ms. Paddy Torsney: But they would have to have paid into the system.

The Chairman: Yes. Some people go back to work, believe it or not, after they get rejected, because there's no other option for them unless they want to go on welfare.

Ms. Sherri Torjman: In 1992 there was a private member's bill that lifted the limit on late applications, because members of Parliament were getting a lot of calls from people who didn't know about this plan, who didn't know they were eligible and who had missed the time limit for application. So that time limit was lifted in 1992. So it's possible that someone—not in 1990, but in 1993—could have been on the caseloads as a result of that, and you'll see that in 1992 and 1993 there were significant caseload increases.

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The Chairman: I raise that point because I think we have to put it into proper historical context. What was going on during these years? Why all of a sudden this surge? It's not that everybody became disabled all at once. I mean, I can't for a second believe that.

Ms. Sherri Torjman: Exactly. Absolutely. I think that's been our argument as well, to look at the program within an historical context, both the employment situation and some of the legislative changes. They help explain what was going on in that program.

The Chairman: This has been very interesting, Mr. Battle and Ms. Torjman. On behalf of the committee, I'd like to thank you for your input.

Ms. Sherri Torjman: Thank you very much for your time.

The Chairman: As well, if we get the material you requested, tomorrow or the day after we'll be forwarding it to you.

Thank you very much.

I will suspend for approximately five minutes.

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The Chairman: Order. I would like to welcome Dr. Herbert Emery from the University of Calgary Department of Economics, and from the Canadian Federation of Independent Business, Mr. Garth White and Mr. Ted Mallett.

Gentlemen, you know how this committee operates. You will have approximately 10 minutes to make a statement, an overview of the major points, and then we will proceed to a question-and-answer session. We will begin with Dr. Emery.

Dr. J.C. Herbert Emery (Department of Economics, University of Calgary): Thank you and good morning. It was an honour to be given the opportunity to present in front of the committee today, and I've been very impressed by the submissions I've heard so far. Lots of excellent information is being imparted. I somewhat anticipated there would be lots of good presentations.

I would like to present an alternative point of view that has not been heard in Canada of late concerning the Canada Pension Plan. I'm going to take up the difficult challenge of defending the pay-as-you-go Canada Pension Plan, with its payroll taxes rising to 14% by 2030, against the pre-funding initiatives of Bill C-2. This is not an easy thing to do, because lots of people believe in pre-funding and believe it's the answer. What I would like to do is to make a case that the pay-as-you-go arrangement may not be all that bad compared with the alternative of pre-funding.

Obviously governments cannot devise perfect policy solutions to all economic and social problems. In evaluating a policy change like Bill C-2, we should not reject or accept it on the grounds that it is an ideal solution but on the grounds that it is or is not an improvement over what we already have. As I will outline, Bill C-2, which will accelerate the Canada Pension Plan tax increases in the short run but hold Canada Pension Plan tax rates lower than the current pay-as-you-go arrangement in the long run, does not represent an improvement over the pay-as-you-go arrangement we have now. Potentially Bill C-2 may make things worse.

The changes in Bill C-2 have been crafted to accomplish several goals, but through the media and through other presentations, the two I take to be most salient are that we want to make the Canada Pension Plan financially sustainable through the creation of an enlarged Canada Pension Plan reserve fund, and second, that we want to make the Canada Pension Plan intergenerationally fairer by having current generations pay more of their own benefit costs under the Canada Pension Plan.

Bill C-2 does not accomplish either of these goals. The changes do not make it any more financially sustainable than a pay-as-you-go plan, and in addition, the accelerated tax rate increases are in fact intergenerationally regressive, not intergenerationally progressive, as the framers of Bill C-2 would like to have us believe.

When the Canada Pension Plan was devised in the 1960s, it was well known by policy makers and advocacy groups from both the left and the right that you don't need a reserve fund to make a pay-as-you-go plan financially solvent or sustainable. Despite its title, the Canada Pension Plan in reality has been nothing more than a tax transfer device with a balanced budget requirement, a device we used to allocate income across non-retired and retired Canadians.

The ultimate solvency of this plan is guaranteed by the willingness of working Canadians to pay the taxes required to pay promised benefits. For this reason you don't need an investment fund as proposed under Bill C-2 for financial sustainability, since the current arrangement, if it goes to 14%, is itself financially sustainable. We're still paying out the benefits as promised. The pre-funding initiatives of Bill C-2 in the current pay-as-you-go arrangement finance the same benefits to retired Canadians, both plans are solvent, and one is no better or worse than the other in ensuring financial solvency.

The pre-funding arrangement is really intended to make the Canada Pension Plan politically sustainable. A government can always use its coercive powers to make a pay-as-you-go plan budget balance with the current promised benefits at some time in the future, but typically a government does not like to do things like this.

The problem for the Canadian Pension Plan today is that we cannot decide what benefits will be paid in the future. Future Canadians will decide that. They will evaluate the cost of the program, what they feel they can afford, what they are willing to pay. As the Canada Pension Plan tax rates increase with the pay-as-you-go plan, the fear is that Canadians will decide the plan is too expensive and start to cut the benefits or vote it out of existence. With pre-funding there will be a belief that Canadians have prepaid their benefits and that will make it more awkward for Canadians in future to cut the benefits.

In this sense the pre-funding arrangement proposed in Bill C-2 is primarily an initiative to increase the influence of Canadians today over what benefits might be paid in future. Canadians have not been made aware, however, that even with pre-funding as prescribed in Bill C-2 the government today cannot guarantee any of the benefits currently promised. That will be decided by Canadians in the future.

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If Bill C-2 cannot address the financial problem that does not technically exist, does it represent a desirable change on the grounds of intergenerational equity? Like any formula pension plan in the private sector, Canadians who receive Canadian Pension Plan benefits today receive more in benefits than what they've paid as contributions over their working lives.

As the cost of the pay-as-you-go-financed CPP increases for working Canadians, the generosity of the Canada Pension Plan under the pay-as-you-go arrangement has been declared intergenerationally unfair, or as it's sometimes called, a reprehensible outcome of an intergenerational Ponzi game.

To date, retired Canadians have not paid their own way. The notion of equity implicit in the Bill C-2 initiatives is that it's only fair if Canadians pay their own way. To address the notion of intergenerational inequity, the pre-funding initiatives of Bill C-2 will have current generations of working Canadians paying more of their own way to spare Canadians in the future from the burden of paying baby boomers' pensions. That this is only fair is the impression we get.

Evaluating intergenerational equity is a complex task. Now we're being asked to make normative judgments in evaluating whose welfare is more important: that of people tomorrow or that of people today. Certainly the paying-your-own-way criterion is one of many legitimate criteria for making this evaluation, but it's not the only criterion, nor is it even the obvious criterion.

To make my point, let me invoke another common equity criterion used when we talk about taxes, which is that those Canadians with a higher ability to pay should bear a higher burden. Now, I want to make it clear: I'm not saying I believe this is what our criterion should be; I just want to invoke an alternative. So I'm invoking it because it's a criterion that has been used to date to justify other progressive tax structures used in Canada.

Pre-funding Canada Pension Plan benefits requires an accelerated increase in Canada Pension Plan tax rates to build up an investment fund. Higher tax rates from 1997-2015 than under the balanced budget, pay-as-you-go plan yield the dividend of lower Canada Pension Plan tax rates after 2015 as compared to the pay-as-you-go arrangement.

Thus, the main change we have with Bill C-2 is a levelling of the tax rate schedule over time. Remember that both schedules finance the same benefits, so the only difference is when do you want your tax, now or later?

Is the tax rate schedule associated with Bill C-2 intergenerationally fairer than the tax rate schedule of the current pay-as-you-go arrangement?

Consider that even with historically low growth rates and real average wages in Canada of 1% per year, real incomes will have increased by 50% by 2030. Even allowing for a 10% increase in total taxes paid, real after-tax incomes will be significantly higher in the future.

Consider also that in all likelihood we will see an acceleration of real-wage growth as the baby boomers retire, not the continuation of sluggish real-wage growth that we've seen today.

Average real incomes in Canada will, in all likelihood, be more than 50% higher than they are today. Although tax rates will be higher in the future, so will be the capacity to pay them.

Under the current pay-as-you-go arrangement, we would be taxing higher-income Canadians of the future at higher rates than we are taxing the lower-income Canadians of today. By accelerating the tax rate increases under pre-funding, we are reducing tax burdens on higher-income Canadians of the future and increasing tax burdens on the lower-income Canadians of today.

In other words, although with the paying-your-own-way criterion Bill C-2 changes may appear to be intergenerationally fair, by another well-established criterion, which is that those with a greater ability to pay should pay more, these changes are intergenerationally regressive and hence are intergenerationally less fair.

Let me present another concern with the pre-funding of Canada Pension Plan benefits. Even if you don't buy the previous argument and you just think I'm playing with semantics, consider this: can we even get tax relief out of a pre-funding arrangement?

So far, we've had general descriptions of an arm's length investment fund, but no explicit policies. But specifics will matter in this case. In particular, the only hope for tax relief under pre-funding is if the fund is invested in productive assets that generate some real rate of return for society. In other words, we need a larger national income in future to divide up between retired and non-retired Canadians or we need claims on another country's future production.

When we invest in government debt, we're merely exchanging higher Canada Pension Plan tax rates for higher provincial and federal income and consumption taxes, so there's no real tax relief when you do those kinds of investments.

If the investment fund is to be invested in securities markets, what is the impact of a fund the size of the proposed CPP reserve fund on the TSE? Are we going to stay with the 20% investment requirement for Canadian content? Is the government assuming that introducing a fund the size of the CPP reserve fund to capital markets will not lower the realized rates of return? Does the accumulated fund represent an increase in total Canadian savings, or is it merely a crowding out of private savings to increase Canada pension plan savings?

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Another unanswered question with Bill C-2 is why the government has to accumulate a centralized fund for investment. Why not keep the pay-as-you-go arrangement, point out to Canadians that their taxes may increase in future to finance currently promised benefits, but let them keep more of their own money to save and invest on their own? Why does the government need to manage money for Canadians?

Perhaps the biggest problem with Bill C-2 is that it represents a policy focus that has stifled a more fundamental debate. If we are concerned about pension incomes of Canadians in the future, what is the best way to secure their retirement incomes?

We should not be examining the Canada Pension Plan in isolation and asking how to finance its benefits, which we can't guarantee anyway. We should be examining the role of a Canada Pension Plan and a system of pension arrangements that includes personal savings of Canadians; private pension plans; old age security; the guaranteed income supplement; and registered retirement savings plans.

If retirement incomes are a concern, we need an integrated policy focus, not a narrow focus on a particular instrument. Rejecting Bill C-2 to do this would not be a costly decision, since Bill C-2 will do nothing to improve on the current situation.

Finally, we should keep in mind that even if we reject Bill C-2, we still have, and will have, the Canada Pension Plan.

Thank you.

The Chairman: Thank you, Dr. Emery. Mr. White.

Mr. Garth White (Vice-President, National Affairs, Canadian Federation of Independent Business): Thank you, Mr. Chairman.

My colleague, Ted Mallet, is director of research with the Canadian Federation of Independent Business. We'd like to thank the committee for inviting us to appear before you today.

Quite frankly, we've been preoccupied with the threat of a postal strike—today, yesterday and tomorrow—and have been working quite hard on that issue. I'd be remiss if I didn't mention that. It's an issue that is impacting on many businesses across the country. I'd certainly be willing to talk to people afterward about that.

We did not apply to appear before this committee because essentially we see it as a done deal. We see it as a done deal because it's been signed off by the provinces and the federal government. There's little tinkering that can be done without going back there.

Having said that, what we want to focus on are two issues, very important issues, which should be addressed...which will be impacted, or can deal with with the implications of this bill. I think this committee can deal with that.

First, the committee can recommend that the government establish a plan for a broad pension reform process. As was stated earlier, CPP is only one part of a bigger process. I agree with Dr. Emery in that government is making an inherent assumption of what CPP should be in the future. At the same time, Canadians are still unsure of what they require or how they can get there to plan for their own future.

We are a member of the Retirement Income Coalition, which has over 20 different groups working on some sort of way to work with the government on retirement income planning under a system that deals with your own personal savings, private pension areas, and also CPP and the tax system—and of course the seniors benefit.

So there are a bunch of things there that we would like some answers on. I think the committee should at least say, okay, government; we're finished now with Canada Pension, so let's look at the full retirement income picture.

Second, we have to deal with the increases in premiums. There will be fallout. You may not be getting the cries now, but next year, once people understand how much premiums are going up, all of a sudden people will start to understand what the people appearing before you are saying. We think there's a way that you can offset these increases—we've said it before, and we're going to repeat it—and that is, by reducing EI premiums to offset the CPP increases.

I'll be referring to the document that's before you. Really, it's a compendium of previous documents we did. It's not a statement, then, but a compendium. It has five pieces of information. One is the letter we sent to Mr. Walker, the chairperson responsible for the CPP review committee, in June 1996.

The second item is our survey and background information, which we sent to 87,000 members. We say 88,000, but we actually have more members than we did then.

The third item is new information we've collected, based on 10,000 responses, on priorities from the small business sector for their retirement planning.

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Fourth, we talk about our CPP premium increases and our research on that and the impact.

Fifth, there's a document that was presented to Mr. Martin last week on lowering EI premiums. We provide some strategies to do that.

I would like to turn to the second item, just to explain what we did and what we're reporting here.

The second part talks about our survey and the backgrounder. We sent a four-page survey to our members and a four-page backgrounder which distilled the 60-page white paper. We were working with the Department of Finance and with Human Resources Development. They signed off on it and then we sent this to our membership. Ted should take a lot of the credit for putting this together and distilling this information so they can make choices.

In the survey, we asked them about the magnitude of the premium increase, the rate of increase, whether it should be moderate or it should be quicker. We asked about benefits and breaking out the benefits and linking it to premiums. We talk about the revenue sources for CPP and we talk about the benefit side of it.

We also asked about a super-RSP. We vetted it through the Reform Party and asked our members about their support for that type of system.

I'm bringing to the table that information at this committee's request and linking it to the two things we're talking about. One is the premium increase, but first it's as part of an overall pension retirement strategy.

We came up with 10 principles based on that survey. I should say we broke it off after 6 weeks and we got 9,000 responses from business owners across the country. So this is based on 9,000 responses. They were quite thoughtful responses...in that they read the backgrounder and the survey.

The first statement is that our members support maintaining the current Canada Pension Plan retirement, the CPP. They support it. They agreed it should be protected. At the same time, they also said you must improve the CPP's investment performance; the returns we were getting were outrageous and they put us in this position in the first place.

We also said you have to improve CPP public accountability. It's astounding that until last year Canadians were not informed of the pending crisis now facing the CPP plan, which affects literally everyone. Much better public accountability of the status and the performance of the plan should be formally established to ensure the current situation doesn't happen again.

You must put mechanisms in place to allow for independent actuarial oversight, prudent investment, and more discipline with the allocation of benefits. We strongly recommend and concur with any proposal that would allow that legislation be brought in to require any new benefits proposed to undergo stringent review to ensure the system can afford them.

Another principle was act now. This is a political hot potato and we said to work on it. This was copied to the Prime Minister and to the first ministers. We said let's avoid the easy path of deferring action for another year and deal with it right now.

I would like to turn to the fresh information in the middle of the presentation, on current research on SME retirement planning priorities. We asked our members, and we're still asking, what do you depend on for your retirement future? We're concerned that the governments, provincial and federal, will say the CPP is done and they are done with the retirement issue.

Also, we have heard that RSPs, for example, are seen as only for the wealthy. We asked our membership about the importance of RSPs, and 92% of them said RSPs are important or very important to their retirement plans. The $500,000 capital gains exemption is very important. The market value of their business and retained earnings in the tax system are very important; and 77% said CPP was important. So they look at these vehicles, but they look at them in their entirety, not just as CPP.

How does CPP link into RSPs? We said this to you two weeks earlier. On the one hand we talk about Canada Pension Plan as a pension issue and we say people have to prepare for their pension, and then we talk about RSPs as a budget issue. RSPs have to be capped, and it's a tax issue. We can't have it both ways. We have to allow people to plan for their future. We can't just treat RRSPs as a tax expenditure. They have to be part of the major plank in people's planning for their own retirement future.

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So if CPP won't make it, especially with the younger generation—if they feel they're not getting as good a return as they should on CPP, which is a natural feeling to have—they should at least be allowed to invest in RRSPs.

I'll move on quickly to the costs, and I guess you know all this, so I'll be very quick. In our study we looked at this. We did it before we knew the actual break-out on how you were going to allocate the costs of CPP over a six-year period.

Our survey of our members said yes, they realized there should be a mix between reducing benefits and increasing premiums. We had a split vote on how fast it should be done: 45% said it should be done over time and another 45% said it should be done very quickly, but our quick scenario was six to nine years; it wasn't six years. Then we asked what level is affordable, and we found it was between 7% and 8%, not between 9% and 10%. We actually said in our old letter that at 9% or 10%, it will have significant impacts on the business community and their employees and it will hurt job creation.

So our concern is what do you do? These premiums are going up next year, probably more than 66¢ next year. That's quite a hit. Many will argue that lowering payroll taxes will not create jobs, but everyone agrees that raising payroll taxes does hurt jobs. We ask our members every year what it will take for them to create more jobs—and they're seen as the job creators—and they say increased consumer spending and decreased payroll taxes. Well, what we're doing here is increasing a payroll tax.

In our presentation and in this study, we show that over this time period, a business with 10 employees will see increases of about $7,000 in CPP premiums. It's going to be a hit.

What do we suggest? On the last page, what we present to Minister Paul Martin is linking CPP increases with EI decreases. There's opportunity to do that. Right now, at the end of this year, the employment insurance surplus will be $12 billion. If it stays at the $2.80 rate, it will go up to $20 billion. So we're taking money out of the system—up to $20 billion—and meanwhile we're raising premiums by 60¢ to 80¢. That's unnecessary. You can offset them, and this committee should recommend that.

It's timely, because like the postal strike, that decision will be made this month or in December. So it's the time to link them. The first ministers agreed with that. They came out in their conference and agreed to it. This is an option that doesn't hurt the fisc, doesn't hurt the program, and will not reduce the surplus. You can actually build up the surplus at a $2.20 rate to $15 billion or $16 billion. And if you don't know that or don't believe it, please ask the actuary for the numbers. This committee can ask for those numbers.

If that's the case, our question back to the committee and to the finance minister is at what level will the EI surplus be enough? Is it $12 billion, $15 billion, $20 billion, $25 billion? Especially at a time when CPP rates are increasing as quickly and as dramatically as they will be increasing...

We're putting this on record now, because the time will come next year when people will look at their paycheques and realize they're less in January than they were in December, and people will start to catch on to what these increases will mean. There's an opportunity to offset those increases with lower EI premiums.

Thank you, Mr. Chair.

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

Now we'll proceed to the question-and-answer session, beginning with Mrs. Ablonczy.

Mrs. Diane Ablonczy: I get four rotations, right, since I'm the only one here?

The Chairman: Yes, absolutely.

Mrs. Diane Ablonczy: I appreciate you gentlemen coming and giving us the benefit of your expertise.

First to Dr. Emery, we're all very interested in your approach to this issue. Of course this is the first time, as you probably know, that any of the witnesses have suggested we simply continue with the plan as it is. The plan, as you even point out, is actually a pyramid scheme, where people at the top get quite a windfall funded by continuing contributions from people at the bottom. You're suggesting to just keep this pyramid scheme going.

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Why would you propose sustaining what's essentially a pyramid scheme, which is illegal for obvious reasons? If your analysis is correct, and we'll assume it is, then why are the Minister of Finance and the government making these changes? Why is this fund being set up? You've raised some good questions about the fund, but I'm just wondering about your analysis as to what other reasons there could be. If you're saying the ostensible reasons to make the fund financially sustainable and intergenerationally equitable really are not valid, then what other reasons could there be?

Dr. Herbert Emery: Let me try to keep them straight. The first one about the Ponzi scheme is an interesting one. Technically Ponzi games are illegal, but remember what I'm recommending. I'm not saying the pay-as-you-go alternative is the solution itself, but are we making a positive change by moving to pre-funding versus the Ponzi scheme we have now? The answer is no.

This does not say I would not support something like a more privatized system or even phasing the Canada Pension Plan out entirely, but these are not options that have been entertained. I was asked, when I came before the committee, to comment on Bill C-2. So please take my comments in reference to whether Bill C-2 is better than what we have now. I don't think it is.

I'd like to address the Ponzi game aspect. This is an interesting turn of phrase that I believe has been attributed to Bill Robson, who has been building on notions by Paul Samuelson and other people like that. But when this was set up it was well recognized that the only way people who were about to retire could benefit from a growing economy was to somehow link their own incomes to the incomes of people who were still working. So the redistribution across the generations was not considered unfair at that time, even though it was clearly a progressive tax transfer where you take from Canadians who are working at higher levels of income and transfer it to lower-income seniors.

Now the cost of this game has increased considerably. For years we've said it's fine to redistribute income from high-income people to lower-income people. Now all of a sudden with the shrinking tax base proportional to the growth in benefits, people are saying this is just too expensive to carry on with.

Calling it a Ponzi game makes it politically feasible to start attacking the system we have in place, but in a lot of ways you could call it a Ponzi game or you could call it a progressive tax transfer mechanism. It probably depends on whether you're trying to defend this program or defeat it. Unfortunately, when you try to defend the pay-as-you-go against the Bill C-2 changes, it really diverts attention from what will happen with Bill C-2.

Why is the government trying to build up a fund? That's a very good question. We've seen a lot of funds expropriated by governments, paid into general revenues and used for purposes other than the program itself. I believe there are hints that the EI surplus may have been just buried into general revenues and not used toward the EI system. As an aside, I still think it's unfortunate we now insure people against employment in Canada; I would have preferred to see unemployment insurance. But one of the big threats with this has always been that the governments just use this as a source of deficit finance. So the arm's length initiatives did not appear originally when the federal government was going to the round table discussions. That appears to have been a development that has come in the last year.

Generally it's a good idea if it can act fast and deal with people's fears and concerns that there's a problem with the Canada Pension Plan, but in a lot of ways the federal government, through the media, has fostered the crisis. It's a crisis of assumption. It has to do something now because it has backed itself into a corner and Bill C-2 is the quick fix, not the long-term solution.

Mrs. Diane Ablonczy: I just want to follow up on that. You say it's a quick fix, not a long-term solution, and you talked earlier in your response to me about other options to better the plan or get better pension returns for Canadians. I just wonder if you can expand on this. What wouldn't be a quick fix?

Dr. Herbert Emery: There's no easy way out of this problem. Basically you have a plan right now that's getting very expensive for working Canadians. When you look at an acceleration of the tax increase to 9.9% over the next five years, you will be taking a good chunk of income out of people's pockets. It's going to be painful. The pay-as-you-go plan, which sees the higher rates in 2030, is painful for future Canadians, but people today are sort of spared some of the burden. The notion that we should be accelerating is based on the idea that it's “fairer” to bear the hit today and not bear the hit tomorrow, so we have confusion over that.

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You can look at the pre-funding arrangement as the thin edge of the wedge. Once you go to pre-funding, it is very simple to go to a privatized system. Jim Pesando has laid this out in a C.D. Howe paper. You could manage to do this with a 9.9% payroll tax, as they're projecting now, and apportion 4.76% for your benefits in an RRSP, 2.24% for the CPP contribution for death and disability benefits, and 2.9% to the unfunded liability. It's a very painless way to move towards a privatized system because the unfunded liability is amortized over time and is recouped in the same tax system you're introducing anyway.

So if we go ahead with Bill C-2, I would not be surprised if we're back here in a year or two suddenly demanding to go towards a privatized system because we can manage it under the same financing. The federal government, in doing the quick fix—which is to just jack up the rates so that everyone believes this thing is safe, all the while not coming clean with the fact they cannot guarantee those benefits in the future because this is still not a savings plan—may be opening up a whole can of worms for themselves that they're not prepared for.

Mrs. Diane Ablonczy: Gee, don't tell them that.

I just have one quick question, Mr. Chairman, for Mr. White and Mr. Mallet. It's been suggested that when these payroll taxes like Canada Pension Plan contributions are increased for employers, sooner or later they are passed on to employees. I wonder what your perspective is as representatives of employers.

Mr. Garth White: That's the theory, but it doesn't happen. A lot of our members, 50% of them, can make zero profits in a given year, and what kills them and hurts them, especially in the last recession, is the before-profit taxes, which are municipal taxes, business taxes and the long list of payroll taxes, like workers' compensation premiums, payroll taxes in some provinces, EI premiums and CPP premiums. It goes on and on. And it's very difficult to pass them on.

Also, though, it adds to the cost of hiring an employee if that, plus all the benefits...in some businesses it adds up to between 20% and 30%. It's an extra cost to hire, and if they have an alternative, chances are they won't. It becomes a barrier for getting into business.

As the OECD's job study pointed out, high payroll taxes and very stringent labour legislation were the two major factors impeding job creation. Actually, this government and the Reform Party...they all recognize that. They have said that. It's just that now the CPP is not really recognized as a payroll tax per se, but it is.

Mr. Ted Mallet (Senior Economist, Canadian Federation of Independent Business): The economic literature is pretty well split on the long-run effects of payroll tax increases. Some studies say they do affect employment and other studies say they go into lower wages. The balance of opinion seems to be that the longer term you go the more likely that these kind of changes move to wages, but of course it depends on the kind of business and on the elasticities and the market factors associated with the kinds of workforce you're dealing with, or the market power of employees versus employers. And of course that is by no means a homogeneous factor across the economy.

The interesting factor, though, is that we never live in the long term; we always live in a series of short-term progressions. So every policy shock that happens—every increase the EI system underwent over, say, the late 1980s—and the increases we will see in the CPP will have short-term shocks that will limit employment as opposed to working through to the wage level. Unless we have a stable system for the next 15 years, we won't see any of the long-run effects on wages; we will tend to see them, in our belief, more on the employment side.

Mrs. Diane Ablonczy: Thank you. I appreciate that feedback.

I have lots of questions, but I imagine others do too, so thank you, Mr. Chairman.

The Chairman: Please, have another question.

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Mrs. Diane Ablonczy: Well, I do have another question for Dr. Emery.

This proposal is very intriguing. These are again questions about the fund. Yesterday we had a number of witnesses who talked about pension management, how to get the best return on investment, the fact that there needs to be efficiency and accountability and transparency in a large investment fund such as is being set up under this legislation. I noticed in your presentation that you had a bit of a discussion about the fund, its impact on our markets and just how realistic some of the provisions for accountability are. If you could expand on that, I'd find that very helpful.

Dr. Herbert Emery: I can try to do this. I'm not an expert on pension management, so I'm a little bit uncomfortable in making pronouncements on that.

One of the big concerns is, if you accumulate a fund this large, how are you going to manage it? There are two scenarios you can have here.

One is a centralized management of one fund where you could set up arm's length directors who will invest to the best of their ability according to the rules of the game, such as only 20% being outside of the country. Now, what you have a problem with is a large fund centrally managed that has a limited market for capital. So we have only the TSE as our main securities market. We don't know what the impact of a fund this big will be on the rates of return in there. Will it trigger other people selling off as this fund comes in and starts playing around with the prices?

Will it actually increase total savings is the bigger issue. If all we're doing is taking money out of people's own savings plans, money they would have put into RRSPs and things like that, now you have to have a government fund that is outperforming private savings. Most people have trouble in believing that this is possible, particularly given that there is still some provision that the provinces will have some access to this fund in terms of borrowing. So the more provincial debt you get locked in there, the bigger the problem you could have.

One of the biggest precursors to this is probably the Alberta Heritage Fund. I've been in Alberta now for five years; I'm still not sure how much that fund is worth or if there's actually any of it left, and it's supposed to be one that was managed fairly well.

So setting these things up at arm's length does not guarantee that things will work out in the end, because we don't know what's going to happen to interest rates and we don't know what's going to happen in the stock market when you flood the market with a large amount of capital all at once.

An alternative way of managing this fund is not to have a government arm's length agency taking care of it. But when you think about a privatized system where there's a mandatory RRSP component, all of a sudden you just have people managing their own funds. You could even set up 20 that are recognized by the government. The reason you can go to that is that once you recognize that this is a tax that's being paid to fund current benefits and future benefits, there's no reason why you can't decompose it into these components: a portion of the tax for your own retirement; a portion of the tax to retire the unfunded liability; and a portion of the tax to pay for the social program elements—the disability, death and survivor's benefits—that haven't been dealt with in other programs.

Privatized RRSP types of systems, like in Chile and other places like that, are really just alternative visions of how you would manage a fund like this. Potentially you could even go to a fully privatized scheme through this initiative, because all you're really doing is expanding private savings initiatives over public savings initiatives.

Mrs. Diane Ablonczy: But what about the concern that this is too risky for individual Canadians, that they can somehow, through falls in the stock markets or some bad investments, lose their whole pension protection?

Dr. Herbert Emery: As you're well aware, most financial planners do not suggest that people sink all their money into one investment. The government could still structure RRSP programs that would force some kind of diversified component, but again now you're getting into specifics of individual investment strategies.

The question we have is, are people capable of planning for themselves or do we need a paternalistic government to take care of some of these provisions? That's really getting back to an ideological debate, one that I can't settle, nor can anyone else in this room. It comes down to what you believe. But under one vision we would have OAS and GIS types of pensions as the safety valve and the Canada Pension Plan, if it became privatized, would be the place where you could bear a bit more risk. But right now the risk appears to be, do we want 12% or 15% returns? I can't believe people are afraid of the variability between those rates of return.

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The Chairman: Thank you, Dr. Emery.

[Translation]

Ms. Girard-Bujold.

Ms. Jocelyne Girard-Bujold (Jonquière, BQ): My question is addressed to Mr. Emery. It is the first time I come to this committee, but I believe you are one of the people who said that the modifications to Bill C-2 could make things worse. You totally reject four points. What is this rejection based on? Have you carried out a study demonstrating that these four points of the Bill can make things worse?

[English]

Dr. Herbert Emery: As I laid out in my presentation, the questions that are being addressed by Bill C-2 are very complex: do we make it more financially solvent or not with pre-funding? When you have a pay-as-you-go system, which is just a tax transfer system where you distribute current income across non-retired and retired people, you don't need a fund for solvency. The fund has to have other purposes, and maybe achieving a higher rate of return to make Canadians better off is a laudable goal. However, I'm skeptical that the government can out-perform private individuals investing in their own purposes, even it's consumption or investment in their children, who may be their security blanket later in life.

With the intergenerational equity, the perception is that future generations will have lower incomes than Canadians today; that the baby boomers are the wealthiest generation ever and they will be the maximum in terms of wealth levels that we've ever seen, in which case imposing a higher tax burden on future Canadians can only be bad. We're forgetting that real incomes do grow and through the miracle of compounding, even at low rates, real incomes will be higher.

If we believe in progressive tax systems where the people with a higher ability to pay should bear more of the tax, then there's nothing wrong with imposing a higher payroll tax on future generations.

I didn't get an opportunity to say that I don't believe these payroll taxes are ever going to 14%. If real wage growth accelerates, they're never going to make it there. I don't believe that younger Canadians today, who are bearing higher tuition and other policies like that, are going to look sympathetically at this program in twenty or thirty years, even at 9.9%. I don't think you'll see the benefits that are being paid today in the future even if you pre-fund it. All you're going to do is put a huge burden on working Canadians today with no greater political security over those benefits. It's really just distracting us from the bigger issue, which is that if we really care about pension incomes, how can we get an integrated policy approach and not have the Canada Pension Plan on one hand and claw back OAS on the other. It's really a divide and conquer strategy right now.

Young Canadians are fixated on the Canada Pension Plan because they're paying into it. Seniors are being hammered with the OAS. They've been saving, they were playing by the rules of the game, and now the rules have been changed. We really have a bunch of different fires going in different corners, and what we need to do is to start bringing these things together and ask what is best for Canadians as opposed to how do we finance a Canada Pension Plan benefit that we can't even guarantee.

I understand this is a different view from what is heard. One reason I was pleased to come in front of the committee is because my point of view is not widely accepted by all people, I recognize that, but it is an opportunity to get it on the record. I'm basing my opinion on thirty years of research by economists, from the inception of these pay-as-you-go plans right through to the present. I think we're more ignorant of these pay-as-you-go plans today than we were in 1966. We keep forgetting the past, and as a result we're condemned to continually relive it every five years when we go through a rate review. If we can set a 25-year rate schedule, why do we review them every five years?

Other rhetoric I'm finding disappointing is the discussion of steady-state rate when we know that the baby boom population is a transitory bulge in population whose effect will disappear over the next thirty years. Does it make sense to even have a steady-state policy?

[Translation]

Ms. Jocelyne Girard-Bujold: My second question is addressed to Mr. White. In the letter you sent to the Honourable Paul Martin, you mentioned that, in his economic and financial statement, he said that the government wished to improve the quality of life of all Canadians. You also mentioned that he said he was firmly convinced that seeking prosperity should not mean giving up on the principle of equity. Finally, you mentioned that for several years, your association has been asking that Employment Insurance premiums be changed, and you provided suggestions on how to do this. Are these suggestions related to new contributors and contributors in new businesses? Could you elaborate a little on this?

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[English]

Mr. Garth White: We have tried to come up with a solution that does not hurt people who use the system, does not hurt the people who pay into the system, does not change the system, and will help job creation. We have come up with that solution.

The recommendations we are putting forward do not reduce the surplus, do not decrease the program or cut into the benefits of the program. All they do is reduce the extra premiums employers and employees are paying. We also believe the number one social program is the job. The job creators tell us that if you reduce premiums, that will help them create jobs.

Right now this committee is working on a process where premiums will be significantly increased through CPP. We're trying to find a solution to offset that—a political solution, a concrete solution, and one that doesn't hurt anyone.

We even made a recommendation, for example, to deal with youth employment, in which we're heavily involved. We're doing major surveying on the youth issue. We're seen by youth as a very good potential source for their jobs.

We've talked about a voluntary student exemption. A lot of students don't want to pay EI. A lot of students will not collect EI. Why can't they put up their hands and say they will not be collecting it, and why should employers have to pay it? Then it can be put it back in their pockets. There is where we're trying to get a win-win-win situation.

The New Hires program, which dries up this year, which this government supports and pushed forward, and I believe everybody supports, is gone next year. It's 25%, Mr. Chairperson. It's now 100%. It drops off. We're hoping that will be renewed.

We're trying to come up with solutions that meet all those objectives without putting extra pressure on the fiscal situation.

The Chairman: Thank you, Mr. White. Merci.

Mr. Pillitteri. No question? Mr. Szabo.

Mr. Paul Szabo: Thank you, gentlemen. It's interesting.

I want to focus on two things. One is the intergenerational equity, and the other is the value of the benefit relative to the cost.

I don't think you're proposing in any way that current seniors or beneficiaries be touched in terms of their present situations. That necessarily means that others are going to have to pick up the cost. I think Dr. Emery raised the issue that there is a component of the 9.9% that does in fact account for the funding of that liability with regard to current beneficiaries. But the arguments seem to be that “Well, there's no value”, or “Those seniors are getting so much more and we're getting so much less”, and suggestions of possible opt-out and all this other stuff.

I guess my question is for Dr. Emery, since you raised the issue of private approaches or privatization. Have you actually gone out and determined what the cost of a fully equivalent system would be for someone who wanted to get the pension, with all the survivor and child benefits and the disability and death benefits and the indexing and the security that are provided under the CPP? Have you costed it out? How would that cost compare to the 9.9%—for anybody, regardless of where they are on the spectrum?

Dr. Herbert Emery: The issues you're raising are very important ones, but they're usually dealt with by people who manage pension funds and who go into the market and figure out what the going rates are.

As you're pointing out, in the move to any new system, or even keeping the old system, there are always going to be transition costs and people are going to lose by it. This is because when we move away from a Canada Pension Plan with 9.9%, we're moving a lot of redistributional power that we retain under a Canada Pension Plan.

The Canada Pension Plan has more goals than pure savings. In fact, it's not a savings plan. The privatized scheme I was raising, as you might as well do once you start going to pre-funding, is not intended to say I don't believe there is a role for public pensions. It's really a matter of how do we provide public pensions?

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I don't believe raising the rates to 9.9% to build up this fund is the solution. I also don't think privatization is always going to work for everybody in Canada, but it would definitely benefit a lot of Canadians, who would have expanded room for savings. They would get to keep the rate of return as opposed to sharing the rate of return from the CPP fund across a broader base of Canadians.

Mr. Paul Szabo: Just for your information, Finance officials have advised us that it would be 15% more expensive to get it privately.

You continue to talk about a full-funding alternative, but you have to agree, this is not a fair reflection of what Bill C-2 is proposing. The pay-as-you-go system is going to continue. The change is not full funding; it's a little bit fuller funding. Instead of a two-year accumulation of benefits, it's going to move up to five years. It's not going to be full funding.

You've repeated that so many times it really makes me wonder why you are suggesting something that is really not the case. It tends to distract from your message, because it's not a fair reflection of what's being proposed. I guess we could debate that.

I do want to know why you think just leaving the system alone and letting it go up to ultimately 14.2% is even a viable possibility given that, at that point of contribution rate, the value of the benefits would probably be less than what you put in during a working career, and therefore there would be unanimous consent to scrap the plan. Nobody wants to put into something that they're going to get less out of than they put in.

Why do you say we should just leave it as is? It doesn't make sense.

Dr. Herbert Emery: You're raising some good points. I apologize if I gave the impression that I believed Bill C-2 to be full funding. “Fuller funding” is the language I usually use. As well, I am aware that they're basically doubling the fund.

The important point with that is, why not a full funding rate? The level you pick is arbitrary. You're basically trying to create tax relief through an investment strategy. Now there's some political pressure that people won't like a tax rate of 12%, which was the full-funding, steady-state rate.

Another point, before I move on, is that you're right, there are huge economies of scale to governments taking over pension programs and internalizing transaction costs. We see that in health care. The United States has a more expensive, privatized health care system than in Canada. That's why I do believe there is a role for government pensions.

As to why I believe the current pay-as-you-go plan is an alternative to Bill C-2, I don't think Bill C-2 is any more politically solvent than the pay-as-you-go plan we have now. I don't think we will ever see 14% payroll taxes, in part because the tax base is going to grow dramatically over the next 20 to 30 years. We're starting to see the savings of baby boomers rising. That results in more capital in the economy, which results in more productive labour, which translates into higher wages.

So you have a smaller tax base in one sense but you have a higher tax base in another.

Mr. Paul Szabo: Okay. Let me—

Dr. Herbert Emery: To just finish one point, if you believe Canadians in future will actually look at a 9.9% rate, where they are getting no more out of the plan than they really are under 14.2%, the maximum at $2,030, it's not clear to me why this government thinks that's somehow politically more palatable even though, if you look at the opportunity cost of money from today, Canadians are paying in far less under the pay-as-you-go arrangement than under the fuller funding alternative.

Mr. Paul Szabo: The issue, though, is whether or not you want to acknowledge that the chief actuary has said that in actuarial terms, the rate would have to go to that level to be able to meet the cashflow requirements of the then beneficiaries and to have sustainability.

I agree with you, however, that when it gets to the point where you get not only not a fair and reasonable return but in fact a negative return, you couldn't charge a 14.2% payroll tax. But you can't look at CPP in isolation from all other things. You have to look at the full gamut of taxation and benefits that we get under our tax system. It's clear we would probably have to move to a phased-in system of funding by some other method, simply because for the taxpayer it matters what's in his or her pocket, not how it got there. It's the net impacts.

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So if you don't pay the 14.2% on CPP, you will pay a combination of some rate plus something else you are giving up or increased taxes, which combined comes up with the 14.2%. It's playing with numbers. The fact is, actuarially, 14.2% one way or another will be necessary if you do nothing.

Dr. Herbert Emery: I agree with your points there. There is a difference between an economist and an actuary. The actuary takes existing conditions and presumes they will hold for some time. The economist wants to figure out where prices, wages, productivity and things like that are going. So where economists are content to say wages and prices might change in the future, the actuarial forecast says: suppose conditions never change from today; how would we finance this benefit? We're not talking about a private pension plan where you can stipulate what will be paid in 2030. We're talking about a political tax transfer mechanism where future voters will decide what the distribution of income will be.

Dressing this thing up as a savings plan does nothing to change that reality, and you really can't guarantee anything with this plan. I agree with you that Canadians care about what's in their pockets and not what's promised in the future because the Liberal government may not be in power in 30 years. It won't be able to say it promised in 1997 it would pay these benefits. There's a good chance it will be in power, but...

Mr. Garth White: We're members of a coalition—Mr. Valeri was present there—with 20 different and diverse groups, everything from teachers groups, senior citizens and the chamber of CFIB to actuaries, just a mix of people. We argue about a lot of issues, which isn't surprising. But a key point this committee has to recognize is that we can talk about different options and different scenarios, but people are very afraid about planning for their retirement and for the future. The fact is they were concerned about CPP being eroded or gone. To many people that is all they take.

The issue we got together about was that CPP is inadequate by itself. You have to look at the full pension picture. Why is there fear? There is fear because no one sees the full pension picture. No one knows what it takes to plan for their future. At least the committee is pushing that process and we need to work together to know what people are thinking about along the whole gamut of pension policy.

One of our concerns about the private pension option was that we weren't sure how much it would cost on an individual basis and also how much it had been matched by employers. It turns out a lot of our members look at the CPP as part of their planning mix, so they are concerned about that. We need the full picture because this is only one piece of the pension puzzle. We're concerned every year about suggestions that there are no guarantees whether RRSPs will go up or down. We can't have that any more. We have to have some stability and the ability to plan for our pension future.

The Chairman: Thank you very much, Mr. White, Mr. Mallet and Dr. Emery. It's been an interesting round table.

There's no question the whole pension issue is a challenging one. Having said that, Canadians would simply not accept inaction from any government on this particular issue. It's important to look forward to address some of the key concerns. I'm sure there will be opportunities to refine some of the points that have been raised by organizations and individuals like you to improve it.

The bottom line is that Canadians are seeking a sense of security more and more, and that's what we're trying to address in this committee. So on behalf of the committee members, I would like to thank you for your answers and also thank the members for their questions.

Mrs. Diane Ablonczy: Mr. Chairman, I have a point of information for the committee.

I have some information about the CATO Institute conference I referred to earlier in this committee. This is the one in London, England. It's looking at solving the global public pension crisis, and we're a microcosm of that process. I have this information for committee members and I highly recommend we get information back from this.

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As I mentioned before, Dr. José Piñera, who introduced the pension changes in Chile, will be the keynote speaker. He testified before the British parliamentary committee looking at pension reform, and apparently was very impressive. I think this would be good information for us, so anyone who is interested can pick one up.

The Chairman: Yes, and perhaps we can instruct the clerk to see if she can get transcripts of his presentation so that we can also benefit.

Mrs. Diane Ablonczy: If it wouldn't be too politically incorrect, I think it would be a great idea.

The Chairman: The meeting is adjourned.