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Submission to the House of Commons Committee studying changes to the Canada Pension Plan May 1996 The Alberta Federation of Labour welcomes this opportunity to present the views of our affiliated unions and their members on the five year review of Canada Pension Plan contribution rates. The Alberta Federation of Labour represents approximately 107,000 working Albertans who are organized in 33 different public, industrial and service sector unions in 298 locals. Our members and their families and dependents represent a significant cross-section of the Alberta population. Moreover, the Federation has always striven to represent the interests of non-organized working people since they have no other vehicle to voice their concerns as workers. From the perspective of working people, the proposed changes to the Canada Pension Plan benefits are extremely alarming. Reducing retirement pensions, raising the age of entitlement, reducing indexation of pensions from full indexation to inflation minus 1 %, reducing survivor and disability benefits, and increasing years of contribution required for a full pension would each have a punitive effect upon retired workers. These kind of sweeping fundamental changes to the Canada Pension Plan, which is the cornerstone of seniors' financial security, must have a far more comprehensive public consultation and review process than simply being included in the normal five year review process on contribution rates. To put this in perspective, the Special Joint Senate and House of Commons Committee that established the Canada Pension Plan in the first place received evidence and public presentations for two whole years in 1964 and 1965 prior to implementation of the enabling legislation (Bill C 136). It is vital to the current debate to remember the explicit purpose of the Canada Pension Plan as outlined repeatedly by that Committee: to ensure that all Canadians could retire with dignity. To solve the predicted future financial problems of the CPP by cutting benefits without measuring the effects of those cuts upon Canadians and ensuring that people can, in fact, retire with dignity, is an absolute contradiction of the most basic function of the program. A. Defining the Problem The current panic over the future of the Canada Pension Plan has been fueled by misleading media reports over the "unfunded liability" of the plan and by self-interested interventions by organizations with a vested interest in the dismantling of public pensions. The CPP is a pay-as-you-go plan with a two year fund to compensate for short-term financial fluctuations. It does not have an 'unfunded liability'. Further-more, it has nothing to do with government debts or deficits - it is completely funded by employer and employee contributions. There is no crisis in Canada Pension Plan funding. The debate is a consequence of report of the Chief Actuary, tabled in 1995, that concluded that CPP benefits will cost significantly more than previously expected because of the effects of the last recession and the higher number of people receiving disability pensions. Assuming that the two elements will not change, contribution rates will have to be increased more than previously planned. It is important to note that it is not the aging of the baby boom population that is causing the need for this rate increase. The population demographics were well-studied and incorporated into CPP planning twenty-five years ago. The whole process appears to be straight forward. Simply increase the rates as required. This is not a voluntary process - the Canada Pension Plan is mandatory and deeply imbedded in the Canadian social and economic structure. There is no question about future generations being unwilling to live up to their obligations to retired Canadians - that is a fabrication that is politically indefensible, empirically unsupported and just plain malicious. Future generations will no more refuse to support retirees who are, after all, their parents and relatives, than the current generation will. That argument against the continuation of Canada Pension as it now exists is so pathetic that deserves no credibility at all. The only other coherent argument against simply raising contribution rates to the appropriate level is the claim that raising contribution rates will create job loss. The effect of so-called 'payroll taxes' on employment is highly contentious. Some economists argue that such costs have significant effects upon job creation and employment. An equal number claim that studies predicting significant employment effects are base upon faulty assumptions, and that payroll taxes have a minimal effect on employment. The obvious point here is that employers will hire workers when the cost of the labour is more than offset by the product of their labour. That will vary from industry to industry and with fluctuations in the domestic and international marketplace. Any claim of direct employment consequences of raising CPP contribution rates must be viewed with a healthy skepticism:
It is worth noting that the costs of the Canada Pension Plan, including the propose rate increases, are not high when compared to other economically advanced nations. "Most other industrialized countries have already reached that level of contribution rate [14.44% - the peak rate predicted by the Chief Actuary] for their public pension plans. For example, the 1994 World Bank Policy Research Report, Averting the Old Age Crisis, estimated that in 1991 combined employer/ employee payroll taxes for pensions in OECD countries averaged 16.3%." Even the United States at a combined rate of 12.4 % is substantially ahead of the Canadian rate. Yet Canada consistently suffers higher unemployment than the U.S. despite its higher payroll tax for pensions. B. Addressing the Causes The current problems with Canada Pension contribution rates revolve around two things: unexpectedly high unemployment continuing from the last recession and higher than expected disability claims. Both of these problems can and should be addressed by government at the federal and provincial levels. There is some evidence that the higher levels of disability claims are a downloading of costs from the private sector and the provinces to the CPP. Private insurers can cut the costs of long-term disability pensions by the amount of the CPP disability payment. Similarly, provinces can reduce social assistance payments (and WCB pensions) by pushing people onto a disability payment, even though such a transfer is financially punitive for the individual claimant. Supporting this explanation is the fact that the Quebec Pension Plan, where no transfer to a federal program is available, has not shown a corresponding increase in the incidence or duration of disability benefits. If there is substantiated evidence of such provincial and private insurer abuse of the CPP disability benefits, surely measures could be taken to put a stop to it. On the persistent levels of higher than expected unemployment, much more needs to be done. It is the single most serious problem confronting Canada today - yet it receives very little attention in policy making circles. Not only is it causing problems for the Canada Pension Plan, it is also negatively effecting public tax revenues, demands on social programs and the health of the small business community. This is not the forum for a discussion of effective job creation programs, national industrial strategies or regional development programs. However, it needs to be noted that the failure of governments at all levels to address the problem is, in fact, one of the major contributing factors to the CPP rate problem. In fact, a consistent message to the Canadian public that high unemployment levels and not the aging of the population is causing the CPP rate debate would be a valuable impetus to focus attention on the real issues before us. C. What are the Consequences of Cutting CPP Benefits and Entitlements? 1. Reducing Benefits There are several 'inescapable consequences to the proposed reduction of CPP benefits and entitlements. First, any reduction in actual pension benefits (the suggestion is to reduce pensions from 25% of annual earnings to 22.5%) will create economic hardships for seniors - particularly those who are already retired and who have no possibility of adding to their incomes. 56% of unattached women and 38% of unattached men aged 65 or older already have incomes below the poverty line. Given that only 27% of Canadians have been able to afford to buy RRSPs and that only 45% of paid workers belong to a private occupational pension plan, it is clear that the majority of Canadian workers depend upon the Canada Pension Plan to maintain any semblance of a decent life in retirement. This is particularly true now that the federal government is in the process of reducing the amount of money available through the Old Age Security, Guaranteed Income Supplement and Spouse's Allowance programs. Even the most modest reductions in benefit levels will inevitably force thousands more retired Canadians below the poverty line. 2. Partially De-indexing Pensions The proposal to partially de-index pensions so that they increase I % less than inflation each year is a particularly strange proposal. It will in effect hurt those who live the longest the most. In effect, the message to Canadians (particularly to women who have longer life expectancies) of such a policy would be that long life is a burden on society and that you will be penalized for it. 3. Increasing Retirement Age Similarly, the proposal to increase the retirement age to 67 contradicts social reality. At a time when employers are increasingly forcing workers into early retirement through downsizing, the public pension system is considering trying to force them to work longer. Between 1989 and 1994 there was a 30% increase in the number of people reporting they had retired before age 65 because they had lost their job and were unable to find other employment. When you consider the crisis in youth employment, any measure forcing seniors to hang onto their jobs longer is simply counterproductive. Lowering the retirement age makes more sense than increasing it in the current economic context. The problem is lack of jobs and particularly lack of good jobs. Raising the retirement age won't address the problem at all. 4. Reducing the 15% Exclusion Currently, everyone is allowed to exclude l5% of their work years with the lowest earnings (parents may exclude additional years when they had children under seven). This provision protects contributors from being penalized in retirement for pursuing advanced education, raising children or simply being unemployed. Given the increased demand for mid-career retraining and the increasing instability of employment, any erosion of these protections would simply penalize increasingly large numbers of the workforce in their retirement years. 5. The Effect upon Collective Bargaining The majority of union pension plans are integrated with the Canada or Quebec Pension Plans. Any reductions in CPP benefits will be taken to the bargaining table. That is a certainty. Our members cannot and will not accept retiring into poverty after a lifetime's work. Given the current economic climate, there is no question that membership demands for a pension protected against unexpected CPP cuts would cause a major downturn in the Canadian labour relations climate. One of the reasons most employers supported the creation of the Canada Pension Plan in the 1960's was that the success of unions in negotiating pension plans was creating a broad demand for pensions and a corresponding demand for union certification amongst working people. If the labour movement were simply self-interested, as many of our detractors claim, we would not oppose cutting CPP benefits. Our unions would make up the difference, and union membership would become more attractive than ever. But, our concerns are neither that narrow nor selfish. Cuts to CPP benefits would hurt senior Canadians badly, and they would hurt the poorest workers the most. That is not acceptable to the labour movement or to the vast majority of citizens. 6. The Effect Upon Local Economies One of the other aspects of cutting seniors' benefits that hasn't been accounted for is the effect upon local economies. What happens to small businesses and local economies when seniors cease being consumers? Conclusion The Canada Pension Plan is the cornerstone of Canada's retirement income system. It covers everyone and takes into account all earnings from all the various jobs a person may have during their working life. It is fully indexed to inflation, fully vested and its costs are jointly shared by employers and employees. Its administrative costs are well within expectations and its survivor and disability benefits meet crucial needs. The CPP is one of the main reasons that most retired Canadians do not live in poverty. The OAS and CPP account for 64% of the 'income of retirees with incomes between $14,500 and $26,464. Any reductions would hurt these people badly. No benefits or entitlements should be eliminated or cut back simply to meet a desire to keep rates lower than they otherwise should be. No credence must be given to the unsupportable claim that future generations will not meet their obligations to Canada's elderly. Certainly no such changes should be made without a full, lengthy and complete public consultation, far beyond the scope of this committee. The exact impact upon seniors' incomes from any change must be examined thoroughly before any changes are made, and the measuring stick must be compliance with the original stated intention of CPP: to ensure that all Canadians can retire with dignity. Job creation is clearly the responsibility of the various levels of government and of the private sector - not of our public pension administration. Pitting the right of Canadians to retire without financial hardship against the needs of unemployed Canadians for jobs is wrong. The relationship between payroll taxes and employment is not supported by many economists - nor is Canada's public pension plan too expensive by international standards. Put simply, government and business must accept that a decent retirement benefit is part of the cost of doing business in Canada. It is not a luxury and it is not debatable.
Respectfully submitted, |