CUPE's Response to the Information Paper for Consultations on the Canada Pension

The Canadian Union of Public Employees (CUPE) represents more than 460,000 members who provide services to the public across the country. Our members are employed in Canada’s hospitals, municipalities, school boards, nursing homes, public health units, universities, social service agencies, libraries, public utilities, airlines, broadcast facilities, and other institutions providing services to the general public. We welcome this opportunity to express our views to the joint federal-provincial committee which is reviewing the Canada Pension Plan (CPP).

The CPP is one of the most important publicly administered programs in the country, not only for all CUPE members, but for all working Canadians. By establishing the program in 1966, the federal government put in place an effective system through which retired seniors would be able to draw a retirement wage - beyond the basic guarantee of the Old Age Security Program -which would reflect their earnings over the course of their work lives. Jointly funded by employees and employers, the basic framework of the CPP remains very much in its original form, and has operated much as its architects had expected. As a pay-as-you-go plan, current benefits are paid by current workers.

Recently, the stability, efficiency, and long-term viability of the CPP has been called into question. Misinformation about how the Plan is funded has been fostered by ill-informed and downright misleading media coverage. And, when the federal government’s Chief Actuary filed a report on the status of the CPP in early 1995, many right-wing critics seized on his comment that the CPP fund would be “exhausted by the end of 2015”, and interpreted this to mean that the Plan was “bankrupt” and should be abolished.

These right-wing critics, along with the numerous interested observers in the financial community who are eager to tap a huge new market for their “goods”, have been performing a monumental disservice to Canadians. By confusing the facts, and taking advantage of widely-held misconceptions, they have set out to undermine and destroy an effective income replacement program that offers basic retirement benefits which are quite modest by international standards.

Unfortunately, the federal government’s “Information Paper for Consultations on the Canada Pension Plan” (hereafter “Information Paper”) does very little to remedy this state of affairs. In fact, the Information Paper appears to embrace many mistaken assumptions about the state of the CPP. As a result, the various proposals to “remedy” the Plan focus almost exclusively on a range of options for either cutting back the benefits provided by the program, or making eligibility more stringent.

This submission will show that the government’s Information Paper, developed out of flawed assumptions, has offered a series of false choices to Canadians. Rather than taking this opportunity to educate by clarifying the operations of the CPP, and shore up its financial position (as the CPP’s architects envisioned), the government appears intent on reducing the benefits it pays. Unquestionably, such a move will force many more seniors, and particularly women, into a poverty-racked retirement. Far from securing the Plan, such benefit reductions are bound to confirm Canadians’ worst fears about the future of the Plan, and generate new doubts about the “next round” of cutbacks. And once this occurs, support for the program is likely to erode very rapidly, putting the entire program at risk.

Fortunately, such a tragic outcome can still be avoided if the federal and provincial governments come to recognize that the best way to “restore fairness” (the objective set out in the Information Paper, p.4) is to restore the public’s confidence in the program itself. This route will require the government to strongly stand up for the equity principles that the CPP reflects, and defend it vigorously from its self-serving private sector critics. It will also require that contributions be increased over time - much as has been anticipated since the Plan’s inception.

Before examining the detailed content of the Information Paper, the next section will provide some context for the discussion by considering several of the most common misconceptions about the CPP.

PART II - THE CPP UNDER SEIGE: IS THE PLAN FACING BANKRUPTCY?

The Myth of Bankruptcy

Recently, the CPP has faced a renewed attack from right-wing critics, whose ideological distaste for a successful publicly-administered pension system has led them to question its very existence. The tone of this questioning has reached epic proportions, as Canadians have read repeated references in the mainstream press to the imminent “bankruptcy” of the CPP - references purportedly citing the Fifteenth Actuarial Report of the CPP’s Chief Actuary. Even a former federal Revenue Minister has recently published a shrieking editorial in the business press which asserted categorically: “The public pension plan will be bankrupt within 20 years”1.

Canadians should be forgiven for believing him. Such assertions come on the heels of a continuous barrage of criticisms of the CPP appearing in the media, including the notion that it constitutes a “Ponzi pyramid scheme”2 which robs future participants, and that the Plan is now little more than a “ticking time bomb”3. There are also repeated references to a $500 + billion “unfunded liability” in the plan which threaten its solvency.4

This scaremongering is having its intended effects: many Canadians, especially younger workers, are losing faith that the plan will be there for them when they retire. The financial services industry is even incorporating these fears into their advertising - invest in our products now, they say, since the CPP will be gone by the time you retire. And this, of course, could become a self-fulfilling prophecy: if it becomes widely enough believed, all Plan contributions will be resented, and support will grow for the Plan’s abolition.

Nonetheless, the outrageous claims about the CPP’s imminent bankruptcy are simply wrong. The full quotation from the Report of the CPP’s Chief Actuary (which is rarely provided) indicates that the depletion of the CPP reserve fund is in fact a very unlikely hypothetical:

The financial projections shown in this report indicate that the existing 25 year Schedule contribution rates requires some revision to prevent the Account from becoming exhausted by the end of 2015.5

In fact, the Chief Actuary points out later in the same report that the design of the plan is such that the possibility of reserve fund exhaustion is virtually excluded by a mechanism known as the “Fifteen-year Formula”. This mechanism, he points out, come into effect even if the five-year review of the Plan’s operation fails to reach an agreement:

At the conclusion of each quinquennial federal-provincial review, the rates for the last 20 years in the 25-year Schedule must be confirmed or revised and the Schedule extended for the following five years. In addition to the 25 year Schedule, the 15 year formula…prescribed by regulation would come into operation in the absence of agreement or recommendation at subsequent quinquennial federal-provincial reviews.6

The possibility of fund exhaustion is thereby excluded by legislation, making the repeated warnings about the “bankruptcy” of the CPP spurious and misleading. Moreover, even without the protective mechanism of the 15 year formula, the Plan was designed so that contribution rates could be adjusted, as required, at intergovernmental reviews held every five years. Taken together, these built-in protections ensure that the Plan’s Account will remain adequate even through a period of rising expenditures attributable to demographic change. That was how the Plan was designed to work, and that is exactly how it does work.

The Spectre of “Unfunded Liability”

Confusing the hypothetical exhaustion of the CPP reserve fund with the inevitable bankruptcy of the CPP itself points to a second basic misunderstanding of the essentially unfunded character of the Plan. As a pay-as-you-go plan, the CPP transfers today’s worker contributions to today’s retirees. It is not a funded plan. The CPP reserve fund, officially termed the Account, is only intended to serve as a “cushion” for those periods in which expenditures rise higher than anticipated. This is why the fund is maintained at a level approximately equal to two years worth of benefits.

Since many Canadians are more familiar with the dynamics of private, fully-funded plans, this feature may not be immediately clear. A recent editorial in the Kitchener-Waterloo Record demonstrates this uncertainty:

If the amount in the CPP were frozen today, then there would be only 2 ½ years of payments left in the plan. That’s a scary thought…For comparison, look at the Ontario Teachers’ Pension Plan. If the amount in that pension fund were frozen today, there would be 40 years of payments left.7

Such apples-and-oranges reasoning demonstrates how deep the confusion is. Having “only 2½ years of payments left” is exactly how the Plan was designed. Because it is pay-as-you-go, the real asset of the CPP is not this fund at all but the future employed workforce and the economy as a whole. In fact, if perfect knowledge of future demographics and economic change were possible, the CPP could continue operating smoothly with no reserve fund at all, with simple contribution rate changes as required. As such perfect foresight is impossible, it was agreed that a reserve fund would serve as a cushion against unforseen expenditure increases. And since this cushion was never intended to be a long-term capital fund, the fact that it is kept to roughly two times the annual Plan expenditures can not be considered a “scary thought” at all.

Nonetheless, the critics of the CPP have worked desperately to capitalize on such confusion by lamenting the size of what they call its “unfunded liability” - which they put at more than $500 billion. They claim that with such an enormous “liability” the Plan is doomed - a claim usually followed by an appeal for its privatization. However, as we have seen, such claims are based on the fiction that the CPP is normally, or should ideally be, fully-funded. It is not, and it should not be. The fact is that CPP contributions - as intergenerational transfers - are most properly viewed as an investment in the future of the Canadian economy. As contributions are determined in proportion to earnings up the average industrial wage (YMPE), contributors can be assured that their future retirement wage will have the same relationship with the average industrial wage in place in the future - regardless of where the annuities market is, or which particular stock, mutual fund, or foreign market is “hot” at the time. The security of the CPP is based on the strength and stability of the Canadian economy as a whole - and not on the marketing or stock-picking savvy of a private investment advisor.

Given this fact, it is disappointing to find that the intergovernmental Information Paper failed to take this important opportunity to clarify some of these basic principles underlying the operation of the CPP. With its proposals for drastic benefit reductions, it appears to have tacitly embraced the false notion that the Plan is in mortal crisis - but offers no evidence in support of this. In making no fewer than 19 separate references to the uncertainty of the Plan’s “sustainability”, the Information Paper is certain to further heighten many Canadians’ worst fears. Quite clearly, these references are intended to generate popular support - and minimize popular opposition - to the cutbacks it proposes so that the contribution rates will “never have to reach 14.2 per cent.” (p.25)

Clearly, then, the Information Paper’s discussion of contribution rate increases is premised on the “unsustainability” of a 14.2% rate. As such, its proposals are almost entirely focused on benefit reductions. The next section will review these proposals in detail.

The Need for Higher Contribution Rates

It has always been recognized that the high birth rates of the post-war period will mean a higher eventual expenditure rate on CPP benefits. The Plan architects also designed a gradual phase-in period, understanding that the Plan’s first generation of beneficiaries would not have much of their work lives (10 years) to make contributions. While the Plan’s critics have pointed out that the full benefits received by the initial set of CPP beneficiaries reflected significantly more than the amount they had “paid in” to the Plan, it was always understood that this was the best and fairest way to proceed, and that the imbalance would be eventually overcome as more and more beneficiaries come to spend their entire work lives making CPP contributions. In keeping, the contribution rates began to rapidly increase in the 1980s, and have now reached 5.6% of pensionable earnings.

The analysis of contribution rates in the Information Paper is restricted to the narrowest consideration of cost factors, to the exclusion of other crucial concerns. In focusing almost entirely upon the possible contribution levels to be reached by 2030 (14.2% of insurable earnings), the paper has clearly assumed that such a rate would be untenable, and frequently refers to the “generational unfairness” of such an increase from the current rate of 5.6%. Leaving the existing Schedule of increases in place, it suggests,

…fails to deal with the fundamental challenge of whether it is either reasonable or fair to expect younger generations to pay such high contribution rates.8

On this basis, the Paper proposes a range of extensive benefit reductions and cutbacks, ostensibly aimed at “restoring” fairness and ensuring “sustainable” contribution rates.

However, despite frequent menacing references to an “unsustainably high” 14.2% rate, the paper goes on to demonstrate that if a simple speed-up of contribution rate increases were to be implemented over the next six years (the so-called “steady-state” rate), the eventual “peak” of the rate would be just 12.2%. What these projections demonstrate is that the problem with the CPP is not that its benefits or its costs are too high, but that the current contributions and benefits remain too low.

There are two other important factors left out of the Information Paper’s analysis. First of all, while the Paper poses the question of whether or not a 14.2% rate is fair, it does not meaningfully consider the possibility - it simply assumes that it is not. Had it genuinely sought to answer the question, it would have found that many comparable countries have much higher contribution rates for their earnings based public pension programs - and that the existing CPP has one of the lowest. As Monica Townson noted in their 1995 study Our Aging Society,

[In 1994], when Canada’s combined employer/employee payroll tax for pensions was 4.6% [it has since increased to 5.6%], the rate in the United States was 12.4%, while combined employer/employee rates of payroll tax for pensions in most other countries were between 16% and 18%, rising to as high as almost 23% in Austria, 20% in France, and 26% in Italy. In fact, with the exception of Iceland, which had a combined rate of 2%, Canada’s rate was by far the lowest of any other country in the OECD.9

The Information Paper does not mention this, nor refer to a comparative context at all.

Secondly, the Paper avoids any discussion of the poverty in which far too many Canadian seniors still live. The most recent Poverty Profile published by the National Council on Welfare notes that there remains a horrible reality of poverty among Canada’s senior population: approximately 567,000 people 65 and older lived in poverty in 1994, a figure which has increased by 13,000 since 1990.10 While each and every cut proposed in the Paper is likely to push more and more seniors below the poverty line, the Paper does not consider this. By focusing narrowly on the fractional contribution rate reductions each cutback would garner, it successfully avoids the uncomfortable subject of the continuing poverty of a significant portion of Canada’s retired population. In particular, the economic vulnerability of retired and widowed women is utterly and irresponsibly ignored.

We would submit that these issues must become central to this consultation process, with each of the options being examined not only in narrow dollar terms but in social terms - for example, given a 15% cut in the level of the retirement benefit, how many more seniors can we expect to see in poverty? How many of these seniors will be women? What will be the macroeconomic impact of recipients’ reduced purchasing power and disposable income? On such questions the Information Paper remains silent.

The Information Paper’s proposal for “steady-state” CPP financing is based on the clear need for higher contribution rates pointed out in the Chief Actuary’s 1995 report, and the accumulation of a small fund for “smoothing-over” the demographic bulge of the baby boom appears to be a reasonable response to a temporary situation. However, this change must be considered carefully. As it implies the formation of a larger reserve fund (equal to about six years of benefits), it is a step away from the pay-as-you-go character of the Plan. Such a step raises a number of new questions and potential problems - such as the question of how a larger fund would be invested, and whether this change would become a permanent feature of the program.

The Information Paper appears to favour a permanent partial-funding formula, and pointedly raises the possibility of a different investment policy. Despite the fact that “returns on the CPP fund have been comparable to returns on other pension funds over recent decades” (p. 29), the paper notes that there have been “criticisms that the current CPP investment policy does not maximize returns”. As a result, the door is opened to a “new investment policy” through which the larger, steady state CPP fund would be taken to the open market and “professionally managed” (p.30).

There are several problems with such an approach. First of all, the paper does not consider the impact of such a significant channelling of private investment into domestic capital markets, only “raises the issue”. This is despite the fact that a CPP fund carrying roughly six years worth of benefits would be substantial. If such a fund were accumulated by 2002, the fund would move from roughly $40 billion to over $150 billion. It is not at all clear that the securities markets in Canada could handle such a dramatic infusion, nor is it clear that draining these funds to international markets would be sound public policy.

Either way, the Information Paper provides no analysis or context with which to consider such complex questions. Before embarking on such a departure from past practice, we would hope that the governments would provide far stronger evidence in favour of such a change than the fact that “there have been criticisms” (p. 29) of past CPP investment policy. On this note, it is worth remembering how the Canadian government initially explained its CPP investment policy. The original public information pamphlet explaining the operation of the CPP outlined the policy as follows:

By lending the money which accumulates in the Fund to provincial governments…your province can use your contributions to advance the various public services which it provides. The funds will be loaned to provinces in proportion to the contributions resulting from employment in each province. Thus your contributions will be invested in safe securities, they will be used productively, and they will earn a return which will be used to help pay the benefits under the Plan.11

The Information Paper provides no grounds to justify a deviation from this initial approach.

While the Information Paper claims that fuller funding would have positive long-term impacts, such as “increased national savings, more investment, higher capital stock, reduced foreign indebtedness”, this is presented as axiomatic and without any detailed analysis. There is no consideration, for example, of the very real possibility that increasing pre-funding would increase the risks faced, and thereby proportionally reduce the ultimate security of workers’ retirement wages.

Moreover, the premise on which increased funding is based is that recent experience has seen interest rates remaining higher than the growth of wages (and overall economic growth). “By the 1980s and continuing into the 1990s”, the paper says, “interest rates were higher than the growth of wages. Today, it would be imprudent to assume any change in that relationship for the foreseeable future.” (p. 23) Of course, it would be imprudent to assume a change in this relationship. But this relationship is one which the federal government has a direct role in determining through its monetary and fiscal policy. In fact, we would submit that the historical trend being underlined here is a clear reflection of the political choices made by successive federal governments to over-emphasize inflation control at the expense of employment, growth, and wages.

In fact, this point was made eloquently by the Liberal Party itself during its last federal election campaign. The “Red Book”, as the primary policy document was termed, outlined the following excellent arguments in support of an active government which can and should directly create jobs:

Liberals, unlike Conservatives, fundamentally believe that government can be a force for good in society. Economic growth is not a matter for market forces alone. Jobs, health care, a safe and sustainable environment, equality for women and men, care for the very young and the aged, and the alleviation of poverty are societal issues that cannot be addressed simply by having each individual aggressively pursue immediate, narrow self-interest.

We are profoundly optimistic about the future of Canada. We do not believe that the only solution to our economic problems is another five years of cutbacks, job losses, and diminished expectations. We believe we have to take immediate measures to make our economy grow and to create jobs.12

It is startling that these important points can be forgotten so quickly, and social policy discussion can proceed under the assumption that economic growth and unemployment will continue much as it did under the Conservatives.

In fact, this point has recently been raised by one of the architects of the CPP itself, Tom Kent. As chief policy adviser for then-Liberal prime minister Lester B. Pearson, Kent oversaw the original design of the CPP. His view of the current problem facing the CPP is summarized in a recent media report:

The key problem is that real interest rates - the nominal rate minus inflation - are far too high, choking off economic growth and driving up unemployment, he says. “This is a real crisis: Can we do something about this?” Kent says. “The so-called pension crisis is a subsidiary of that problem.” The former top policy advisor and senior bureaucrat argues that Bank of Canada must shift its policy away from protecting the value of the Canadian dollar with high interest rates to one that encourages growth.13

What is revealing about this view is that it touches on the wider policy context that the Information Paper has ignored completely. Worse yet, the Paper has developed its proposals with extremely pessimistic projections and assumed that there are not other policy options to consider. What would be the impact, for example, of a modest upward adjustment to the Bank of Canada’s inflation targets, and a corresponding lowering of the interest rate? What impact would this have on employment and growth and, in turn, the funding of the CPP? Once again, as these questions are not even asked, the Information Paper provides no answers - nor even an indication that these are reasonable and important policy considerations with respect to changing the character of the CPP.

Finally, while there appears to be few grounds for increasing the size of the CPP fund, it may occur. Unfortunately, the Information Paper provides no indication as to how this larger fund would be managed. Would it, for example, be administered “in-house”, or would it be sent to professional pension fund managers? To whom would the managers be accountable, and what relationship would they have to a democratic political process? Through what communications process would Canadians learn of their operations and keep them accountable? And how can Canadians be assured that a larger fund would be invested responsibly and ethically, in Canada? Canadian workers - the contributors to the plan - require detailed answers to these crucial questions before any final decisions are made.

On this question in particular, the Information Paper has outlined proposals fraught with risks, and without providing the analysis or the context with which Canadians can fairly evaluate the available options.

Year’s Basic Exemption

Following its discussion of partial funding of the Plan, the Information Paper also suggests a reduction of the year’s basic exemption (YBE) to 10% from the current 15%:

Reducing or freezing the basic exemption would result in a substantial decrease in the plan’s contribution rate because contributions would be levied on a broader earnings base. (p. 30)

However, the Paper itself points out that this exemption is one of the most important elements of the Plan’s progressivity, since “lower income earners are exempted from contributions on a larger proportion of their earnings than are higher income earners.” (p. 30) What the Paper fails to add is that the result of such a change would be a drastic increase in contribution rates specifically for low income earners.

The Information Paper’s first proposal for a CPP benefit reduction targets the basic amount of the retirement benefit for new retirees. It points out that reducing the current benefit by 10%, from 25% of the YMPE to 22.5%, future contribution rates could be reduced by 1.25%.

As noted above, any reduction of this nature would be devasting. It would reduce the role of the CPP in Canada’s established retirement income system - and leave retirees that much more dependent on other means, especially private savings. And, once again, this proposal is presented without any consideration of the adequacy of the current level of retirement income being drawn from the CPP.

In this light, it is revealing to again consider some international comparisons of public pension spending. Monica Townson has shown that in 1991, Canada’s public pension spending “averaged 4.2% of GDP, compared with 6.5% in the United States, 9.5% in the United Kingdom, and ranging to a high of 14.8% in Austria. With the exception of Australia, Canada’s spending was the lowest as a percentage of GDP of all the OECD countries.”14

This is not a record of which we can be proud, and it is an insult to Canada’s current and future retirees for the government to suggest that our seniors deserve even less. Our aim should be achieving a level of public pension spending which is closer to the international standard - not further from it.

Years Required for Full Pension Drop-Out Provisions

Several of the proposals of the Information Paper are geared to reducing expenditures by making it more difficult to qualify for the CPP benefits. For example, the proposal to reduce the “drop-out” provision which allow workers to exclude 15% of their lowest income years in the calculation of their average lifetime earnings. Reducing this dropout from 15% to 10%, the Paper points out, would garner a 0.31% reduction in future contribution rates.

What this does not mention is the regressive impact such a change would inevitably have. Once again, it is the lowest income workers which have the highest need for such a drop-out period. The savings from such a reduction would almost all be drawn from Canada’s lowest income contributors.

Far worse still is the proposal to place a limit on the total number of years that could be dropped out: “For example, the general drop-out and child rearing drop-out combined could not exceed 15 years.” Such a proposal not only targets lower income workers, it specifically targets the women who are and will be the vast majority of those who utilize the child rearing which was designed to provide a minimal assistance to women whose child rearing responsibilities leave them with lower life time earnings, on top of lower average incomes, than men.

Furthermore, recent changes in labour market conditions have made the existing drop-out provisions more vital than ever. As Monica Townson has pointed out,

With ever longer periods of high unemployment, an increased need for lifelong learning, training and retraining, not to mention the increase in non-standard work such as temporary and contract jobs, a strong case can be made for increasing the drop-out provision rather than reducing it. Cutting it back to 10% would have the greatest impact on the most vulnerable - particularly those who are trapped in non-standard and unstable jobs.15

Stripping this provision would guarantee that women take the brunt of this cut, and continue to face the prospect of retirement into poverty.

Raising the Age of Entitlement

The Information Paper also proposes an increase in the age of entitlement to 67. The Paper claims that concerns that later retirement might limit the employment prospects of younger workers are unjustified.

It is important to note that when the baby boomers start to retire, it is expected that there will be no shortage of jobs, so delayed retirement would not hurt young people.16

Unless the paper is suggesting that the challenge of unemployment will have been completely solved by their proposed implementation year of 2011, it would appear that any time such a drastic change is made, it will directly result in thousands more workers remaining in the workforce, with no complementary increase in the number of jobs available.

Recent trends have demonstrated that more and more Canadians are interested in retiring sooner, rather than later - even at the expense of a higher retirement income. In fact, most workers now retire before age 65. In fact, as Monica Townson has pointed out, “61% of people who started receiving their CPP retirement benefits in September 1995 has retired prior to age 65, even though by doing so, they received an actuarially reduced benefit.”17

Moreover, women are much more likely to retire early than men, often stating that marriage and family responsibilities were the main reasons for retiring early. An increase in the age of eligibility is likely to disproportionately negatively affect women, and will serve to further reduce the “early retirement” pensions of all those who choose to retire at, for example, age 60.

Finally, this proposal highlights the unique vulnerability of older workers to an increasingly insecure labour market. For example, older workers who lose their jobs often have more difficulty finding other employment. With a higher age of eligibility, these workers suffer a double blow, as they are not eligible for either an “early retirement” or a normal CPP for two years more than they otherwise would have been (age 62 for early retirement, and age 67 for “normal retirement”). Once again, such a proposal would place the burden of supposed “cost-saving” onto the most vulnerable workers, and in particular, women. As in other areas, the Information Paper fails to even consider this issue.

Partial Indexing of Pension Benefits

Considering the angry response of seniors when the former Conservative government of Brian Mulroney attempted to de-index their pensions, it is shocking to find a similar proposal in the governments’ Information Paper. A limitation on inflation protection to the rate of inflation minus one percentage point, it says, would reduce expenditures in 2030 by 9 per cent. The Paper even makes a reference to how such a measure would “lessen the burden” of the CPP on younger generations.

Clearly, the employment of this terminology - the “burden” that the CPP will place on the “young” - is a direct attempt to play on the existing insecurities of seniors, and the widespread misconception that their legitimate retirement needs constitute a “burden” on their family, or on society generally. This reprehensible implication must be firmly and continually resisted, and it is disappointing that the Information Paper failed so badly in this regard. Once again, the CPP is a social insurance type pension program funded by workers and employers themselves - it is not social assistance or welfare, nor is it charity. The fact that its costs are increasing can not and should not be blamed on seniors themselves.

The specific proposal to partially de-index would reduce expenditures only because the purchasing power of CPP pensions would be eroded over time, even with relatively low inflation. Once again, women would be the biggest losers, as they tend to have lower pensions to begin with, but also live longer than men. Seniors who live the longest, almost all of whom are women, would be the hardest hit.

Disability Benefits

The Information Paper proposes a range of changes to the CPP’s disability benefits as well, and once again does not consider their probable consequences. In particular, nearly all of the proposed cuts and eligibility changes are likely to have the immediate and direct result of increasing disabled workers’ reliance on other forms of social support. The Information Paper has ignored the financial implications of such a transfer, whether for important programs such as workers’ compensation, or for the families and individuals affected.

For example, increasing the qualification period to require contributions to have been made in 4 of the past 6 years (instead of the existing 5 of the past 10 years) will have the effect of throwing disabled Canadian workers onto social assistance. This will leave them not only doubly punished for becoming disabled, but with the additional stigma attached to social assistance recipients. Moreover, such a change would directly target the most vulnerable categories of worker - the young, the precariously employed, and recently immigrated Canadians.

The Information Paper also proposes to limit the eventual retirement pension of disability pensioners to the average wage that could be calculated to the time of disability (as opposed to the current provision which includes the indexed disability pension up to age 65). Inevitably, such a change would create a second tier of pensioner - those unfortunate enough to be forced from the labour force due to disability. Not only will they have been left with the reduced wage of their disability pension while under 65, they are punished once again by drawing a reduced pension. As pointed out above, the basic pension benefit is already low by international standards. Lowering the benefit yet further specifically for disabled pensioners would, once again, target those workers least able to afford further loss to their retirement incomes.

The paper also complains that disabled workers have an “advantage” over those workers who opt for a reduced early retirement pension. “Disabled Canadians,” it says, “receive, when they reach 65, more generous retirement benefits than workers who retire early and receive reduced benefits.” (p. 39) For this reason, the paper proposes the reduction of the disability pension to a level which would “treat disabled persons at retirement commensurate with those who take early retirement.” (p. 40) This proposal, and the comparison on which it is premised, make no sense. How can workers who voluntarily opt for early retirement be considered comparable to those who are forced from the workforce due to disability? Moreover, workers who do opt for early retirement do so, in most cases, after a full work life uninterrupted by serious disability, and their CPP retirement benefit will reflect this. On the other hand, those drawing disability benefits are already likely to have a lower benefit entitlement at 65. Pushing this entitlement still lower, through an actuarial reduction, pretends that these two types of beneficiary are comparable, and equally capable of sustaining benefit reductions, which they are not.

There are several general points that must be made with regard to the disability provisions of the existing CPP. Canadians with disabilities are generally poor. In 1986, surveys showed that 46% of CPP disability benefit recipients had incomes below the low-income cut-offs or poverty lines. But by 1991, that figure had climbed to 60%18, and is likely that this trend has continued to rise in recent years. Certainly, this relatively low-income recipient category should be the last target of expenditure reductions in the CPP.

It has also been widely noted that the expenditures on disability claims have sharply increased since 1992. The Canada Pension Plan Advisory Board issued a report in December 1994 indicating several contributing factors, including: the longer duration of unemployment following the last recession; a one-time surge in applications following a 1992 change in the eligibility rules; the increasing requirement by private insurers that the recipients of long-term benefits from private insurance plans apply for CPP benefits; and the fact that more and more provincial programmes are urging eligible social assistance recipients to apply for CPP disability benefits.19 The last item can be viewed as a consequence of the “offloading” of federal funding to the provinces in the form of cutbacks to transfer payments. Nonetheless, a full explanation remains difficult. As the Report of the Advisory Board notes, “until a more thorough analysis is made, it is difficult to assess whether these higher rates of incidence are a permanent or temporary phenomenon, and the long-run impact on CPP costs.”20

As this was the conclusion of the CPP’s own governing Board, it is disappointing to find that the Information Paper does, in fact, conclude that these higher disability-related costs are permanent, and accepts the Chief Actuary’s cost projections on that basis. On this note, Monica Townson has suggested that:

It is significant that the rapid increase in disability claims has apparently already started to slow and it may well be that higher spending on disability benefits will not be a permanent feature of the CPP, as the Chief Actuary has assumed.21

Should this prove the case, the contribution rate projections contained in the Information Paper would be rendered useless.

Given the above, we find that the Information Paper’s proposals for reducing the costs of disability provision to be especially unjustified. On this issue, we recall two of the recommendations made by the 1994 report by the CPP Advisory Board:

2. We see no need to amend the general eligibility provisions for the CPP Disability Benefit at this time.

3. We do not propose a change to the current level of the CPP Disability Benefits at this time.22

We find no evidence in the intergovernmental Information Paper to support the proposals that it has presented.

Survivor Benefits

The Information Paper points out that tiny cost reductions could be affected with limitations on the combined benefit rules. This would meant that someone receiving a combined disability/survivor benefit would no longer be entitled to the current maximum disability pension plus 25 per cent of the maximum retirement pension (currently $182 per month). Once again, a disproportionate number of CPP beneficiaries entitled to such a combined are women, and are already faced with the prospect of a single income retirement. Overwhelmingly, such recipients will be low income retirees, and unable to afford a reduction in their incomes. Such a change would push thousands more into poverty.

Similarly, a small expenditure reduction is proposed through the discontinuation of the death benefit. The Information Paper justifies this proposal by pointing out that Canada has seen “three decades of rising incomes among the elderly” (p. 41). This optimistic reference to the real economic situation of Canadian seniors - perhaps the only example in the entire paper - is sadly inadequate to assessing the impact of the elimination of the death benefit.

The reality is that, in general, while Canada’s elderly population has seen modest increases in their incomes since the CPP was introduced, this is primarily due to the introduction of public pension programs such as the Old Age Security (OAS), the Guaranteed Income System (GIS), and the CPP itself. Thinking that this gradual improvement is justification for a cutback is shortsighted in the extreme. Moreover, with the rise in recent years of chronic high unemployment, insecure forms of employment (partial, temporary and contract work), and the overall erosion of collective bargaining rights, it is not at all certain that the trend toward higher average retirement incomes will continue.

PART IV - FLAWED ASSUMPTIONS

Contribution Rates Will Reach 14.2%?

The entire premise of the cutbacks proposed in the Information Paper is that 14.2% contribution rates are “too high” or “unsustainable”. The Paper concludes by alluding to “serious concerns that future generations will be unable or unwilling to pay contribution rates in the 14 per cent range.” (p. 46) As a result, the entire focus of the paper is to explore various cutback options, geared to reducing the possible peak rate of 14.2%.

There are several strong reasons for remaining sceptical of such a singular cost reduction focus. First of all, the projections themselves have been derived from a set of assumptions which may well prove inaccurate. For example, there is no exploration in the Information Paper of the possible impact of adjustments to immigration policy. The Chief Actuary’s report, on the other hand, points out that even minor adjustments to immigration policy would result in CPP contribution rate reductions. Had the Information Paper explored the dynamics between the public pension program and demographic factors such as immigration, it would be more clear that there are a range of other political choices available which would not result in CPP benefit reductions.

Secondly, the Information Paper continues to refer to the 14.2% projected rate for 2030 despite the fact that administrative changes already enacted are projected to reduce future expenditures:

The administrative actions taken to date are projected to reduce CPP expenditures in the long term by about 1.5 per cent (a 0.22 percentage point reduction in future contribution rates). (p. 37, emphasis added)

While it is clear that these changes have already occurred, and that the resulting peak rate for 2030 should therefore be no more than 14.0%, the Paper continues to refer to the higher,14.2% figure. In fact, these administrative efficiencies even appear in a table of “possible CPP measures” (p. 43), making them appear to be still uncertain. The result, of course, is to artificially inflate the peak rate figure used throughout the Information Paper, with the apparent aim of justifying the cuts proposed.

And there is more. Because contribution rates are calculated only on “pensionable” earnings (for 1996, earnings between the YBE of $3,500 and the YMPE of $35,400), the actual contributions of an average wage earner is reduced by the amount of YBE - 10% (this is even higher for those earning below the YMPE). Thus, a future contribution rate of 14% can also be viewed as a rate of 12.5% on actual earnings of a future average income earner. Considering half of this rate is paid by employers, this leaves workers’ highest possible contribution rates - with no changes to benefits, and with conservative assumptions - at 6.25%.

The point is that the Information Paper had done everything to maximize the appearance of a future possible contribution rate, without acknowledging how reasonable the rates really are by international standards. Canadians deserve far better from what is purported to be a “consultation” paper designed to inform and stimulate public input.

There Are No Alternatives?

The projections of the governments’ Information Paper are based on the assumption that future federal and provincial governments will continue to pursue a neo-liberal macroeconomic policy framework, which includes the deregulation of labour markets. We would strongly assert that such a scenario is neither inevitable nor preferable, and that a positive policy re-orientation would result in significant economic changes which would reduce the eventual costs of the CPP.

While a comprehensive outline of such a policy re-orientation is beyond the scope of this submission, we refer the governments to consider the progressive policy options outlined in the 1996 Alternative Federal Budget23, which demonstrate that spending reductions can be affected alongside focused efforts on job creation and the easing of monetary conditions. Adherence to such a policy framework would not only ensure that CPP contributions would not escalate nearly so rapidly nor so high, but it would also have the additional effect of lowering the still shameful poverty rate of Canadian seniors.

The Information Paper also contains a mixed message as to future economic conditions in Canada. While we noted above a reference in the Paper to the current “shortage of jobs” ending with the retirement of the baby boom generation, it is unclear whether this prediction of full employment by 2011 has been incorporated into the Paper’s other assumptions and projections. Moreover, the Paper provides no analysis or evidence to support such a claim.

At the same time, the Paper appears to assume that the recent trends toward declining real wages and high interest rates are unavoidable. To return to a passage cited previously:

In the 1960s and 1970s, the growth in real wages and salaries was very high - 5.1 and 4.8 per cent. It exceeded the real rate of interest. But by the 1980s and continuing into the 1990s, this situation had reversed. Interest rates were higher than the growth of wages. Today, it would be imprudent to assume any change in the relationship for the foreseeable future. (p. 23, emphasis added)

However, by effectively assuming the opposite - a continuation of this relationship, the Paper has accepted as a given that these two key economic indicators will remain unchanged. This is especially ironic considering the dramatic promises made by recent federal governments about the rewards workers would reap from policies such as continental free trade, monetary controls, privatization, and industrial deregulation.

It is incumbent on the federal and provincial governments to openly acknowledge the political determination of these crucial economic indicators. Interest rates, in particular, are set outright by the Bank of Canada - which is directly accountable to the federal government. The implication of the above passage that these are external, unpredictable forces to which we must adjust is highly misleading, at best.

Finally, because the Information Paper considers current economic and labour market conditions as a “given”, and assumes that a 14.2% peak contribution rate is both inevitable and excessive, the only options it considers are the various benefit reductions listed above. If we accept such cuts to the CPP, the effect will be to adapt a key component of our social program infrastructure around the (quite changeable) reality of today’s high unemployment, essentially facilitating its perpetuation. If the governments genuinely sought the “sustainability” and “fairness” of the CPP, they would cooperatively shift their focus to addressing the real underlying problems: high unemployment, and slow economic growth brought on by tight monetary policy.

Impacts On Women

The specific economic position of Canadian women is not considered by the Information Paper, despite the fact that women are much more likely than men to have no sources of retirement income other than government-sponsored plans. A number of other economic, sociological and demographic differences between men and women leave women far more vulnerable to the kinds of cuts envisaged by the Information Paper.

For example, in February of this year, women drew an average of $280 per month in CPP retirement benefits, compared to $487 per month for men.24 This reflects the fact that women’s wages are generally much lower than men’s, and more women than men spend extensive periods outside the paid work force. Obviously, any reductions in benefit levels will be much harder on women than men.

This reality is illustrated most clearly if we consider all of the strengths of the existing program, as recounted by a recent study prepared for the Canadian Advisory Council on the Status of Women:

The CPP/QPP is an ideal pension plan for women. It covers all workers, whether employees or self-employed, full-time or part-time…It accommodates women’s work patterns by allowing time out of the paid labour force for childraising and providing for complete mobility between jobs and regions of the country, without loss of benefits. It provides benefits for spouses of contributors at retirement, death and divorce, even where the spouse did not work outside the home. It provides for those with disabilities and for dependent children of disabled or deceased contributors. It is fully indexed for inflation.25

It is worth noting that so many of these notable strengths of the program have been targeted in the Information Paper for some form of cutback or reduction, with no assessment of its impact on women.

In fact, in previous discussions of the public pension system, a number of trade unions, women’s and retiree organizations have proposed that the basic retirement benefit should be increased to 50% of covered earnings, from the current 25%. While there may not be public support for such an increase at this point, the proposed 10% reduction in the benefit would be a move in the wrong direction. What is desperately needed is the political leadership that would be required to guide the Canadian system toward a more adequate plan with more comprehensive coverage.

Finally, while the Information Paper itself does not consider how seniors with reduced benefits can be expected to make up for the difference, it is clear that the assumption is that private savings systems can do the job. However, there are several reasons that this is a particularly inappropriate approach for women.

To begin with, while 51.8% of employed men were covered by workplace pension plans in 1992, only 42.5% of women were so covered. It is a concern as well that these numbers have begun to decrease in recent years, leaving more people dependent on the CPP. Moreover, while 9% of employed men worked part time in 1992, 25% of employed women did so. Such part time work often affects workplace pension plan eligibility, and always affects the eventual benefit.26

The legacy of past discriminatory practices is also continued by many currently employed Canadian women who remain affected by previously existing policies. Monica Townson has pointed out a range of examples:

Workers were often not allowed to join an employer-sponsored pension plan until they reached a certain age, but the age at which women could join was sometimes set later than the age at which men could join. Sometimes the way in which pension benefits were calculated was different for women than for men - usually giving women a less advantageous benefit. Often, women were obliged to retire at an earlier age than men. All of these provisions resulted in women receiving lower retirement benefits than men did in similar circumstances…despite [recent] changes, there are undoubtedly women today whose financial future will be affected by this kind of past discrimination in their employer’s pension plan.27

Although this cohort of women will be, fortunately, the last to suffer these specific forms of discrimination, they will still be required to make adjustments in their savings should the CPP be cut back, and few will have the resources or the time required to adequately do so. This ensures that the objective of 75% pre-retirement income replacement will continue to prove elusive.

Beyond this particular group of women, the economic position of women continues to leave them far more likely to face poverty in their retirement. In 1990, 21% of men between the ages of 45 and 54 earned less than $20,000; for women in this age group, 55% earned less than $20,000.28 As this profound gender gap in earnings is certain to continue into the foreseeable future, we can be confident that the impact of any benefit reductions will be felt most painfully by retired women.

Shifting Retirement Savings Into The Private Market

One of the primary weaknesses of the proposals outlined in the Information Paper is the assumption that a greater reliance on private retirement savings is both achievable and to be preferred. This assumption can be questioned on several points.

First and foremost, far more than the “savings” of the CPP, retirement income from private savings programs, such RRSPs reflect the earnings capacity of the saver. Higher income earners derive both more tax sheltering benefits from the initial saving, and a higher eventual retirement income from their greater accumulated saving. Of course, enjoying higher disposable incomes in the first place means that high income earners can more easily afford to take advantage of these programs. This will remain true in the event of cutbacks to the CPP.

A further drawback to increasing retirees’ reliance on private savings is the extent to which those savings are re-directed into the private financial and marketing machines which underpin the investment “industry”. All of the various costs associated with private savings schemes, whether in administration, advertising, asset transfers, etc., can be expected to increase proportionally with any increase in the proportion of retirement savings that move into the pre-funded, private sector. As one newspaper columnist recently noted,

A host of powerful financial interests - banks, trusts, insurance companies, stock brokerages, investment managers and pension consultants - stand to benefit if CPP protection shrinks.29

This is in contrast with the existing CPP which, as is widely acknowledged, carries very low administrative costs - none of which are wasted on competitive advertising.

Finally, and perhaps most importantly, existing private savings vehicles such as RRSPs are far less secure than the CPP. While some private savings generate relatively high real rates of return for their owners, there is significant room for actual losses - particularly for those investors who are least experienced. Because higher-risk assets such as equity stock, real estate, and foreign currency denominated instruments are allowable RRSP investments, many savers have been allowed to face far more risk than is appropriate for their retirement.

Worst of all, there is no certainty that RRSP savers will be able to maintain their balance if and when they face financial hardship. The recent recession saw significant amounts of RRSP redemptions (roughly $1 for every $5 saved). Statistics Canada reports that some 650,000 Canadians under 65 withdrew $4.4 billion from their RRSPs in 1993.30 All such withdrawals are, of course, permanent losses from the Plan. The Information Paper fails to even consider mechanisms which could make these savings more secure.

A great deal of recent media attention has been given to the question of “intergenerational equity” and the affects of anticipated contribution increases on youth. The increased contribution rates are often depicted in the media as a crushing burden about to be passed on by the current generation to the next. This line of reasoning occasionally even lapses into sweeping cultural generalizations about the supposed characteristics of the baby boomers, as seen in a recent front page Toronto Star article:

Self-obsessed, socially dominating baby boomers. Not too many will weep at their come-uppance…They’ve been spoiled since the day they sallied out of school into careers of their choice and started planning their early, redefining leisure retirements an hour-and-a-half later.31

Such representations utterly fail to capture the economic reality of thousands of lower-income and chronically unemployed workers of this generation. Far worse, they serve to exacerbate generational tensions, and engender resentment.

Unfortunately, the governments’ Information Paper has strongly reinforced this “issue” by making frequent references to the need to “restore fairness”, and even raising the frightening scenario of CPP collapse by claiming that the current review is about making “the plan sustainable, so that working Canadians - particularly those now in their 20s and 30s - can be sure the plan will be there for them in their retirement.” (p. 8) Such scaremongering is bound to confirm doubts in the minds of this same group of workers, so as to win support for the idea that cutbacks are necessary to “save” the plan.

However, by handling the question of “intergenerational” issues in this manner, the Information Paper not only reinforces the erroneous notion that the Plan’s survival is in real jeopardy, but it also exaggerates the extent to which workers that follow the baby boom bulge are negatively affected by the changing demographics.

The basic challenge facing Canadians today is one of fairness and equity…Today’s CPP pensioners have paid much less than their benefits are worth. In contrast, future generations will be asked to pay considerably more than their benefits are worth…To ensure the sustainability of the CPP, steps must be taken to be as fair to future generations as possible. (p. 4)

Several points must be made in response to such arguments. First of all, it is simply wrong to suggest that future generations will be “asked to pay more than their benefits are worth”. This suggestion appears to be comparing the CPP benefits of future generations to what they might have received had they had a fully-funded plan - but a fully-funded plan would be very different in that ultimate returns are uncertain. For this reason, this is neither a fair comparison nor an accurate statement.

Secondly, the paper does not establish any measure or “test” by which to objectively determine what a “sustainable” plan would look like. It is simply assumed that the “steps” referred to involve expenditure reductions in the form of benefit cutbacks. However, there is no context in which to evaluate how any particular cut will improve or diminish sustainabiilty - the implication is that cheaper is more sustainable, and the issue is left at that.

Most importantly to the inter-generational transfer question is the last few words of the above passage: that the “steps” proposed will make the CPP as “fair to future generations as possible”. It is not at all clear why today’s young workers should view a diminished CPP retirement benefit to be more fair when they have been asked to pay higher contribution rates - if anything, the way to make it “fairer” to future workers is to increase the benefits available.

Moreover, such passages underline the extent to which the generational contribution rates have been blurred with the initial phasing-in period of the CPP. Clearly, the initial set of CPP beneficiaries (full benefits began in 1976) received a pension which represented significantly more than what they had paid into the plan - but this is a simple reflection of the phasing-in period of the plan. These workers had no choice in the matter - and the phasing-in period is one-time only. All comparisons of retirees in 2030 to today’s retirees - or the retirees of the late 1970s - are spurious unless the distorting effects of the phase-in period is explicitly accounted for. Of course, it never is, and the plan’s right-wing critics continue to condemn this supposed “imbalance”. Unfortunately, the Information Paper has continued this methodological fiction by pointedly claiming that “today’s youth will need to pay much more into the CPP than their parents paid, yet receive no more in the way of benefits.” But clearly such comparisons are useless unless the phase-in at the program is clearly accounted for. Disappointingly, the Information Paper has not done so.

Of course, this does not mean that the question of “generational equity” is not relevant. In fact, in recent years, a serious divide has emerged between today’s young workers and those already established in the workforce. Youth unemployment is beginning to look like a chronic problem, and younger workers are particularly vulnerable to the rise of precarious forms of work: part time, temporary, and short term contract employment. However, what this generation needs desperately is jobs, today, not slightly lower CPP contribution rates in twenty years.

Undoubtedly, young workers who successfully enter the labour force and find decent paying jobs will be only to happy to pay the necessary contributions for a decent, portable and indexed pension. Those young workers who are unemployed, or who will struggle for occasional and low paying work will be far more concerned with improving their job situation - not paying 2% lower CPP premiums. Again, the pressing generational issue of the 1990s is high unemployment and insecure employment, and governments have the means at their disposal to address these issues by creating jobs. These issues will not be addressed through fractional reductions in their CPP contribution rates. Indeed, by proposing cutbacks under the guise of “generational equity”, the governments have badly confused this important question.

Alternatives to CPP Benefit Cuts

Because of the misleading assumptions built in to the intergovernmental Information Paper, there is no scope for exploring possible alternatives to the cutbacks, or other means of improving the financing of the CPP. Nonetheless, there are options for progressively adjusting the financing in ways that will ease the transition to an “older” society.

For example, Monica Townson has noted that one creative option would be to adjust the formula by which contribution rates are calculated with respect to the YMPE.

Another option would be to require workers to contribute on earnings in excess of the YMPE, while continuing to restrict benefits to some percentage of the YMPE. This option would represent a transfer from higher income earners to lower income workers, and should be considered as a way of funding reforms designed to strengthen the CPP and improve benefits for low income workers.32

Strangely, while this option could be refined further, the Information Paper precludes such options.

It should also be remembered that there have been substantive proposals for improving the CPP for low-income workers. In the early 1980s, for example, a Quebec government committee developed a proposal which would double CPP benefits to a 50% replacement rate for those earning up to half the average wage, and 25% thereafter, up the average wage. The effect of this two-step replacement rate would be a range of replacement rates between 37.5% and 50% of average earnings.33 In fact, given current trends in labour relations and the fact of diminishing employment security, it is likely that such an adjustment would be more relevant for the next generation of retirees and their communities.

CONCLUSION

The narrow, cost-cutting focus of the governments’ Information Paper distracts attention from the real issue of adequate income