In a press release issued on December 8th, the Minister of State for Finance Kevin Sorenson argued that now is not the time to consider provincial proposals to enhance the Canada Pension Plan (CPP), given the fragile nature of the current economic recovery. This raises the obvious question as to when is the right time to consider long-term structural changes, which would improve retirement savings for most Canadians?

The 2008-2009 recession and the accompanying decline in interest rates have had a significant negative impact on an individual’s ability to save for retirement. The federal government has responded by introducing the Tax-Free Savings Account and the Pooled Registered Pension Plan. Although welcomed, these measures will not be nearly enough to ensure reasonable retirement income for many low- and middle-income Canadians in the future.

A number of provinces have made proposals to enhance the CPP, involving the increasing of pensionable benefits, financed through higher employee and employer contribution rates.  The Minister of State for Finance has rejected consideration of these proposals, arguing that the economy is still too fragile and that higher contribution rates would kill jobs and result in lower disposable income for workers.

It is certainly true that economic growth and job creation have been sluggish for some time, largely due to slow global economic growth and continued restraint by all levels of government.  But the Government’s own forecasts show economic growth picking up substantially over the next couple of years in both Canada and the United States.
When is it a good time to introduce major long-term structural changes? The last significant structural changes to the CPP (and Quebec Pension Plan) were made in the mid-1990s.  At that time, CPP contribution rates were doubled, an independent investment board was established and the program was put on a sustainable basis.    The arguments used by the Minister of State for Finance were not unlike those against the changes made at that time. Opponents to CPP reform argued that doubling the CPP premium rates would have a major negative impact on economic growth and job creation. This did not happen.

On January 1, 1991, the previous Conservative Government replaced the federal manufacturer’s sales tax with the Goods and Services Tax, thereby leveling the playing field between domestic producers and their foreign competitors and providing the federal government with a much more predictable and stable revenue base. This major structural change was introduced while the economy was actually in a recession.  Arguments were made about the timing of such a major structural change but the Mulroney government felt that the change could not be delayed any longer.

The fiscal restraint measures introduced in the mid-1990s were also criticized by some as being ill-timed and too large, which they felt would exacerbate the affects of the earlier recession.  However, here too, the Liberal government felt there was no other option at the time, but to take significant and credible fiscal action to address the financial crisis.

Bold structural measures have been introduced in the past to address pressing structural issues.  They were not put off to the future. In fact, they were introduced when the economic outlook was much more fragile than today.  Ultimately, all of these measures helped strengthen economic growth.

Today, there is no fiscal crisis.  The Harper Government has set a political commitment to balance the budget in 2015-16, but this is not an economic or fiscal imperative.   To ensure that they achieve this political commitment, a number of restraint measures have been introduced in the 2010, 2012 and 2013 budgets as well as in the November 2013 Update of the Economic and Fiscal Projections.

Although the Harper Government provided a detailed analysis of what the impact of the fiscal stimulus measures on economic growth and job creation, the Minister of Finance has yet to provide any details of what impact the restraint measures might have on economic growth and job creation.  The Parliamentary Budget Officer (PBO) has produced estimates of the impact of the restraint measures on economic and job growth.  The PBO estimated that the November 2013 Update restraint measures will result in the level of employment being about 22,000 net jobs lower in 2016 than would have been the case in the absence of these restraint measures.  These restraint measures were introduced at a time when the “economic recovery is still fragile”.  Why would the Minister of Finance introduce additional restraint measures if the economic recovery is still fragile?  Instead, why hasn’t the Government introduced measures that would lead to stronger economic growth and long-term prosperity? Perhaps, the Minister of Finance believes in “austerity driven growth”.

The next three years would in fact be a good time to phase in increases in CPP rates.  Changes to CPP contribution rates could be financed without having a significant impact on economic growth, on an employee’s pay check or on an employer’s payroll.  This could be done through co-ordination with the upcoming reductions to the employment insurance (EI) premium rates.  In September 2013, the Minister of Finance froze the EI premium rates to 2016.  In the November 2013 Update, the employee EI premium rate is forecast to decline from $1.88 per $100 of insurable earnings in 2016 to $1.47 per $100 of insurable earnings in 2017.

The EI premium rate could be reduced earlier. According to the current legislation, once the EI Operating Account achieves a surplus, the EI premium rates are to be reduced accordingly.   In the November 2013 Update, the EI Operating Account is projected to be in an operating surplus in 2015-16. The employee premium rate could be reduced in 2015 by a minimum of 5 cents, with a decline of at least 7 cents for employers, with larger reductions in 2017. As we noted in our assessment of the November 2013 Update and confirmed by the PBO in a recent article entitled “Revised PBO Outlook and Assessment of the 2013 Update of Economic and Fiscal Projections”, the Government is using higher-than-required EI premium rates to achieve its balanced budget target in 2015-16, despite the denial of this by the Minister of Finance. The Government could phase in higher CPP contribution rates while at the same time lowering EI premium rates. This would require the Minister of Finance to undertake serious discussions with his provincial counterparts, something that he has been hesitant to do to date.

Let’s remember that in the May 2006 Budget, the Harper Government proposed to examine the possibility of allocating a portion of any surplus at year-end larger than $3 billion to the Canada Pension Plan and Quebec Pension Plan.  Although this proposal was never adopted, it may be time for the Harper Government to consider other options to finance improved benefits. It would do a lot more for the economy than the tax cuts the government has promised to introduce when the deficit is eliminated.