Globe and Mail columnist Jeffrey Simpson.The Globe and Mail
Pension reform was a signature triumph of prime minister Jean Chrétien's first government. Now, pension reform has become an early
triumph of Prime Minister Justin Trudeau's first government.
Pension reform sounds easy, but it is not. For who, after all, can be against "reform?" Actually, a lot of people, and institutions.
Billions of dollars are at stake. Seven provinces plus Ottawa must agree to change the Canada Pension Plan. Higher contributions are never popular. The short-term pain of higher contributions is more easily identifiable, and therefore more politically controversial, than the long-term gain of increased pensions later. Business generally opposes any increase in premiums, claiming that it will kill jobs.
Paul Martin, finance minister in Mr. Chrétien's government, surmounted all these obstacles in 1996. Premiums and payouts were raised and a new arm's-length institution for investing the money was created. Both were far-sighted moves that put the Canada Pension Plan on a solid financial footing. The changes were among Mr. Martin's fine legacy as finance minister.
The CPP was placed on solid actuarial foundations, but were the payouts going to be enough for tomorrow's changed demographics with more elderly people and fewer young people having saved for retirement? Many retirees won't have plans at all; others will have small plans; still others will have defined-contribution plans that are less secure than defined-benefit plans.
What to do? What not to do was follow the Stephen Harper Conservatives, who listened to the business community and insisted that higher contributions would cripple the economy. Instead, the Conservatives proposed a voluntary plan for employees in companies without a pension plan. Predictably, uptake was small, because if plans are voluntary as opposed to mandatory, a whole lot of people will not participate, being more worried about today than tomorrow. Targeted plans don't cover as many people as do mandatory ones.
Governments could have designed a new system or bolted something new onto the CPP.
Either option would have rendered the new system more complicated than the old, thereby defying a principle of sound administration that, where possible, you choose simplicity over complexity.
Canadians know the CPP. They trust it. Their money is well invested, evidence for which are the good returns their money has earned. Risk is widely shared. If a problem exists, it lies in the age of full receipt – 65, a date set a long time ago when people lived up to a decade less than today.
Major countries in Europe and the United States have set higher ages for receipt of pensions and other income support for the obvious reason that people are living longer than when the programs were introduced. Raising that age has proved to be a bridge too far in Canada.
Unfortunately, the Trudeau government reversed the Harper government's increase of the age for receipt of the Old Age Supplement to 67 from 65. That move was based on Finance
Department projections that the cost of the OAS would have ballooned to $108-billion in 2030 from $38-billion in 2011.
The Conservatives estimated that by raising the age of receipt to 67 in 2023, the federal Treasury would save about $11-billion a year. That sum must now be found somewhere, somehow by means the Trudeau government has not yet determined.
Small business griped immediately about the higher contributions that companies will have to pay. There is a way, however, of easing their pain, provided that the Liberals fulfill an election campaign promise.
One of their promises was to drop the small-business tax rate to 9 per cent from 12 per cent. This was dubious policy, since why should small businesses have a lower tax rate than larger ones? Nonetheless, the Liberals made the promise. However, they conspicuously failed to fulfill it in the last budget. By doing it in the next budget, the Liberals could reduce costs with one hand for small business while increasing them with the other. Not pretty, to be sure, but perhaps a reasonable compromise.
In any event, the new contributions agreed to by the Trudeau government and a sufficient number of provinces will be phased in slowly and won't start until 2019. And they will be small to start. The pain will be eased, but the eventual gains will be real.
The 1996 reforms were among the wisest decisions of the Chrétien years. These new reforms stand on the shoulders of what happened 20 years ago.