As 2013 comes to a close, Canada's federal-provincial finance ministers will meet to determine how the Canada Pension Plan (CPP) can safeguard a secure future for retiring Canadians. The meeting just before the holiday season is an ideal time to announce plans for enhancing the CPP – a major pillar of the income security system for most Canadians.
Last week, Minister of State for Finance Kevin Sorenson repeated Ottawa's position that any changes to the CPP entail a huge cost to Canadians. However, this need not necessarily be so.
CPP benefits are paid to workers who contributed to it via employment withholdings. Employees and employers each contribute 4.95 per cent of employment income up to $51,000. Benefits range from a few dollars a month for those with minimal work histories to just over $1,000 a month for those who have worked and contributed for 40 years at relatively decent wages. Still, the average benefit of $600 per month does not meet the needs of many retirees.
Proposals at earlier finance ministers' meetings include increasing contribution rates to 6.5 per cent. However, some provinces like Alberta as well as the federal government fear that a rate increase will stifle job creation. Other provinces like Ontario counter that job creation did not suffer when contribution rates were last raised from 3 per cent to 4.95 per cent in the late 1990s.
The time to make decisions for an enhancement CPP is overdue for three reasons. First, it will take several years before plans are implemented given that governments provide considerable advance notice for pension reforms, and phase in changes gradually.
Second, Canadian payroll taxes (which include CPP contributions) have remained flat over the last decade. According to findings published last month by the World Bank and PriceWaterhouseCoopers, payroll taxes in Canada ranged from 12.4 per cent of profits in 2004 to 12.9 per cent in 2012. In comparison, the average payroll taxes in the G8 countries ranged from 26.2 per cent to 25.6 per cent during the same period.
The current average Canadian payroll tax is higher than the average U.S. payroll tax. High payroll taxes can stifle job creation since they are imposed on the employer regardless of whether the company earns a profit. However, the average profit tax in Canada has declined significantly in recent years, and is now significantly lower than the average profit tax in the U.S. Such lower profit taxes offer firms incentives to hire that can offset the disincentives imposed by a higher payroll tax.
Third, Canada is fortunate to have the lowest tax compliance burden among the G8 countries according to the World Bank/PwC study. In fact, we are the only G8 nation ranked among the top 10 in regard to the administrative ease of paying taxes. From a compliance perspective, an enriched CPP contribution is not a new tax, but an increase in an existing one.
To ensure that the CPP is foundationally strong to meet the income security needs of an aging work force, increases in contribution rates and income ceiling base should be accompanied by raising the age of eligibility for benefits from 60 to 62, or even later. Delaying benefits ensures that there is more money to be paid out. Increasing the age of eligibility also conveys the expectation that Canadians should plan to work longer.
Last year, the federal government raised the eligibility age for Old Age Security, the other pillar of public pensions in Canada. Starting in 2023, the age at which Canadians will qualify for Old Age Security will gradually rise from 65 to 67 over six years.
Discretionary tax-assisted retirement savings plans such as the RRSP contribute only modestly to the retirement income security of low and middle income earners. The incomes of these groups often do not keep up with inflation, and even brief periods of unemployment erode savings. Only 24 per cent of eligible tax filers contributed to an RRSP in 2011, down from 26 per cent in 2010. Unused RRSP contribution room reached almost $684-billion as of 2011, demonstrating that simply asking workers to save more – even with tax incentives – is not effective.
Given the evidence supporting the need for CPP enhancement, and the lack of other ways to provide greater income security to low and middle income workers, there do not seem to be any grounds for Ottawa to block reforms. Canadians are counting on decisiveness by the finance ministers when they meet this weekend.
Amin Mawani is an associate professor of taxation at the Schulich School of Business at York University. Thomas Klassen is a professor of political science at York University.