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canada pension plan application |
Solutions to the Canada Pension Plan Mess
by Jay Neiman EXECUTIVE SUMMARY
The Canada Pension Plan is in a state of crisis. The
Fifteenth Actuarial Report on the CPP indicates that contribution
rates will have to rise to over 14% of earnings in the future to
pay for benefits in 2030. Total contributions are expected to go
from $10.4 billion in 1994 to $165.3 billion by 2030; a 1,473% increase.
Such a massive increase in payroll taxes is not acceptable to the
vast majority of Canadians nor is it a policy conducive to economic
growth. The options for CPP reform tabled by the federal and
provincial governments (concerned only with raising contribution
levels and lowering benefits) fail to address the inherent flaw
of the CPP -- the pay-as-you-go system This pyramid scheme or ponzi
game makes for an extremely volatile public pension system and necessitates
an intergenerational transfer of wealth. Under the governments’
proposed reforms, contribution rates may have to be raised again
and again. The Canadian Taxpayers Federation rejects the short-term,
job-killing, tax-and-spend approach advocated in the CPP Federal-Provincial
Information Paper. Instead, the Federation recommends a winding
down of the public pension plan and replacing it with a mandatory,
defined-contribution, fully-funded, privately-managed plan. Adopting
a Mandatory Retirement Savings Plan (MRSP) would produce larger
pensions in relation to contributions and would negate the necessity
of perpetual tax increases. No new taxes or increases in taxes should be levied
to pay for the shortfall between contributions and expenditures
either in the lead up to, or in the period following, the dissolution
of the CPP. Instead, the unfunded liabilities of the plan should
be paid out through "recognition bonds" given to contributors
upon retirement until such a time as the debt is exhausted. A reduction in questionable budgetary expenditures,
the sale of Crown assets, debt amortization and a possible reduction
in CPP benefits would avoid having to raise taxes in order to reduce
and eliminate the CPP’s liabilities. A successful MRSP requires separating death and disability
costs from the retirement portion of any new plan, while still providing
individuals and their dependents with income in unfortunate circumstances.
This task is accomplished by requiring every Canadian worker to
purchase death and disability insurance under a privately managed
and individually accounted system.
INTRODUCTION
The Canada Pension Plan is in a state of crisis. Unless drastic measures are taken immediately, the plan faces the exhaustion of its reserve fund and a tax increase the likes of which Canadians have never seen. The socioeconomic spin-offs of the current dilemma have the potential to be extremely destabilizing to the country. Any reductions to CPP benefits will likely be met with a great deal of hostility by those who have been contributing for many years and by those who are already retired. Conversely, increases in contribution rates with the prospect of much lower returns may very well be construed as an attack on the living standard of younger Canadians. The Fifteenth Actuarial Report on the CPP indicates that contribution rates will have to rise to over 14 per cent of gross earnings in the future in order to pay for benefits in 2030. Total contributions are expected to go from $10.4 billion in 1994 to $165.3 billion by 2030; a 1,473% increase. Such a massive increase in payroll taxes is not acceptable to the vast majority of Canadians nor is it a policy conducive to economic growth.
The solutions put forward by Canada’s governments to deal with the growing crisis have been predictable. In their Information Paper for Consultations on the Canada Pension Plan, the federal, provincial and territorial governments of Canada outline a list of so-called "options" to save the CPP. Failing to recognize the inherently flawed structure of the plan, the governments’ proposals centre on tinkering with benefit and contribution rates to adjust for inept management and past failures in accurately projecting economic and demographic trends. The options for reform contained in the Information Paper are nothing more than short-term solutions that will drive up taxes and drive down incomes.
The Canadian Taxpayers Federation (CTF) rejects this short-term approach in favour of a comprehensive revision of the CPP and the Canadian retirement income system in general. Specifically, the CTF recommends a winding down of the public pension plan and replacing it with a privatized system of individual retirement plans. A mandatory, defined-contribution, fully-funded, privately-managed plan with specified individual accounts would correct the problems inherent in the CPP and produce larger pensions in relation to contributions than the existing plan. Equally as important as instituting a Mandatory Retirement Savings Plan (MRSP) itself are the details surrounding the transition from the current plan to a fully-funded MRSP. It is the Federation’s position that no new taxes or increases in existing taxes should be levied in order to pay for those benefits not covered after the dissolution of the CPP. Instead, CPP liabilities should be paid for out of general revenues and through the sale of Crown assets.
After years of mismanagement and neglect, it should be obvious that the Canada Pension Plan is no longer sustainable under the current circumstances. There is no guarantee that the options for reform set out in the governments’ Information Paper will serve to put an end to further contribution increases or benefit reductions; taxpayers will remain susceptible to the fundamental structural problem of the CPP. Canadians no longer have faith in politicians and bureaucrats to look after them in their golden years. It is time that the government gave Canadians back the ability to look after themselves.
THE SYMPTOMS AND THE REAL PROBLEM
There are a number of reasons for the imminent collapse of the CPP. The federal Department of Finance has identified four of the most basic causes that have led to the decay of the public pension system.
The failure to predict demographic trends...
First is the problem of changing population trends. As the Canadian population ages, there are fewer workers for every retired person. It’s a problem because the CPP works on a pay-as-you-go basis. That means that there is no substantial investment account from which benefits are drawn. Instead, this year’s benefits are financed from this year’s contributions. As the baby boomers retire they’ll be putting an enormous strain on a smaller group of younger workers. If these younger workers were to continue to contribute at the same rate as the baby boomers have, the funds in the CPP would run out by about 2015.
The decline in real wage growth...
Second is the problem of growth. When the CPP was put in place economic growth was strong. Planners of the CPP thought this rapid growth would continue. It didn’t. Economic growth has slowed down considerably over the past few years, and along with it, increases in wages and salaries. In the period 1960-69 real wage income growth averaged 5.1%; through 1980-89 growth dropped to 2.1%. This poor planning has resulted in contributions being outpaced by expenditures.
Ironically, much of the decline in wage growth is attributable to taxes generally, and payroll taxes - like CPP contributions - specifically. From 1980 to 1992, the average Canadian family’s tax bill increased by $2,078 in constant (1992) dollars. During the same period, non-governmental family income plummeted by $2,316 in real terms, while income after tax fell by $1,832. The decline in real wage growth, then, may be said to be at least partially attributable to the CPP itself. Source: Canada, Office of the Superintendent of Financial Institutions, Canada Pension Plan: Fifteenth Actuarial Report as at 31 December 1993 (Ottawa, 1995) p. 19.
By 1993 the shortfall between revenues and expenditures had reached an all time high of $5.1 billion. The only thing preventing this shortfall from precipitating a collapse of the plan were the returns achieved through limited investment income.
Benefit enrichment...
In the midst of completely erroneous estimates of population trends and economic growth, the government decided to enrich CPP benefits. It instituted full indexation (beefing up payments to keep pace with inflation), paying survivor benefits to widowers and widows regardless of need and allowing them to keep the benefits after remarriage, increasing disability benefits, and a number of other extras. It’s estimated that benefit enrichments have boosted the contribution rate by 2.4 per cent.
Runaway disability benefits...
Finally, according to the Department of Human Resources (HRD), the costs of disability benefits have been soaring despite the fact that Canadians are healthier than they’ve ever been. How has this been allowed to happen? In part, the criteria for receiving a disability pension has gradually become incredibly lax, with bureaucrats handing out taxpayers’ money based on a person’s financial status rather than any actual disability. At other times HRD "may have contributed to some inappropriate grants," and has even continued to grant pensions after claimants have recovered from their disabilities. It’s almost impossible to estimate how many billions of tax dollars have been spent in this fashion.
Source: Canada Pension Plan Annual Report, Statistical Bulletin and Unpublished Statistics from Income Security Programs, Human Resources Development
The real problem...
While all the factors listed above have contributed in some degree to the unsustainability of the CPP, they are only symptomatic of a much larger problem. The fundamental problem with the CPP is the fact that it is based on a pay-as-you-go funding system, where the current year’s benefits are paid out of the current year’s contributions. Some commentators have referred to the pay-as-you-go system as a ponzi scheme or a pyramid scheme.
It should be obvious to those considering CPP reform that all pyramid schemes eventually collapse. They work well as long as the amount of contributions outpaces the amount of expenditures. This does not necessarily mean that the number of contributors must be much greater than the number of beneficiaries, but simply that the total dollars paid in plus investment income must be greater than or equal to the expenditures of the plan. Economic growth can compensate for a declining population but that growth must be accompanied by low interest rates in order to get the population to subscribe to the plan in the first place. If the rate of return is lower in the plan than one could find outside the plan, the incentive to participate no longer exists. The CPP now faces this prospect -- contributors are being forced to invest in savings vehicles which limit maximum returns.
Source: Canada, Office of the Superintendent of Financial Institutions, Canada Pension Plan: Fifteenth Actuarial Report as at 31 December 1993 (Ottawa, 1995), p.101 and J. Bruce MacDonald, Actuarial Monograph on the Canada Pension Plan, July, 1995, p. 32.
The solution to the CPP dilemma is to replace the inherent instability of the pay-as-you-go system with a fully-funded, individually-accounted plan. The federal and provincial governments cannot seriously expect one group of Canadians to pay heavily for another (while receiving meager if any benefits) based on their year of birth. Annual deficits and accumulated debt have already shifted wealth between generations; CPP reform should not exaggerate this fact. Tinkering around the edges by reducing benefits, increasing contributions and reevaluating population and growth estimates will not alter the basic problem of the CPP as a pyramid scheme. There is no telling how far contribution rates (read: taxes) can go. Under the governments’ proposed reforms rates may have to be raised again and again. If we seek to avoid the mistakes of the past, we must accept the only intelligent option available -- mandatory retirement savings plans. The experiences of other jurisdictions give us reason to believe in the utility of this approach.
THE GLOBAL EXPERIENCE
When it comes to public pension reform, Canada is not the only country facing challenges. Most other industrialized countries are also contending with social security systems buckling under the weight of aging populations. In recent years a clear trend has emerged toward the reduction of pension benefits, cost-control, and greater reliance on private sector retirement savings plans. Often governments have chosen to phase in these changes to lessen their immediate impact. In general, these developments have been energized by growing fiscal pressures. Three countries in particular provide case studies for dealing with the crisis in public pension plans through the implementation of MRSPs.
Australia...
Prior to 1986, most of the Australian workforce relied on publicly funded social security for their retirement income. Effective that year, however, employers were required to extend pension plan coverage to lower level employees as a means of easing the anticipated burden on the public system. By 1992, all Australians were required to provide for their own retirement as opposed to relying solely on social security. Mandatory employer pension plan coverage was further extended and "allocated pensions" (like MRSPs) were permitted under new legislation. This new private system of retirement savings has become a significant source of investment capital.
Britain...
Since 1978, residents of the United Kingdom have been allowed to opt out of the public system and contribute funds to privately-run pension plans. A special surtax was introduced on withdrawals to compensate for lost revenues to the public plan, but the reduction in future beneficiaries also reduced the public plan’s liabilities. The British system is now largely self-funding.
Chile...
In 1924, Chile became the first country in the Western Hemisphere to initiate a government sponsored social security program. Chile’s pay-as-you-go system suffered, however, from many of the same flaws as our own Canada Pension Plan, and by the late 1970’s, Chilean pension benefits began to outstrip contributions.
Faced with a crumbling system, the Chilean government became the first in the world to replace its public system with a privately-funded and administered plan. The new system, which went into effect on May 1, 1981, is a true defined contribution pension plan with a mandatory contribution rate of 10% of earnings. Chileans’ pension benefits are based on total individual contributions plus accrued interest. Initially, participants in the old system were given the opportunity to switch to the new plan. After 1982, all new employees were required to join the new plan and by 1992 between 90% to 95% of all persons under the old system had shifted their savings.
Contributions to the system are paid entirely by the employee; there is no employer payroll tax. At the initiation of the program, however, all employers were required to increase workers’ wages by 18% which equaled the increased cost of the new system to the worker but was less than the reduced cost to the employer.
Chileans’ pension funds are invested in security portfolios administered by private organizations known as administrators of pension funds, or APFs. Twenty-one APFs, which compete with each other on the basis of investment returns and service, are closely regulated and must comply with government mandated financial and investment requirements. To further ease the transition to the new system, the government issued recognition bonds, which effectively recognize the value of the obligation incurred by the government (the taxpayers) to those who had participated in the old system. The government bonds pay 4% annual interest and add to the accumulated contribution value of the APFs at the time of retirement. Interest is paid out of the government’s general revenue fund and is in no way supported by the pension system. Other benefits include lower overall labour costs, higher wages, increased national savings, greater retirement system equity, and a large infusion of capital into domestic financial markets.
The changes instituted in 1981 to the Chilean retirement system have been a great step forward. Even the country’s trade unions, which initially denounced the plan, have changed their position. The leader of the nation’s textile workers’ union admitted that their original position was "a mistake," and that the private system is "very popular among workers." It appears that Chile has sparked a privatization revolution in social security systems worldwide. Within the last two years, Peru, Argentina, and Columbia have all, to a greater or lesser extent, privatized significant portions of their social security systems along the lines of the Chilean model. As well, Mexico has implemented a new privatized system operating alongside the old, state-run model. When will Canada follow suit?
THE COMPONENTS OF A SUCCESSFUL MRSP
A mandatory plan...
The Canada Pension Plan was designed to ensure, through state coercion, that Canadians would set aside some portion of their earnings to be used later as retirement income. This forced savings approach assumes that, left to their own devices, Canadians would not save for their retirement but would instead spend virtually all of their disposable income. Indeed, there may be some validity to this theory. Canada’s household saving rate is estimated to be only 8.0% as a percentage of disposable income for 1996. That is the second lowest saving rate in the G7, and less than half of that of Japan at 16.5%.
Others argue, however, that Canada’s high rate of taxation prohibits private investment because it severely curtails the amount of disposable income available for investment purposes. With federal and provincial taxes eating up 46% of the average Canadian family’s income, it is no wonder that Canadians do not contribute more in retirement investments. Irrespective of one’s personal views on the spending habits of Canadians, however, a mandatory savings program serves to fulfill a fundamental principle that ought to be included in any reformed pension system -- that of universal coverage.
A mandatory component is needed to ensure that the entire paid labour force is covered, thereby limiting the financial strain placed upon noncontributory retirement income programs, such as the newly announced Seniors Benefit.
Defined contributions...
The CPP’s unfunded liability of $556 billion at the end of 1995 is based on calculations that assume a set of fixed benefits. In other words, the CPP is, for all intents and purposes, a defined benefit plan. The annual pension is equal to 25% of the average of the contributor’s pensionable earnings adjusted for wage growth. The advantage of a defined benefit plan is that it allows individuals to plan for their retirements with a great deal of certainty. Every Canadian knows how much he or she can expect to receive from the CPP on a monthly basis given his or her annual income. The disadvantage of a defined benefit plan is that it makes no allowance for fluctuations in contributions or returns on investment. Pledging to pay people a fixed amount of their incomes without any guarantee that those funds will be available when they retire constitutes a false promise.
But the government has a way of getting around the built-in problem of defined benefit plans. It simply increases taxes. The only way to finance a defined contribution plan in the case of a deficit is to ask others to make up the shortfall, meaning they will pay more for less -- the current case for the CPP. Canadians can protect themselves from these erratic and inequitable tax increases only by moving to a system based on defined contributions, where payees can expect to reap what they have sown -- no more, no less.
Full funding...
The federal and provincial government’s answer to the mounting liabilities of the CPP is something described as "steady-state financing":
The idea behind steady-state financing is simple: contribution rates would increase faster than currently legislated in the short term so that the CPP fund can be built up to help pay for benefits in the future and reduce contribution rates in the long term. Steady-state financing is a form of partial funding.
Once again Canada’s governments have produced a band-aid solution to a problem of massive proportions. Note that the definition above indicates that steady-state financing is a form of partial funding; that is, our governments have no intention, at least at this point, to reduce the debt of the CPP. They simply want to manage the growth of the debt through higher taxes. Not only does the steady-state system fail to address the plan’s unfunded liabilities, but it also permits further tax increases. "Steady-state" does not imply a fixed, continuous contribution rate, but rather one that fluctuates with the liabilities of the plan. Steady-state financing, then, is just as prone to increases in contribution rates as is the present system. The only difference is the timing of those increases.
Mandatory Retirement Savings Plans, on the other hand, would put a cap on future pension tax increases, and would provide a launching pad for the process of reducing and eliminating the CPP’s unfunded liabilities. Unlike the Canada Pension Plan, which has seen a contribution rate hike every year since 1987, the contribution level for MRSPs would be fixed at a set percentage. Because MRSP plans would contain individual accounts, there would be no need to increase rates. The plan would be fully funded because each individual’s contributions are dedicated to that same individual’s benefits. No one would be benefiting unduly from another contributor’s labour, as now occurs under the pay-as-you-go scheme, and hence no liability would be incurred. In addition to freezing the growth in the unfunded liabilities of the CPP, MRSPs would actually begin to reduce the debt itself. The contributions now going to finance the CPP would instead end up in private plans, providing a much larger pool of investment capital than currently exists. That money would, presumably, lead to an increase in economic growth and therefore an increase in revenues which the federal government could use to pay down the pension debt. A fully-funded plan should be the first order of business in any public pension system.
Private management...
We have already seen how public management of the Canada Pension Plan has led to run-away expenditures on benefits, and perpetual rate increases. Private management of MRSPs would solve both these problems and overcome another salient short-fall of the CPP -- investment returns. The World Bank has advocated the introduction of privately-managed plans based on the poor showing of government-managed plans in a number of countries juxtaposed against the high rates of investment returns seen in private plans. As David Slater points out:
It is readily acknowledged that higher rates of return than those earned by the CPP can be realized through either a fully-funded government-managed plan or a privately-managed plan.
Combining full-funding with a privately-managed plan would, without a doubt, produce much higher returns than the current system. In Chile, the rate of return on privately-managed portfolios has been roughly 14.5%. There "has also been a considerable addition to capital accumulation." Privately-managed plans have further,
greatly reduced (indeed, have so far eliminated) government temptation to meddle - to use social security as a device to redistribute to the politically connected or to finance questionable investments, public or private.
It is sometimes remarked that even if good investment returns are achieved on average, substantial variations will occur from time to time, and among various market programs. This, it is said, leads to a great deal of uncertainty about the level of benefits one might obtain if one were to purchase an annuity upon retirement using the funds from the MRSP. To overcome this obstacle, MRSPs simply have to be designed to allow for both the purchases of annuities or for the phased withdrawal of funds from the MRSP. This type of system would maximize the return for individual Canadians by allowing them to purchase an annuity when interest rates are high or to wait if rates are lower than the return they expect. Irrespective of such minor considerations, given the evidence, it is next to impossible to argue that government-run plans have an advantage over privately-managed systems. Even if Canada’s federal and provincial governments maintain the CPP, they must seriously consider handing the plan over to private managers.
THE TRANSITION TO MRSPs
Honouring Canada’s commitment..
The World Bank’s 1994 report on old age pensions suggests three options for reforming the contributory element of public pension systems. It suggests a transition can be accomplished by either downsizing noncontributory programs like the new Senior’s Benefit, while reallocating contributions to a second mandatory plan; holding the public benefit relatively constant while raising contribution rates; or, "recognizing accrued entitlements under the old system and agreeing to pay them off while starting a completely new system right away." The Canadian Taxpayers Federation is very much in favour of the third option.
The faster the Canada Pension Plan can be wound-up, the faster the growth in its liabilities can be stopped. Yet the federal and provincial governments cannot simply pull the plug on those Canadians who have contributed to the plan. The liabilities owed at the time of dissolution of the CPP must be paid back. Ensuring contributors receive a reasonable return on their investment requires calculating the implicit debt that is owed under the CPP and figuring out a way to finance that debt without creating an inordinate burden on taxpayers.
Calculating the debt...
The graph below has been constructed from information provided by the Chief Actuary of the Canada Pension Plan. It represents a scenario in which the CPP is wound-up in the year 2008. At that time the Chief Actuary estimates a total unfunded liability of $488.5 billion (assuming an increase in contribution rates to prevent the Account from becoming exhausted in 2015 and 5% cumulative interest to the end of 2008 on those contributions accumulated to that time). The CPP could be wound-up at any time; 2008 is an arbitrary year. What the graph illustrates is not just the total amount owed under the Chief Actuary’s scenario, but how that liability might be distributed over a period of approximately 47 years if to were to be paid off through "recognition bonds" as each contributor reaches the age of sixty-five. Obviously, the federal government could not pay off the CPP debt in one fell swoop. It could, however, deal with the unfunded liabilities of the plan over a period of years. Recognizing this fact is important, but even more so is the method of financing the debt.
Source: Canada, Office of the Superintendent of Financial Institutions, Correspondence with Gordon Hall of William Mercer (Unpublished Data)
Financing the debt...
A number of options for financing the CPP shortfall have been suggested. As we have seen, Great Britain introduced a special surtax to finance its transition to privately-run pension plans. The C.D. Howe Institute has suggested a similar tax -- an additional flat personal income tax levied at a rate around 1.5% to 2.5% to pay for the outstanding liabilities after dissolution of the plan. Alternatively, the Institute has remarked that a payroll tax of 4.5% over the first three decades after winding-up the CPP would cover the debt. These tax hikes are also predicated on reforms undertaken to increase the CPP Account before dissolving the plan. The Institute recommends raising contribution rates to 7.5%, separating the disability programs from the rest of the CPP, increasing retirement age to 70 over a 20 year period, and scaling back to 60% all benefits accruing from 1998 forward.
While the Federation can appreciate the fact that building up the CPP Account before dissolution would help to equalize the tax burden across generations, we are opposed to increasing taxes in the transition phase from CPP to MRSPs. Reducing benefits would, however, be a step in the right direction in terms of equalizing inter-intergenerational returns. While many of those now receiving benefits can expect a return on their contributions of over 30%, their great grandchildren will be lucky to realize one-sixth of that amount -- about 5 percent. It hardly seems fair to perpetuate this inequity in a transition period between systems.
The Federation is also opposed to any new taxes or tax increases dedicated to financing the remaining CPP liabilities after winding-up the plan. Surtaxes, an increase in personal income taxes, payroll taxes, or any other form of taxation designed to pay for the leftover liabilities would only serve to limit job creation, reduce personal income, and stunt economic growth. Instead, the Federation recommends paying for the unfunded liabilities out of the federal budget. This does not mean that the federal government should be given the latitude to raise taxes in any number of areas to increase the general revenues from which the liabilities would be paid. Rather, liabilities should be paid for out of existing program spending levels, indexed to the growth rate of population plus inflation as outlined in the Federation’s proposed Taxpayer Protection Amendment. This would, no doubt, necessitate a reevaluation of the federal government’s spending priorities. Invariably, funds now devoted to such activities as the subsidization of businesses, Crown corporations, special interest groups, and other spending areas would need to be reduced or eliminated to pay for the CPP’s obligations. Reducing or eliminating questionable spending and using that money to buildup the CPP Account before the plan is terminated would help to reduce inter-intergenerational inequities by distributing the tax burden more equally. For example, a $11.7 billion savings could be achieved from the federal budget over the next five years leading up to the dissolution of the CPP simply by eliminating business subsidies alone. This money could gain interest in the CPP Account (or another dedicated account) before it is needed to pay for the plan’s outstanding debt. The sale of Crown assets, the proceeds of which could be put toward CPP liabilities, would further ease the tax burden on future generations. The federal government held $58.7 billion in assets in 1994-95. Given the enormous total federal debt, the Prime Minister and his cabinet would do well to look at applying some of these assets to a reduction in CPP liabilities.
Careful planning, a reduction in questionable budgetary expenditures, the sale of Crown assets, debt amortization, and a possible reduction in CPP benefits would avoid the trap that Canada’s politicians seem to want to jump into -- raising taxes indefinitely to pay for an inherently flawed public pension system. Further increases in CPP premiums is not the answer. Payroll taxes kill jobs. According to a recent Bank of Canada study, employer payroll taxes increased from 10.6% of wages and salaries paid in 1989 to 14.1% in 1994. This increase in taxes "is estimated to have reduced the level of employment by about 1 per cent in 1993." Any increase in CPP premiums are, therefore, likely to exacerbate, rather than solve, the current dilemma.
Disability and survivor benefits...
The Canada Pension Plan is much more than a retirement income system. Disability pensions, disabled contributor’s child’s benefits, death benefits, surviving spouse’s pensions and orphan’s benefits have led to a remarkable escalation in the cost of the Plan over the past several years. If a MRSP is to be successful, these costs must be separated from the retirement pension of any new plan, while still providing individuals and their dependents with income in the case of death or disability.
This task could be accomplished by requiring every Canadian worker to purchase death and disability insurance -- much along the same lines that drivers are required to carry liability insurance. As with auto insurance, Canadians would need to purchase enough coverage to provide for them in case of emergency. The level of premiums required to pay for death and disability insurance is a matter of debate, but they would have to be high enough to cover the same benefits available under the current CPP arrangement. As with the MRSP, and automobile insurance, death and disability insurance should be privately managed and individually accounted.
Of course, those death and disability benefits which form a part of the CPP’s current contingent liabilities should be paid out in the same fashion as retirement benefits in the transition to an MRSP. The Government of Canada has an obligation to honour its commitment to those who have contributed to the CPP and who’s expectations have been based on the current system.
CONCLUSION
It should be painfully obvious by now that the Canada Pension Plan is beyond repair. The pay-as you-go structure of the Plan is unsustainable given current demographic trends.
Proposals to retain the CPP through benefit reductions and premium increases ignore the fact that an ever shrinking workforce cannot indefinitely sustain the pension benefits of an ever increasing population of retirees. It would seem, however, that Canada’s politicians reject this thesis, believing instead that there is no limit to the amount of taxes they can raise to pay for the CPP. This type of thinking is not only abhorrent to the people who pay the bills -- it is also economically irresponsible. A study by the economic analysis and forecasting division of the federal Department of Finance indicates that "the increases in compulsory contributions to CPP and QPP (the Quebec Pension Plan) from 1986 to 1993 reduced employment by nearly 26,000 jobs," and that further premium hikes would double the job toll by 2000, and then double it again by 2016. Payroll tax hikes will, then, only lead to a reduction in the labour-force, lower revenues and the corollary of increased pressure on the pay-as-you-go scheme
The federal and provincial governments must act now to wind-up the CPP and replace it with a Mandatory Retirement Savings Plan. Such a plan would provide a retirement income for all Canadians with higher rates of return . It would also resolve the instability problem of the CPP through the creation of a fully-funded, defined-contribution, individually accounted pension plan. Those who have contributed to the plan would receive a reasonable return on their investment as the contingent liabilities are paid back over approximately five decades through the issuance of recognition bonds. Most importantly, an MRSP system would avoid the massive tax increases required, and apparently desired by some, to sustain the CPP.
Our governments owe it to the people they represent to manage tax dollars in the most efficient and responsible manner possible. Continuing the CPP would be an abrogation of that trust. It is in the interests of all Canadians - those of today and tomorrow - to move to a more responsible pension system.
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