Pay Now Or Pay Later

February 1, 2014 | By Adey

Pension reform presents a dilemma with serious political and social ramifications.

The Ontario government has been talking about pension reform since well before Kathleen Wynne became premier. The reform the Liberal Party of Ontario would like to see is a significant increase in Canada Pension Plan (CPP) premiums and payouts. The government’s goal is to double the CPP payout over time. Wynne’s argument is that using CPP is a good way to have taxpayers invest in their own futures by saving now. It is no secret that projections show that the baby boomers will have a profound saving shortfall when they retire.

Ontario is not the only province advocating CPP increases. Nova Scotia, Newfoundland, Manitoba, Quebec and Prince Edward Island are all in favour. That is not enough to change the law, however. CPP rules can only be changed if at least seven provinces representing two-thirds of Canada’s population, plus the federal government vote for the change. At press time there are six provinces or 70 per cent of the population in favour. All that is necessary for the change would be one more province to get on board and the feds, of course.

And there is the rub. The Conservative Party of Canada is against CPP expansion. If the pension regime is increased at all, it would prefer some kind of voluntary plan that will mimic the investment flexibility of Registered Retirement Savings Plans (RRSPs). They do not want to impose federal legislation that will increase payroll taxes. Their argument is that an increase in payroll taxes will hurt job growth. If CPP is to be expanded, they want to wait until the economy strengthens. That may be a long time, of course. In fact, it might be never.

For that reason, the Liberal Party of Ontario has been floating the idea of a provincial pension plan, which would mean new legislation, new rules and an entire new Ontario bureaucracy. An Ontario pension plan will cost a lot of money and add even more red tape to business operations. It is not a good idea as a savings vehicle but it is very effective as a way to put pressure on the federal government.

The federal government points out that many economists in Canada, the U.S. and the U.K. believe that an increase in payroll taxes would hurt job creation. Payroll taxes are taxes paid by employers. In Ontario for example, the payroll taxes currently in effect are the employer’s share of CCP and employment insurance (EI) and the Ontario Health Tax.

The economic argument is that an increase in payroll tax makes employees more expensive. More expensive labour leads to the search for cheaper substitutes, which results in increased automation and moving jobs offshore. Automation has some positive aspects for the economy. Offshoring simply shifts economic activity somewhere else, which is not good. So, increasing the payroll tax is bad, but it is not the only bad thing about an increased CPP. Employees pay half of CPP themselves and an increase would lead to workers saving more and spending less. That sounds virtuous, but a decline in spending results in lower economic growth. Which means it hurts.

As they point out at every opportunity, the federal government is philosophically against the expansion of government. It wants government to become a smaller player in the economy, which it hopes will increase economic growth. This means the federal government is not just against expanding CPP, it would like to reduce the welfare net in general.

A year ago, the Tories oversaw a change in CPP rules that encouraged people to work longer and contribute longer to the program. That is sensible given that people are healthier and have longer life spans. Today a typical Canadian begins working around age 21 and retires around age 65. The savings from those 40 plus years of working are supposed to fund about 20 years of retirement – an impossible task for most people. Working an extra seven years to 72 reduces the retirement period to about 13 years, which is a much more achievable goal.

The recognition of these demographic facts led most people to accept without much objection the government’s recent changes to CPP. It is not the government’s fault that we are living longer. And many baby boomers have been forced to recognize that retirement at 65 is out of the question.

In other words, the pension issue is not really philosophical. It is a result of major changes in our society, namely the shift of jobs offshore, longer life expectancy, fewer workers paying taxes as the boomers leave the workforce, and the demographics of a large number of elderly people. Along with that, fewer Canadians actually have pension plans. Many Canadians have little or no savings. RRSPs are a great idea, but families earning less than $100,000 have not been able to save much.

Tories reasonably believe that government alone cannot deal with all these things. We do know for sure that the trend of manufacturing and service jobs moving offshore will not reverse itself. No one really expects our economy to be as glorious as it once was. But that means if we do not expand CPP or something like it soon, our elderly will be in real trouble. Or, maybe not. Even if they are poor, the elderly won’t be powerless.

They will have political remedies. Already the elderly form a potent voting bloc, and it is growing in numbers and in strength. All political parties will have to deal with “grey power” soon. When a lot of baby boomers are in economic trouble, they will naturally vote for increased payouts. Why wouldn’t they? It is not like they will be paying for the social net themselves. Other people’s children will.

The money will not come from CPP. The worker and the employer jointly fund CPP during a taxpayer’s working life, which simply means if the money is not put into CPP soon, baby boomers will have to collect their handouts from other sources. Those sources will be general tax revenues, which will be a burden on the working population at that time. If the federal government is worried about increased taxes hindering growth now, it should spend a moment reflecting on what taxes will be like 10 years from now when indigent baby boomers vote themselves a richer payday.

Political wisdom suggests that it is better to ignore problems until they become too large to avoid. Generally that makes a lot of sense given that our ability to forecast is lamentably weak. But in this case, putting off to tomorrow what we can avoid facing today may not make economic sense. The burden we are putting on the younger generations will simply be too much for them to carry. <>

Hank Bulmash, CPA, CA, MBA, TEP, is CEO of Bulmash Accounting Professional Corporation in Toronto, ON. He can be reached at hank@bulmash.ca.

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