Can a myth be “technically true,” and still be a myth? Can peer-reviewed academic research findings be dismissed as mythology, when no opposing evidence or argumentation is presented? These, and other holiday head-scratchers, courtesy of the Canadian Federation of Independent Business’ “Myths versus Reality” on the Canada Pension Plan.
Here are the CFIB’s myths, with our commentary underneath:
“Myth: CPP is in financial trouble and more money is needed in the plan to ensure benefits are there for future retirees.”
Here the CFIB usefully slays one of the most stubborn shibboleths surrounding the CPP: that the plan is financially unsound. Congratulations to the CFIB for repeating the Chief Actuary of Canada’s assessment that the CPP is stably funded for at least the next 75 years. Maybe the CFIB could enlighten their Fraser Institute colleagues, who insist on pretending that the CPP will have no future contributors or contributions so that they can “reveal” a large unfunded liability, and call into question the sustainability of the CPP.
“Myth: Canadians who choose to retire before age 65 can receive partial CPP benefits.”
The CFIB concedes that it’s “technically true” that CPP recipients can draw actuarially-reduced CPP benefits as early as age 60. Is it still a myth, then? Rather than ponder this question, the CFIB quickly diverts attention (and resentment) toward public-sector pension plan members who may (or may not) enjoy a bridge benefit. But why exempt private-sector defined-benefit plans, which also commonly contain bridge benefits? Another puzzler.
“Myth: Proposals being made to increase CPP benefits will help low income seniors and reduce poverty.”
Could increased CPP benefits help low-income seniors and reduce old-age poverty? This seems like a relatively-straightforward hypothesis, amenable to evidence. John Myles found that growing CPP retirement benefits played “the dominant role” in the increase in average incomes among unattached senior women between 1980 and 1995. Income inequality fell due to the shift from highly-concentrated income sources (like employment and investment income) to less-concentrated sources of income, especially (CPP/QPP). What counter-evidence does the CFIB raise to suggest that higher CPP benefits would not assist low income seniors or reduce old-age poverty? None.
“Myth: Proposals being made to increase CPP benefits has [sic] no negative consequences.”
The CFIB is concerned that additional CPP benefits would be factored into income calculations determining whether or not one’s Old Age Security benefits are clawed back. The OAS recovery tax reduces OAS benefits by 15% on income above the minimum income recovery threshold ($73,756 in 2016), until OAS benefits are reduced to zero around $120,000 in income.
According to the Chief Actuary, about 6% of all OAS pensioners were affected by the OAS recovery tax in 2010. This is projected to rise to 6.7% of OAS pensioners in 2050, not taking into account any possible increase in CPP benefits. At current thresholds, the vast majority of OAS recipients will not be affected by the OAS recovery tax. And as the Chief Actuary points out, pension-income splitting and the TFSA allow high-income seniors to reduce or escape the recovery tax altogether.
“Myth: Increasing CPP will benefit all workers.”
At every opportunity, the CFIB alleges that increasing CPP contributions will result in massive job losses and weaken economic growth. The CFIB claims that a modest expansion to CPP is likely to eliminate the equivalent of 700,000 full-time jobs for one year and permanently depress wages by 1.5%.
This estimate is formed on the basis of a 2010 study by the University of Toronto’s Policy and Economic Analysis Program (PEAP) that forecast a loss of 1.2 million person-years of employment, and a permanent 2.5% reduction of real wages resulting from doubling CPP benefits.
In this context, it’s interesting to revisit a 1998 paper written by the Director of the PEAP published in Canadian Public Policy entitled, “The CPP Payroll Tax Hike: Macroeconomic Transition Costs and Alternatives.” The 1998 paper uses the same FOCUS macro-econometric model developed at the University of Toronto’s Institute for Policy Analysis employed in generating the predictions contained in the CFIB’s 2010 and 2013 studies.
The September 1998 paper was a reflection on the finance ministers’ reforms to the CPP, agreed to in 1997 and receiving Royal Assent in December that year. Among other amendments to the CPP, the reforms increased the combined contribution rate from 6.0% in 1997 to 9.9% in 2003, remaining stable thereafter.
In his 1998 paper, the Director of the PEAP warned that “the new CPP premium increases will have severe negative consequences in the short to medium term” (395). Predicting “an extended period of higher unemployment and lower output” (396), the paper cautioned that the peak impact would be “quite severe” between 2000 and 2004: “At maximum, in 2002 and 2003, there is a loss of over $13 billion (1996 dollars) of GDP per year and the employment loss reaches almost 200,000 in 2003” (396).
Having front-loaded the strong claims about the negative consequences of increased CPP contributions, the author hedged his argument by adding that his simulation “may represent something of a worst-case scenario” (397). Nevertheless, the predicted economic damage was great enough for the paper to recommend privatizing the CPP and “setting up a compulsory RRSP-like plan that would be the responsibility of individuals (employed or not) and governments only…” (397).
In the event, the model was spectactularly wrong. Between 1997 and 2003 real GDP grew 23%, real investment rose 19%, employment grew 14%, and the unemployment rate fell from 9.1% in 1997 to 7.6% in 2003, before falling to 6.1% in 2008. Notably, both small establishments with between 20 and 99 employees, and medium-sized establishments with between 100 and 500 employees, experienced faster employment growth over this period than large establishments.
More credible than the CFIB’s dire projections may be the analyses produced by the Ontario Ministry of Finance and the federal Department of Finance which conclude that a phased-in enhancement in the CPP may have a short-term negative impact on the economy and employment that would gradually disappear over time. Over the long run, high CPP benefits would raise retirement incomes and consumption possibilities of seniors. Coinciding with stronger economic growth as increases did in the 1990s, short-term impacts of gradually phased-in contribution increases could be negligible.
“Myth: government needs to make retirement savings mandatory because Canadians aren’t looking after their own retirement needs.”
The problems with voluntary saving are well understood, as are the corrosive impact of the high fees charged by financial institutions that sell private saving products like RRSPs and TFSAs. Moreover, take-up is low; under a quarter of all taxfilers and just over a third of eligible contributors put anything away in an RRSP. Similarly, Rhys Kesselman finds that in 2013, more than 3 in 5 eligible Canadians had not even opened a TFSA, and 1 in 15 had taken full advantage of the TFSA contribution limits.
“Myth: Labour groups are proposing increases in CPP because they are sticking up for workers and low-income seniors.”
Here the CFIB accuses unions of backing CPP expansion in a selfish attempt to limit future liability growth in their own workplace plans. However, this explanation doesn’t account for the labour movement’s consistent support for a robust CPP from the plan’s inception in 1965. Despite higher pension coverage and workplace plans that were often grappling with large and growing surpluses, the labour movement in Canada has always supported a bigger CPP. The many union-negotiated plans that are not integrated with the CPP also doesn’t fit the explanation, nor does the fact that a number of unions in Ontario supported exempting rather than integrating their workplace plans with the Ontario Retirement Pension Plan (ORPP). Something more than self-interest is at stake here.
The CFIB also accuses the labour movement of not worrying about the impact on workers. Actually, the labour movement frequently calls for improvements in the Working Income Tax Benefit (WITB) and/or capping RRSP contributions (which predominantly benefit higher income earners) and using the savings in tax expenditures to help lower and modest-income earners contribute to an expanded CPP.
“Myth: Small business owners enjoy a “free lunch” since they don’t provide pension plans to their workers that match those in the public sector.”
More misdirection: who mentioned the public sector? Small employers can’t match pension plans offered by large employers in the private sector — which is why expanding the CPP, which they already participate in and make fixed contributions to, makes perfect sense. Without it, employees of small and medium-sized businesses will continue to need the tax-funded Guaranteed Income Supplement to eke out an existence in retirement.
Folklore aside, it’s high time to leave aside the tall-tales and phony sleight-of-hand and get on with improving Canadians’ retirement security.