CPP Expansion Could Hurt Small Firms, Jobless

Economist Milton Friedman argued that, “One of the great mistakes is to judge policies by their intentions rather than their results.” Take, for instance, the Canada Pension Plan (CPP) and recent discussions to reform and expand its scope.

PEI Finance Minister Wes Sheridan, with support from Ontario Premier Kathleen Wynne, recently called on the federal government to raise the CPP contribution rate to 13% from 9.9% on income between $25,000 and $51,000, in which case the employee and employer would each contribute 6.5%. The reforms would also include expanding the earnings cap from $51,000 to $102,000, for which the contribution rate would increase from 0% to a combined rate of 3.1% and the annual contribution limit would nearly double from $2,356.20 to $4,681.20.

Mr. Sheridan and Mrs. Wynne argue that it is necessary to expand the CPP to ensure that Canadians are financially secure during retirement. Their compassion and consideration, however, does not address several implications and unintended consequences of CPP expansion.

Beneficiaries of the CPP, for instance, are an exclusive group of individuals: the employed. For those who are excluded from the CPP (the unemployed), securing a pension is less important than securing an income. The proposed CPP expansion, however, requires businesses to surrender a greater portion of their revenue per employee–without increasing productivity or efficiency–thereby reducing the amount of capital available to hire additional workers (an effect similar to that produced by minimum wage laws).

Larger businesses and corporations that provide employee pensions are better equipped to absorb the costs of CPP expansion and will have an incentive to reduce–and potentially end–company pensions as the CPP becomes a more economical alternative. For smaller businesses that do not typically provide employee pensions, however, this is not an option. Even more, for those who are self-employed (and thus required to contribute both the employee and employer contribution), increasing the payroll contribution rate becomes even more daunting.

Small-business owners employ 69.7% of Canada’s private labour force–74.5% in Atlantic Canada–and only 20% of small-businesses offer some form of company-sponsored pension plan. CPP expansion will prevent these businesses from hiring new workers, as well as force them to economize by either reducing hours or laying off existing employees. Furthermore, CPP expansion requires employed Canadians to surrender an additional 1.55% of their disposable income, reducing aggregate demand–a particularly important caveat during an economic recovery.

Mr. Sheridan, Mrs. Wynne, and other supporters of CPP expansion are undoubtedly well intentioned. Canada has a rich social democratic history with no shortage of welfare-oriented legislation and policy, but idealism and naivety should not trump economic reality.

The millennial generation faces a different set of challenges than the baby-boomer generation. The post-war era afforded Canadians with an economic environment unrivaled by today’s standards that facilitated a greater capacity to save. Millenials, however, have taken on higher levels of debt in an increasingly restrictive labour market, limiting their ability to save for retirement.

Retaining a greater portion of income and revenue, as opposed to contributing more to the CPP, simultaneously ensures that Canadians and their employers have the resources and flexibility necessary for surviving in today’s economy and affords small-businesses a greater capacity to hire new workers.

Perhaps, then, Canadians will be better-positioned to invest their incomes into more diverse and accommodating financial instruments, such as Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs) and unemployed individuals will have healthier employment prospects.

Shaun Fantauzzo is a policy analyst and the AIMS on Campus project coordinator at the Atlantic Institute for Market Studies