There is some confusion lately regarding the proposed expansion of the Canada Pension Plan. Supporters of CPP, for instance, argue that the federal government has a responsibility to provide for retired Canadians and that Ottawa is capable of doing so without any unintended consequences.
The reality, of course, is that augmenting any government service requires an exchange.
Like all forms of taxation, CPP contributions incur two costs. The first is the proportion of income lost to taxation. The second is the value of foregone opportunities.
Currently, the CPP contribution rate–levied on both employees and employers–is 4.95% on income between $3,500 and $51,000, for a combined rate of 9.9%, per employee. Self-employed Canadians, on the other hand, are responsible for both the employee and employer contributions. New proposals, however, suggest increasing the contribution rate by 1.55%, while expanding the earnings cap to $102,000. In any case, the employee and employer lose a portion their disposable income and revenue.
The opportunity cost, however, is much higher.
For instance, the employee, as consumer, would have less to spend on clothing, foodstuffs, and luxuries (not to mention RRSPs and TFSAs). Even more, the employer, as producers, would have less to spend on wages, supplies, and rents (let alone additional labour). The result is a reduction in real wages and productive capacity.
The intensity of this consequence, it is true, fluctuates according to the economic climate in which it occurs. In Canada’s post-war economic heyday, during which Parliament conceived the most adorned welfare-oriented policies, the strength of the Canadian economy readily permitted for programs like Medicare and Unemployment Insurance.
Current economic realities are much different. Whereas the post-war economy supported these initiatives with relative ease, today’s economy is less accommodating.
Analysts estimate, for instance, that employers need to create an additional 20,000 jobs per month to keep pace with Canada’s expanding labour force. Unfortunately, however, weak consumer demand and economic instability is compelling many businesses to reduce capital expenditures and, thus, hire fewer workers.
Here, the effect of taxation is palpable. The consumer has, for every dollar levied in taxes, one less dollar in disposable income. Similarly, the producer has one less dollar in expendable capital. This, in effect, reinforces chronically lower consumer demand and creates even more economic uncertainty for producers. Any increase in taxation, such as expanding the CPP contribution rate, exacerbates this effect.
Proponents of CPP expansion frequently dismiss (and, in some cases, omit) this detail. Instead, they argue that pensions, whatever the economic cost, are the government’s social responsibility. This assumes, to illustrate but one example, that all businesses have the capacity to contribute a greater portion of their revenue per employee without some proportionate decrease in productivity or efficiency. For businesses that do not, they must compensate by either cutting costs or raising prices–both of which, in this case, are harmful to their operations, staff, and customers.
These very supporters avow the sanctity of pension funds–or, in the very least, state-administered pension funds–ignoring that the Canada Pension Plan Investment Board (CPPIB) faces the same risks as its private-sector counterparts.
Without question, the CPPIB’s recent performance is nothing short of impressive–a 1.8% return on investment, for example, in the second quarter of 2013. In addition, the CPPIB, like most Canadian financial institutions, endorses prudential, principles-based investment ethics that reduce the fund’s risk-exposure. The CPPIB’s ability to avoid economic turbulence, however, is no greater than any privately administered pension fund. Past performance does not guarantee future success.
The success of any fund, in fact, depends solely on the ability of its financiers to generate a greater return than their principal investment. This same principle applies to consumers and producers in terms of their respective income and revenue: Retaining a greater portion, or, at least, the choice to retain a greater portion, simultaneously ensures that Canadians and their employers have the resources and flexibility necessary for surviving in today’s economy–for generating a greater return than their principal investment.
Canada has a rich social-democratic history with no shortage of decent achievements and Canadians, deservedly, relish in those accomplishments. The only guarantor of the country’s future success, however, is safeguarding conditions favourable to greater economic growth and security. Perhaps, then, businesses will have the capacity to hire a greater portion of Canada’s labour force and even more Canadians will enjoy the prospect of retiring with a pension.
Idealism, in the meantime, should cease trumping pragmatism.
Shaun Fantauzzo is a policy analyst and the AIMS on Campus Project Coordinator at the Atlantic Institute for Market Studies
*This piece appeared in the 12 December 2013 opinion section of the Financial Post