CPP Expansion and Jobs

In a carefully timed intervention coming shortly before Finance Ministers meet to discuss retirement income reform, the Canadian Federation of Independent Business today released an econometric study by Peter Dungan of the University of Toronto on the economic impacts of the CLC proposal to double the Canada Pension Plan replacement rate,

The CFIB regards CPP premiums as job-killing payroll taxes. The accompanying media release to their study ramps up the findings a bit to claim that “1.2 million person years of employment will be lost in the short-run.”

To its credit, the Dungan study does not misrepresent the details of the CLC proposal to phase-in a premium increase to double the replacement rate of covered earnings for each year in the new system. It takes no issue with our calculation that it only takes a 60% premium increase (from about 10% to about 16% of insured earnings) to double CPP benefits on a fully pre-funded basis.

The CFIB does not even really take issue with the desirability of expanding the CPP from the perspective of workers, who will, as they acknowledge, get what they pay for during their working years in the form of a higher CPP pension.They “just” want workers to pay the whole premium increase rather than divide it between workers and employers.

The compelling public policy case for an expanded CPP was usefully re-iterated by Jon Kesselman in an op ed piece in the Financial Post today.

“As a mandatory public scheme, the Canada Pension Plan offers many advantages over individual savings and workplace pensions. Expanding the CPP is the best option for improving Canadian workers’ retirement income security; it can ensure results that none of the many alternative reform proposals for private schemes can provide.

CPP expansion will also insulate future generations of taxpayers from the burdens of financing growing numbers of seniors through tax-financed public pension programs. As a form of “forced savings,” expanded CPP ensures that individuals pay their own way, rather than spending all their earnings and then relying on others for support in old age.”

No one – least of all the CLC – has ever claimed that CPP benefits can be doubled at no cost. Clearly there will be some reduction in take home wages today to pay for higher pensions tomorrow. The point is that the CPP is a very efficient vehicle for needed retirement saving, and that the failure of workers to save enough under a “you are on your own system” will squeeze living standards down the road.

But what about jobs?

Kesselman is – with Bev Dahlby – Canada’s leading expert on the economic impacts of payroll taxes. He has found the job impacts of increases to be very small, especially when phased in slowly, as in the CLC proposal. As he argues in his op ed:

“A major concern expressed by smaller businesses is the incremental CPP premiums, which they perceive as a payroll tax increase that will raise their cost of employing workers and thus discourage hiring. Several considerations should ease this concern.

First, half of any CPP premium hikes will be borne directly by employees, not employers, under the 50:50 split of premiums. Even the employer share of increased premiums will mostly be shifted over time to employees via lower monetary compensation, as indicated by empirical studies.

The premium hikes would be spread over at least five years (Addition – the CLC has proposed seven) , and those employers already offering generous workplace pensions will likely reduce their pension costs to reflect increased CPP benefits. Thus, the employer’s total cost of hiring labour should not be significantly increased after all of the economic adjustments have taken place.”

The point about reduced contributions to other vehicles is key. So far as I can tell, the Dungan study assumes that employers – and workers – get no immediate offset to the required increase in the CPP premiums. In reality, there will, as Kesselman argues, be reduced employer and employee contributions to pension plans fully integrated with the CPP as is the case with the vast majority of employer sponsored plans. More CPP means that what has to be set aside for employer sponsored pension plans will be reduced.

In addition, one can expect that there would be reduced contributions by workers and matching contributions by some employers to RRSPs. Typically, employers with more than fifty workers do make some kind of contribution to retirement savings of employees, mainly through group RRSPs or matching contributions to individual RRSPs where there is no pension plan. A key gain from CPP expansion is that it would allow employers to assist workers to save much more effectively and at a much lower total cost.

Total Canadian retirement savings will not, then,  increase by as much as is assumed in the Dungan study.

As Kesselman goes on to note:

“Historical evidence also refutes the notion that sharp CPP premium increases will damage job creation. Between 1997 and 2003, CPP premium rates were raised by nearly 70% (without any associated benefit hikes), while the national employment rate rose steadily and strongly over this period, with only a small slip in recessionary 2001.”