LARGER CPP ‘NEGATIVE’: REPORT
Long-range impact positive
Finance Canada’s own analysis says that boosting the Canada Pension Plan would have some short-term negative impacts on the economy and reduce federal and provincial tax revenue.
The Liberal government is looking to expand the CPP so Canadians save more for retirement, but a handful of provinces — including Saskatchewan, British Columbia and Quebec — have raised concerns that increasing employer and worker CPP contributions could hurt an already fragile economy.
Federal Finance Minister Bill Morneau emerged from a meeting with his provincial and territorial counterparts just days before Christmas to announce they will continue to examine possible CPP expansion and will meet in mid-2016 to continue their discussions, with a decision on any changes to potentially come next December.
Briefing materials prepared by Finance Canada, and released under access to information, said expanding CPP would likely hurt the economy in the short term but would help Canadians over the long term.
“In the long run, expanding the CPP would bring economic benefits. Higher savings will lead to higher income in the future and higher consumption possibilities for seniors,” say the briefing materials, originally prepared in December 2013 for the Conservative government ahead of that year’s finance ministers’ meeting but just released a few weeks ago.
“In the short term, however, CPP expansion is expected to have some negative impact on the economy as higher labour costs and lower take- home pay for workers would lead to reduced demand for labour by businesses and reduced supply of labour by workers.”
The Liberal government is already facing enormous fiscal pressures, due to what it says is an anemic economy it inherited, federal finances that are worse than expected, and campaign promises that aren’t adding up. Expanding the CPP could cost the federal government even more revenue.
Prime Minister Justin Trudeau and Morneau have backed off their election promise to cap short- term annual deficits at $10 billion. They also revealed the government’s promised middle- class tax cut won’t be fully funded by a tax hike on wealthy Canadians, and will instead leave a $1.2-billion annual fiscal hole.
The revenue gap will make it even more difficult for the Liberals to balance the budget before the next election, as promised in their campaign platform.
Finance Canada’s analysis says expanding CPP would erode federal revenues.
“There would be a reduction in federal and provincial tax revenue because CPP contributions would increase and these contributions either receive a tax credit (in the case of employee CPP contributions) or are deductible for tax purposes ( in the case of employer CPP contributions),” the Finance Canada documents say.
The reduction in revenues would be partially offset by lower pension plan and RRSP contributions, which would result in lower deductions from taxable income for individuals, the documents say.
The former Conservative government had come under fire for what many provincial governments said were stall tactics and attempts to block an enrichment of the CPP to help Canadians save more for retirement.
But now, with a federal Liberal government supportive of expanding CPP, there’s a much stronger likelihood that some modest, targeted reforms could be on their way to help Canadians sock away more dollars for their golden years.
Reforming the Canada Pension Plan requires the support of the federal government as well as seven of 10 provinces representing two- thirds of Canada’s population.
The Finance Canada briefing materials say any increase in contribution rates would have some negative impact on economic activity and employment.
The magnitude of the impact would depend on the size of the increase in benefits and contributions, as well as the broader functioning of the economy, the department concluded.
“If such an increase is implemented at a time of robust economic growth, as was the case during the late 1990s … the impact would be outweighed by the underlying strength of the economy,” the Finance Canada documents say.
Saskatchewan has strongly opposed CPP expansion, worried that increasing payroll taxes would hurt a provincial economy already battered by low oil and gas prices.
Kevin Doherty, Saskatchewan’s finance minister, agreed with his counterparts at the annual meeting to examine potential options going forward, including the possibility of doing nothing.
There would be a reduction in federal and provincial tax revenue
Quebec has also raised some concerns about CPP enrichment because of worries that employer payroll premiums are already high, but the province is willing to examine options for some modest and targeted enrichment for middleincome earners.
The Canadian Fed eration of Independent Business, which represents more than 109,000 small business owners, has been a leading opponent to any CPP expansion. The CFIB says a CPP enrichment would burden employers with higher payroll costs during a sluggish economy and hurt their ability to hire new workers.