Why expanding the CPP is a bad idea

Proposal needs to be revisited — and soon
By Dan Kelly
|Canadian HR Reporter|Last Updated: 04/26/2018

In my 22 years working for one of Canada’s largest business associations, I’ve seen a fair amount of healthy disagreement about important matters of economic and social policy. Bank mergers. Corporate taxation. Minimum wage. Labour legislation. The list goes on.

Each of these issues comes with boosters and detractors, yet they typically develop alongside a robust, well-informed and detailed public and political conversation, outlining the pros and cons, the potential impacts, costing, expert analysis and consultations.

Whether or not we agree with the eventual outcomes on these and other policy issues, we respect the process of policy development when it’s open, accountable and informed by evidence.

Unfortunately, one of the biggest public policy changes in recent history — expanding the Canada Pension Plan (CPP) — is breaking with almost all of these steps. The end result is a misunderstood, flawed policy set to cause no small degree of harm to employers and workers alike.

The Canadian Federation of Independent Business (CFIB) is opposed to the CPP expansion plan as it is currently constructed. From its very premise to its touted promise, this is a really bad deal for Canadians and an even worse deal for businesses, especially small- to medium-sized enterprises, which represent the lion’s share of economic activity in Canada.

Here are a few overarching themes that demonstrate why we should think twice about CPP expansion:

It’s bad business policy

Just as regulations and red tape disproportionately affect small businesses, payroll taxes are borne more heavily by smaller employers. In fact, our members consistently say payroll taxes are the number one most-harmful form of taxation to their firm.

While supporters of the CPP hike frame it as modest and inconsequential, small business owners say this is anything but true. When you extrapolate the numbers across a workforce, in extremely competitive industries or in sectors with tight profit margins, the harm is clear enough. Small firms tend to be more payroll-intensive than their larger capital-intensive business counterparts. Whereas a larger business may be able to absorb this higher cost by offsetting it in other parts of the operation, a small business has fewer options. Raising prices in a tough economy is often not an option at all if the goal is to keep customers. 

Make no mistake: in an ever-competitive global marketplace and with a sluggish domestic economy, a healthy business environment is fostered by policy that encourages growth and investment, not one that serves as a disincentive for both.

CFIB research and member surveys capture the likely negative effects of a CPP hike: frozen or lower wages (69 per cent of small businesses), reduced investment (50 per cent), layoffs (37 per cent) and tough decisions on existing benefit packages for employees (28 per cent).

Does CPP really help?

While there is no doubt some Canadians are not saving enough for their own retirement, is the answer to require all of us to save more?  Increasing CPP does nothing for those who cannot afford to save more as CPP is not a gift. It requires people to take more money out of their income today, for their potential benefit tomorrow. And for lower-income Canadians who struggle the most, they will lose some of their paycheques immediately, without any meaningful increase in benefits when they retire, as other government supports (such as the Guaranteed Income Supplement) are then clawed back.

And it must be remembered not a single current retiree will get another nickel from CPP expansion, as the increased benefits must be phased in over 40 years. People over 50 will likely receive next-to-no additional benefits as well, given the decades-long benefit expansion period, which doesn’t even start until after 2019.

Canadians don’t fully understand

Many Canadians don’t really appreciate what they’re signing up for with respect to the CPP, according to a poll by Ipsos and CFIB. For example, about 40 per cent of employed Canadians think the government kicks in CPP contributions, which is not the case.

In fact, when presented with the prospect of wage cuts (a distinct possibility, according to our research), 83 per cent of employed Canadians say they don’t support CPP expansion.

The same poll found 80 per cent support the idea of government consultations on the plan, although British Columbia is the only province thus far to take feedback from the public.

The stunning lack of public awareness about this plan is reason enough to give us pause and it virtually demands a period of broad, inclusive consultation.

There are better options

A mandatory CPP hike is often presented as the best way for Canadians to save for their retirement. But from a strictly financial perspective, any wise investor would laugh at putting more money towards the CPP, since the rate of return is forecasted to be a miserly 2.1 per cent for those born after 1972.

Furthermore, a 2015 Ipsos-CFIB poll found that, of the various retirement savings vehicles available to Canadians, a mandatory increase in CPP contributions was one of their least favoured options.

It also bears mentioning that “savings” these days means much more than a pension or RRSP. Many people have significant assets in real estate or private investments, to say nothing about the massive intergenerational wealth transfer as boomers pass much of their wealth to their children.

We’ve advocated for additional voluntary contributions to the CPP, and voluntary pooled registered pension plans are soon to be on the market in half of Canada. Canadians appreciate choice in how they invest their hard-earned money.

If additional CPP contributions are such a great idea, it only makes sense to entrust Canadians to make this choice on their own terms, and not force them to cough up more off their paycheques when they say they have little ability to save as things stand.

The weeks and months ahead promise interesting times on Parliament Hill. Fortunately, the governments of B.C. and Quebec have not yet signed on, both opting to embark upon public consultation before making a decision. We commend them on that. 

Sadly, the federal government has chosen to disregard its own 2016 budget promise to undertake national consultations. The proposal to expand the CPP needs to be revisited, and we’re rapidly running out of time.

Dan Kelly is president and CEO of the Canadian Federation of Independent Business (CFIB) in Toronto, one of Canada’s largest associations of small and medium-sized businesses with 109,000 members across every sector and region. For more information, visit RetirementReality.ca.

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