Federal Finance Minister Jim Flaherty has backed down on his proposal to dump some of the annual federal surplus into the Canada Pension Plan because of concerns raised by the provinces that this could compromise the independence of the CPP.

The plan raised a storm of public controversy and the idea still seems to be lurking in the shadows as part of the government’s proposals, outlined in its 2006 Advantage Canada document, to eliminate “Canada’s total government net debt” in less than a generation. Although assets of the CPP do not form part of the national accounts, Ottawa has included them in its estimate of the country’s “net debt,” and says it will “use unanticipated surpluses to accelerate debt and personal income tax reductions.”

Flaherty’s original idea was a little-noticed part of his May 2006 budget, when he said, “The government will examine the possibility of allocating a portion of any surplus at yearend larger than $3 billion to the Canada Pension Plan and Quebec Pension Plan, in order to make them more equitable for young Canadians and improve economic competitiveness.”

According to Flaherty, the proposal would have had three main benefits:

> it would “help further progress already achieved in building a co-operative effective federation”;

> it would improve intergenerational equity by helping to lower future contribution rates; and

> lower contribution rates would encourage participation in the labour market and enhance competitiveness of the Canadian economy.

The proposal has not been well received. William Robson, president and CEO of the Toronto-based C.D. Howe Institute, notes in an “e-brief” that the dismal records of provident funds elsewhere “add a worrisome aspect to even the benign-sounding proposal in the 2006 budget to tuck extra surpluses into the CPP’s fund. That transaction would breach what has up to now been a solid wall between the CPP and the regular federal budget. Create a hole through which money repeatedly flows between the two, and the odds are high that one day the flow will go the other way.”

Actuary Robert L. Brown, a professor in the department of statistics and actuarial science at the University of Waterloo, makes the same point: “People were legiti-mately concerned that if the government started putting money into the plan when it had surpluses, it could also start taking money out when it had deficits.”

There was a strong fear that this was “the proverbial thin edge of the wedge,” he adds.

Other critics wonder why the government would consider putting more money into the CPP investment fund when the chief actuary has just given it a clean bill of health, saying it would be sustainable for the next 75 years with more cash inflows than outflows over the entire projection period.

Canada’s combined employer/employee contribution rate of 9.9% of covered earnings is one of the lowest contribution rates for public pensions among industrialized countries. The combined employer/employee contribution rate for U.S. social security, for example, is 12.4% of earnings up to US$90,000 — equivalent to about C$106,000. Canadians contribute to the CPP only on earnings between $3,500 and $43,700.

Michael Prince, Lansdowne professor of social policy in the faculty of human and social development at the University of Victoria, describes Flaherty’s budget proposal as an “ill-advised hot-air social-policy balloon” that should be popped. “It puts our pensions at risk,” he says. “Virtually all observers, including the financial community and conservative think tanks, accept that the CPP is actuarially sound and does not require any further changes to its financing for several decades.”

If tax relief is the objective, he says, “Why go to the bother of allocating a portion of large federal surpluses to the CPP and QPP, and then lower contributions for employers and employees? Unless, perhaps, a longer-term aim is to limit the role of public retirement income supports to promote private-sector investment schemes.”

In fact, Prince wonders if the Flaherty proposal was a Trojan horse — a prelude to privatization, favoured by the old Reform Party with its proposal of replacing the CPP with mandatory “super RRSPs.”

Conspicuously missing from Finance’s analysis, says Prince, is the corresponding strategy of raising future benefits as existing investment funds of the CPP (and the QPP) would actuarially support.

“Why not allocate federal surpluses to enhancing the federal guaranteed income supplement program for low-income seniors?” Prince asks. While poverty rates among seniors have been reduced, he says, declining coverage of occupational pension plans, low RRSP take-up rates and the increased prevalence of casual employment and irregular work patterns could mean seniors’ poverty rates will start to climb again.

@page_break@If Canadians are “overtaxed” at the federal level, as the Harper government claims, Prince adds, much more straightforward alternatives are available. Reducing federal income taxes is an obvious option, he says. Another is further lowering employment insurance premiums. “Such moves,” he notes, “will enhance budget transparency.”

It should be noted that CPP legislation does not allow Ottawa to make changes unilaterally to the CPP. Any amendments must have the approval of two-thirds of the provinces, including Quebec, that combined have two-thirds of the population. A Finance Department spokesperson says Flaherty’s proposal was abandoned because the provinces raised concerns that it could compromise the independence of the CPP.

Brown agrees with that assessment: “The CPP has been independent and should remain so. The proposal was precedent-setting, and it was an extremely dangerous precedent.” IE