FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, October 29, 1997

• 1816

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call this meeting to order. We are here to study Bill C-2, An Act to establish the Canada Pension Plan Investment Board and to amend the Canada Pension Plan and the Old Age Security Act and to make consequential amendments to other Acts.

Tonight we have officials from both the Department of Finance and the Department of Human Resources Development. I'll just briefly introduce them.

Susan Peterson is assistant deputy minister with the federal-provincial relations and social policy branch. We also have with us Réal Bouchard, director of the social policy division; Mr. Bob Hamilton, ADM for investment; and Mr. Paul-Henri Lapointe, ADM for economic and fiscal policy. And with us from the Department of Human Resources Development are Cathy Drummond, the director general of income security; Terry De March, the director of legislation with income security; and Rodney Hagglund, special adviser for social policy.

My understanding is that Ms. Peterson will—

Mr. Jim Jones (Markham, PC): I have a point of order.

The Chairman: Yes, Mr. Jones?

Mr. Jim Jones: Can I ask if the chief actuary is here? If he is, can he join us at the table?

The Chairman: Ms. Peterson.

Ms. Susan Peterson (Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch, Department of Finance): He's not here.

The Chairman: You may begin with some introductory remarks, then, and then we'll get to the question and answer session. I'm sure the members have plenty of questions to ask.

Ms. Susan Peterson: Thank you, Mr. Chairman.

I'll just let you know what my role is in this review of the Canada Pension Plan. As you know, once every five years under the CPP legislation, the federal Minister of Finance and the Ministers of Finance of the provinces are required to review the Canada Pension Plan and look at its financing to see how things are going. The requirement for this five-yearly review was put in place fifteen years ago, so this is the third one that has occurred. One of the changes that is being proposed is that these reviews take place once every three years in future rather than once every five years, because the Ministers of Finance believed it was important to keep a very close eye on the CPP in order to make sure they knew what was going on and that things were keeping on track.

Personally, I chair the Canada Pension Plan committee, the joint committee of the provinces and the federal government. In fact, I have done so for the past three reviews, so these issues have been with me for a long time.

I am basically here to take your questions, as are my colleagues from the Department of Finance and the Department of Human Resources Development, which of course administers the benefits under the Canada Pension Plan. My colleagues' expertise on various issues may be of interest to you.

To start, what I would like to do is tell you that I have for tabling here tonight four things that were asked for or that we thought you would like, based on comments made here last night. I understand we gave them to you as you come in.

• 1820

First, the gender analysis that was done on the Canada Pension Plan is here. That gender analysis has been available since the agreement with the provinces was reached last February. For that reason, some of the numbers are based on the actuarial report on which the review was based. Since then, as required by law, the chief actuary has done another report on the CPP, saying that these are the changes that have been agreed to, and these are the implications of those changes. So the gender analysis was done before the next actuarial report was prepared. It makes very little difference, but I just want to note that because there is at least one number that has changed in it. That gender analysis was prepared in consultation and with the participation of all provinces.

Secondly, the actuarial report is before you. It is the one that the chief actuary is required to prepare when changes are being proposed to the CPP.

Thirdly, you have a piece of paper showing you estimates on how the size of the CPP fund that's going to be available for investment by the board is going to grow over time.

Fourthly, you have the memorandum that the Minister of Finance mentioned last night and which he said he would make available. This is the memorandum that he had asked us to do as officials. To the extent that we can do analysis, it explains the issues that are involved in a mandatory RRSP program as it compares to the Canada Pension Plan, and what the comparative costs are of providing the CPP-type benefits and taking care of the unfunded liability. So that is before you tonight, too.

One other piece that was mentioned last night but that we do not have—it will be available as early as tomorrow—is the analysis we did of the macroeconomic impact of the changes to the Canada Pension Plan. I don't have that with me tonight for the simple fact that it's not translated yet. It's in the process of being translated at this time.

The Chairman: Okay, now we're ready for our questions.

Mrs. Ablonczy.

Mrs. Diane Ablonczy (Calgary—Nose Hill, Ref.): Thank you, Mr. Chairman.

I can't understand why there are no TV cameras here, Mr. Chairman. I think the group of witnesses we have here tonight are far more photogenic than the ones we had last night.

Mr. Paul Szabo (Mississauga South, Lib.): Monte didn't put a motion before us that we had to approve.

The Chairman: We'll get you cameras for next time.

Mrs. Diane Ablonczy: Well, I would think so.

We do appreciate your being here. As you know, this is a huge issue for Canadians. It affects them hugely, so to have your expertise available to us is very helpful.

I wanted to talk to you about the unfunded liability in the plan. According to the actuary's sixteenth annual report, this unfunded liability right now is around $600 billion—as the minister has been saying—but I understand it will go up to $1 trillion in ten years.

I wonder if you could just explain to us how this plan will deal with that unfunded liability. I hope the $1 trillion is the most that the unfunded liability is going to get to. How is that actually going to be financed over the life of the plan? It concerns me that the question of the unfunded liability is not really solved by these changes, and I would like your comments on that.

Ms. Susan Peterson: The answer to your question is basically contained in this concept of a steady state rate. When we sat down with the provinces to look at this issue, the first thing that was readily agreed to was that people should start paying fully towards their own pensions as quickly as possible. The actuarial report that's before you shows you that to do so under the Canada Pension Plan, people would be paying a contribution rate of 6.1%.

The next question was what to do with the unfunded liability. It was agreed—and this is part of the steady state rate—that the burden of the unfunded liability would be spread across all generations evenly in future, so that no one or two generations would have the burden of paying off that unfunded liability. It would be carried across all those generations. To do so costs an extra 3.8% on that 6.1%, which is how you get to the steady state rate of 9.9%.

• 1825

Now let me explain what that means. It means that the unfunded liability does not grow in terms of its size compared to the expenditures of the Canada Pension Plan, how much the benefits will cost in future. It stays steady, so the amount it imposes on contributors will always be a uniform 3.8% in future. Because the expenditures of the CPP will grow enormously as the baby boom generation starts to retire, it does grow in pure dollar terms, and so will the unfunded liability. The thing is that it will never be a bigger proportion of expenditures. It will be a steady proportion of expenditures. For that reason, it can continue to be paid for through this extra 3.8% on a steady state base.

It will not be paid off or paid down. To pay it off or to pay it down over the next number of years would mean that the CPP contribution rates would have to go above 9.9%. That would mean that one or two generations would pay more than successive generations, so the provinces and the federal government ended up agreeing that the fairest way to deal with the unfunded liability is to make sure all generations pay an equal amount towards carrying that burden.

Mrs. Diane Ablonczy: It just seems to me that if we're going to have a $1 trillion unfunded liability in ten years, an extra 3.8% of contributions couldn't possibly carry that huge and unfunded liability.

Ms. Susan Peterson: It does. The chief actuary has looked at this very carefully, and that extra 3.8% is expected to be able to be carried forward uniformly, basically from here on in.

Mrs. Diane Ablonczy: But isn't it true that the only way in which that's going to happen is by giving future beneficiaries an incredibly measly real rate of return on their investments? On page 14, for example, the actuary's report says that people who are only ten years old right now will get only 1.9% in real return over the lifetime of their investment. If I said to you to give me 10% of your earnings and that I'd give you interest back at 1.9% when you retire—and it goes down after that to 1.8%, of course—what would you say? That could hardly be considered fair, particularly when present beneficiaries or past beneficiaries got a much greater rate of return on their investment.

Ms. Susan Peterson: Yes, indeed.

If you look at the page 14 that you're speaking of, what it shows is that past generations did indeed get an enormously high real rate of return compared to their contributions. That was purposeful and by design, as I think Mr. Pettigrew was suggesting last night.

The fact of the matter is that when the Canada Pension Plan was put in place in 1966, you had a generation of seniors in Canada who had not had very much opportunity to save for retirement. So it was designedly put in place in such a way that people would get benefits from the Canada Pension Plan very quickly. For instance, you usually have to pay in for 37 to 40 years to get full benefits, but it was agreed that people would get full CPP benefits after only 10 years of contributions at the time. This was because it was felt that for Canada's seniors at that time, there was a real problem. This was, if you wish—

Mrs. Diane Ablonczy: I understand that, but baby boomers.... For example, the same table shows that if you were born in 1948, which is the baby boomer-type era, you get a real rate of return of about 5% from this plan. But if you were born 40 years later, your rate of return on the plan is only 1.9%. So how can it be said that this is intergenerationally fair?

Ms. Susan Peterson: But may I point out that the table also shows that if we make these changes, when compared to the existing Canada Pension Plan, the rate of return for people who are born in 2012 goes up from 1.5% to 1.8%. In other words, this is all part and parcel of the fact that by taking action now, the contribution rates younger people pay will never have to reach the 14.2% that the actuary said. It still stops at 9.9%. This does not mean that people in future are going to get as good a rate of return as people have in the past, but it means at least they won't get as poor a rate of return as if nothing were done to the Canada Pension Plan.

• 1830

Mrs. Diane Ablonczy: That assumes the plan could keep going with this rate of return. It's arguable that our kids are going to pull out of this plan when they figure out...they're only 10 years old now. When a 10-year-old figures out that his rate of return over a lifetime of investment is 1.9% or 1.8%, how can you expect him to stay in that kind of a plan? This is not sustainable from a practical, common sense point of view.

Ms. Susan Peterson: The reason 1.8% is not higher than 1.8%, albeit it's higher than 1.5%, is the weight of carrying that unfunded liability. If it's not carried in this uniform spread-out way that I described as part of the concept of the steady state rate, it has to be paid for in some other way. Therefore, if you severed the unfunded liability from the Canada Pension Plan and paid for it somewhere else, the taxes of one form or another that you would have to place on a number of generations would have to be at least as high, if not higher. This is the way to spread out that burden forever as opposed to having one or two generations really hit hard with it.

So you may say that this is not as good as you would like it to be. But it's as good as it gets if you're not going to discount or renege on the unfunded liability.

Mrs. Diane Ablonczy: I understand this is as good as it gets, but as you're aware, other countries have faced this same difficulty. They have found ways to protect the people who were on a public plan. By moving to individually owned and privately invested mandatory pension accounts for citizens and while still being able to provide benefits to older citizens, they have also ensured that the younger generations had a fair rate of return.

I assume those options were looked at, since many countries in the world are looking at them. The document you gave us tonight is more of a political statement than a cold-eyed analysis, in my view, under any fair reading of it. The bottom line is, is this the best we can do for our kids? Do we say, give us 10% of your earnings for your whole lifetime and you'll get a whole 1.8% return? I would argue that if that's the best we can give them this plan is doomed. They just won't continue to support it.

Ms. Susan Peterson: Let me just clarify one thing. Of course the 10% is not what employees pay. One half is paid by the employers and the other half is paid by the employees.

Mrs. Diane Ablonczy: If you're self-employed you have to pay it, and of course, it's based on 10% of your earnings.

Ms. Susan Peterson: Yes. I just wanted to clarify that.

On your issue of what other countries have done, I understand that what Minister Martin said last night is that one of the factors in Chile is that they have a younger population than Canada. I don't pretend to be an expert on this. Their liabilities, their outstanding obligations to the people under existing public pension plans at the time they converted were dealt with effectively through inflation. In other words, they devalued the obligations through inflation. That's not something one would do to people in Canada.

Mrs. Diane Ablonczy: It's not the only country that did this. For example, Britain has done this. In contradiction to what the minister said, their population was older than the median age in Canada. About 70% of the people have moved into a different plan that's giving them a better return.

There isn't just one country to look at. It's the principle of it. Have you run an analysis of what it would mean if we took that kind of an option?

Ms. Susan Peterson: Just before the last election in Britain, John Major's government had put out a proposal on effectively privatizing more of their public pension system. It was a very complex proposal. They have a very complex system.

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The bottom line was that they were facing the issue of having people in the existing system and of wanting other people to start saving for themselves. Basically, our analysis came to the conclusion that they were going to require the next generation to pay twice. They were going to have to pay for their own pensions through private means and through other means to pay the obligations towards people in the existing public pension system.

Mrs. Diane Ablonczy: So it's the same thing as we're doing now.

Ms. Susan Peterson: You basically can't get away from this issue. In Chile, of course, their outstanding obligations were dealt with in part through inflation, as I understand. In Britain they couldn't get around this issue either.

If you're going to have people paying entirely for themselves, who pays for the outstanding obligations? In fact, this issue is addressed in our memorandum for the minister. That's the best work we've done in attempting to deal with this issue. If you have better work on it, we'd be interested in seeing it.

Mrs. Diane Ablonczy: I would be interested in seeing your analysis of the British proposal and just how it might work out if we tried to apply it here. Could we have that analysis?

Ms. Susan Peterson: It all comes back to this. We simply said, look, here's the description of it, here's how we think it would work. The bottom line is that it looks to us like the next generation would be paying twice. That's all it says.

Mrs. Diane Ablonczy: You didn't do an analysis.

Ms. Susan Peterson: It was a proposal put out just before the last election. We weren't in a position to subject it to a detailed analysis. We looked at everything they had, but it wasn't the type of thing...we can't run numbers on how the British pension system operates.

Mrs. Diane Ablonczy: So you haven't really looked at any alternatives that other countries have gone toward.

Ms. Susan Peterson: We have in the sense that we know that in Chile they have the unfunded liabilities. They had to deal with them. We know in Britain that they have to deal with them. We know in Canada they have to be dealt with.

So when we worked with the provinces we looked in great detail at what you can do about that unfunded liability. That's how we came up with the concept of a steady state rate. It was agreed this was the fairest possible way of dealing with that unfunded liability to make sure that you didn't disregard it, that you in fact made good on all the outstanding obligations.

As for the outstanding obligations of the Canada Pension Plan and that large unfunded liability, 30% of those obligations, 30% of that amount is to keep one's commitments to today's seniors or to anyone who's now collecting CPP benefits. Fully 70% of it is to make good on the commitments, on the obligations to people who have been working and paying into the CPP and who have been promised pensions from it. So that gives you a sense of where the obligations lie.

You could pay for those outside the CPP by raising other taxes. If you did so, the example in this memorandum is that if you paid them off over 30 years, during those 30 years you could double the GST. That gives you a sense of the huge scale of what it would mean to pay off those unfunded liabilities over the next 30 years. Or you could increase personal income taxes across the board to everyone by 25%, if you wanted to pay it off over 30 years.

For that reason it was agreed that the fairer way to deal with that burden, because it is so enormous, was to spread it evenly over all the generations instead of requiring one or two generations to shoulder that burden on top of paying fully for their own CPP pensions.

Mrs. Diane Ablonczy: Mr. Chairman, I'm sure everyone on the committee appreciates the fact that there's no magic wand that we can wave to make $600 billion or $1,000 billion of liability disappear in a puff of smoke. The particular method of doing this could hardly be characterized as fair just because it gives such a low pay-off. Really, it's not spread over generations.

My generation is paying a little more for a few years, but the real burden is going to fall on our kids and our grandkids. My concern is that when our kids figure out that the pay-off is so negligible for them they simply will not be willing to make the contribution necessary to keep the scheme going.

• 1840

It seems to me that aside from any partisan differences we might have here, it's incumbent on this committee to look at the long term. We have to look at the effect over the years. Sure, we can paper over the cracks of this system for the next 15 or 20 years, but at some point the younger generation's going to figure out that this is a low pay-off. I think we have to ask ourselves whether this is something that will be sustainable, practically and realistically, when that low pay-off strikes home to the people who will be sitting in these chairs at that time.

If we honestly think they're going to keep making this payment for the low pay-off they will get, then I guess we should just let it go ahead. But I don't believe that will happen, particularly when they already have a huge public debt to contend with, increased health care costs, and all the other things they're going to have to pay for.

So I put that to the committee. We can either shrug it off or really grapple with it and see whether there isn't something better we can do for our kids.

The Chairman: Do you have any further questions for the officials?

Mrs. Diane Ablonczy: I'll give someone else a chance. I don't want to dominate the proceedings.

The Chairman: Mr. Crête.

[Translation]

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ): I have a two-part question.

First, the Bloc Québécois suggested a decrease in Employment Insurance premiums to somewhat offset the increase in amounts payable. If the Act is amended to reduce Employment Insurance premiums, would this affect the economy of the Canada Pension Plan as proposed in the Bill?

[English]

Ms. Susan Peterson: If I understand you correctly, the CPP and the employment insurance are entirely separate pieces of legislation.

[Translation]

Mr. Paul Crête: As we are legislators, if we proposed an amendment under which the new plan would entail a reduction in Employment Insurance premiums, would this have an impact on the overall economy of the plan and its operation? Personally, I don't think there would be any, but I would like your views on the matter.

[English]

Ms. Susan Peterson: Just two points. You couldn't reduce employment insurance premiums by amendment to the Canada Pension Plan. You'd have to do it by an amendment to the Employment Insurance Act, number one. But your point—

[Translation]

Mr. Paul Crête: In an Act, there are always transition measures, the possibility of changing other acts. The technical possibility is there. My question is not about that aspect. I am sure it is feasible. For the past four years, I have been involved in the adoption of a sufficient number of Acts to know that, when you want to do something, you find a way to do it. So, if we do it, will it have an effect on the Canada Pension Plan as such?

Ms. Susan Peterson: No.

Mr. Paul Crête: It would have no effect.

[English]

Ms. Susan Peterson: Not one that I can think of, no.

[Translation]

Mr. Paul Crête: All right. This confirms what I think, but it was important that I ask.

If I am mistaken, please tell me. For someone who earns about $40,000 per year, the 1997 rate would climb from 5.85% to 6%, a 0.15% increase, an increased expense of about $60. Is this correct? These figures are from page 4 of the document entitled "Canada Pension Plan, 16th Actuarial Report, September 1997".

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Mr. Réal Bouchard (Director, Social Policy Branch, Department of Finance): In fact, the difference between 5.85% and 6% is equivalent to not more than $48, $24 for employees and $24 for employers.

Mr. Paul Crête: By and large, the insurable salary is $40,000. The increase in the amount withheld from pay cheques will be of the order of $24 per employee. This is what you are telling me?

Mr. Réal Bouchard: For the Canada Pension Plan, yes.

Mr. Paul Crête: This means that application of the Canada Pension Plan will reduce purchasing power. Has the significance of this for consumption been evaluated? I know that the Minister was asked a few questions about it yesterday, but I would like your opinion. Have any studies been done on the effect on the economy of the potential loss in purchasing power of both individuals and employers? What will the impact be in terms of job loss?

Mr. Réal Bouchard: Susan said at the outset that the report would be tabled tomorrow and that the matter would be included in the analysis. In fact, a detailed analysis of the impact on consumption in certain households has not been done. If this type of study is somewhat familiar to you, when an analysis of this kind is done, macro-econometric models are used to take the possible impact on overall consumption expenditures into account. So, yes, this type of analysis has been done.

Mr. Paul Crête: These are the figures we will have tomorrow.

Mr. Réal Bouchard: You will see the impact, not on consumption, but on the economy as a whole.

Mr. Paul Crête: On overall purchasing power. I agree that it is difficult to calculate the effect this will have on purchases as such, but we can determine with a fair degree of accuracy how much less money people will have and the effect of that on the economy.

Mr. Réal Bouchard: The effect on overall economic activity, measured by the gross domestic product.

Mr. Paul Crête: I have another question, about return on investment. In the document, you allude to the average rate developed for the Quebec Pension Plan, on pages 10 and 11 of the document:

Overall, the assumption of an actual return of 4% on the CPP Fund means that the CPP Investment Board would be called upon to realize investment returns comparable to those realized by the QPP and major private retirement plans.

Can you evaluate the effectiveness of this Fund? Do you have the knowledge required to know whether the Quebec Pension Plan Fund sought out the maximum and if the model you are tabling here will allow...? Do you consider that you have a return equivalent to the return on the Quebec Pension Plan? In your opinion, can the assumption on which your thinking is based be qualified as realistic, optimistic or pessimistic?

[English]

Mr. Bob Hamilton (Assistant Deputy Minister, Investment, Department of Finance): In looking at the investment return of the Canada Pension Plan, it's true that it will operate in a manner very similar to the one that's in Quebec in the sense that it will invest the funds in a diversified portfolio of bonds and equities, and that one would expect, within a margin, that they would earn similar rates of return, subject to specific investment choices.

As you know, the assumption going forward for the Canada Pension Plan is a real return of about 3.8%. It's felt by all parties that have looked at this that it's a realistic rate of return, and a prudent one, to assume in going forward. If you look at the history of recent years of what some of the pension funds have earned, you would see that they've earned more than 4%, considerably more, going as high as 13%, nominally. But again, one has to consider that what we're proposing, looking forward, is a long-term assessment of the return one could earn, not a specific period of time where one might earn excessive returns because markets happen to be particularly hot.

• 1850

So, yes, looking back, one could assume that the Canada Pension Plan should earn a rate of return similar to the large public sector funds, whether it's Ontario teachers, the Caisse de dépôt or others. Having said that, we were comfortable that the assumption going forward, that the rate of return would be around 3.8%, was a prudent and good assumption.

Mr. Paul Crête: Ça va.

The Chairman: Mr. Nystrom.

Mr. Lorne Nystrom (Qu'Appelle, NDP): Thank you very much, Mr. Chair.

I want to welcome you again to the committee, and ask you questions in about three or four different areas, if I may.

First, the assumption made by the actuary was based on what some economists think, some rather pessimistic scenarios in terms of wage rates and employment growth in the future. I think the real wage growth was 1%.

I wonder if you did other models at the Department of Finance, where, for instance, you've run a model with a 2.5% wage increase and what effect that would have on the contribution rate of wages that average 2.5% over the period of this model, and holding benefits the same.

One of the problems at least some of us have with this bill is that the benefits are reduced for some of the folks. That's one reason why Saskatchewan and British Columbia are not really supportive of what's happened. So if benefits were to remain the same and if wages were calculated at 2.5%, what impact would that have on contributions?

Have you done some of those models, Ms. Peterson—or whoever? It may be useful in terms of seeing the options.

Mr. Réal Bouchard: I'm not going to comment on whether or not 2.5% is realistic. Perhaps Paul-Henri could say a few words on this afterwards.

What I can tell you, though, is that rather than 1% productivity, if we had 1.25%, the long-term rates would be 9.7% rather than 9.9%.

Mr. Lorne Nystrom: For 1.25% instead of 1%.

Mr. Réal Bouchard: Yes.

Mr. Lorne Nystrom: Is that with the benefits being what they are in this bill or the benefits being what they actually are?

Mr. Réal Bouchard: As being proposed in Bill C-2. Of course, if it's small enough, at least, it's symmetrical. If it were 0.75% rather than 1.25%, the rate would be higher, 10.1%. So it's 0.2% the other way.

Perhaps Paul-Henri could say a few words here.

Ms. Susan Peterson: I would just add that of course it's the chief actuary's professional judgment on how to evaluate the Canada Pension Plan. We don't tell him what to assume.

Mr. Lorne Nystrom: I'm aware of that. I just wondered whether you'd done some models. This information is helpful.

Do you want to add something to that?

Mr. Paul-Henri Lapointe (Assistant Deputy Minister, Fiscal and Economic Policy, Department of Finance): I'd simply add some background about the views we have when we do fiscal planning. For instance, I think there is a consensus that we are not going to see the kind of productivity growth we had until the early 1970s. Over the years, economists have adjusted gradually their views downward as to what is the potential growth of productivity and output.

I don't think it would be prudent, as we do our economic forecasting and fiscal forecasting, and the same thing here, to table on productivity growth returning to what we saw before.

Mr. Lorne Nystrom: Have you done any projections you could share with us, then, based on 2.5%?

Mr. Paul-Henri Lapointe: No.

Mr. Lorne Nystrom: Okay.

Mr. Réal Bouchard: In the fifteenth actuarial report—not this one but the one before—and in the CPP information paper released a year ago, there was a table showing the reasons why the long-term, pay-as-you-go rate increased so much since the plan was introduced in 1966. There were a number of economic factors, demographic factors.

One of the factors was related to the fact that productivity has decreased over the years. In fact, the chief actuary back in 1966, whoever it was at the time, started with a 2.5% assumption with respect to productivity. It was dropped successively over the years, as a result of experience, from 2.5% to 2.0% to 1.5% and now to 1.0%.

• 1855

Mr. Lorne Nystrom: In what year was it 2.5%?

Mr. Réal Bouchard: Unless I'm mistaken, in the sixties and seventies it was 2.5%.

It had to be dropped. He clearly had become too optimistic. It's one of the reasons that explains the increase in the long-term pay-as-you-go rate. In fact, initially the chief actuary estimated the long-term costs of the plan to be 5.5% of the contributor earnings. In the last report it showed it was going to be 14%. The difference between 5.5% and 14%...2.2 points of that were related to that productivity assumption that initially was too optimistic.

Mr. Lorne Nystrom: Another question I want to ask is one that Mr. Szabo might be interested in. We've all been lobbied by the firefighters recently. One of the points they made to us...at least in a private member's bill on one of their concerns, was the possibility of dropping the age for qualifying for CPP from 60 to 65 and early retirement from 60 to 55, because they're in a very dangerous line of work.

During all the negotiations with the provinces, did you look at the possibility of doing that for people in what may be called dangerous lines of work? This might include not just firefighters but also miners and others. This is something they're very concerned about. I think they've asked a lot of us about this.

If you've done that, perhaps you could share it with us. If you haven't, I understand, but there might be a possibility of looking into it.

Ms. Susan Peterson: No, we didn't look at that. As the information paper on the Canada Pension Plan, which has formed the basis of the consultations, shows, one of the options on the table was to look at raising the age of entitlement, as other countries have done, to deal with the escalating costs of public pension plans. Certainly no thought was given to lowering it, not for anybody. The CPP is available at age 60 despite the fact that people are living a lot longer.

So, no, it was not looked at.

Mr. Lorne Nystrom: I wonder if there's a possibility of having somebody take a quick look at that. This is a request we've all gotten as members of Parliament.

I would ask you that, Mr. Chair, I suppose, rather than the officials. It's something we can discuss perhaps later on.

The Chairman: Sure.

Ms. Susan Peterson: Do you know where you would draw the line, what's dangerous and what's not? Because it's hard to know—

Mr. Lorne Nystrom: I know it's very difficult. It's a question I asked the firefighters as well. It's a question we should perhaps look at later on. I don't want to put you on the spot as officials.

I want to ask you another question that's totally different. We received here the other day a list of the members of the nominating committee on the Canada Pension Plan investment board. There are about 11 members on that, and there's not a single woman on it.

I wonder if anybody can explain that.

Mr. Bob Hamilton: I can explain to you how the list came about. Each of the participating provinces and the federal government nominated a person independently to put on that list, and that list is the outcome of that process. So that's how it came about.

As to why there is not one single woman on it, I can't answer that question. Everybody in the provinces and the federal government searched for the best person they wanted to put forward as a name on that committee, which will then identify candidates for the board of directors. One came from the federal government and the others from the participating provinces.

Mr. Lorne Nystrom: I have another question in the same vein. Recently we received a notice that there's a 1-800 toll-free number for information on the recent changes to the Canada Pension Plan.

Well, there haven't been any changes yet. They're anticipated changes. Is it normal to advertise ahead of time, to anticipate that something's going to pass Parliament? Technically it's misleading people, because there have been no changes.

Ms. Cathy Drummond (Director General, Programs Directorate, Income Security Program, Department of Human Resources Development): You're right, it is misleading. It's my fault. I didn't pick up on that.

Mr. Lorne Nystrom: Okay. I'm not trying to put you on the spot.

The Chairman: Any further questions, Mr. Nystrom?

Mr. Lorne Nystrom: If I have time, I would like to ask one more thing about the investment board, which will be at arm's length from the government. I'm wondering what kind of guarantees there are that it will be at arm's length.

As well, when you were drafting the legislation did you look at the possibility of some guidelines that might encourage the board to invest at least certain proportions in different regions of the country?

• 1900

I come from a small province, Saskatchewan, and people would be putting a lot of money into this pension fund as it grows. What guarantee do we have as Saskatchewanites, who do not have a lot of big companies in the private sector, that we'll get some of this money coming back into the province?

Was there any thought given to looking at some of the social concerns like employment and so on, investing in certain companies so they can create more jobs? Were thoughts given to this, and if so, why were they rejected? I'm thinking of things like the caisse de dépôt in Quebec, where they have some guidelines to this effect, according to what I understand.

Mr. Bob Hamilton: Right. It is true that one of the important factors that was pointed out to us as we talked to people about the proposed changes to the Canada Pension Plan was that the investment board would be independent, and we've gone to quite great lengths to ensure that as much as possible. The objectives of the board will clearly be to invest in the best interests of the beneficiaries and contributors of the plan.

There is no secondary objective, if you like, in order to have another criterion to satisfy, whether it be economic development or other. In that respect it is somewhat different from the Caisse de dépôt in Quebec. We have a number of measures in the legislation and in the guidelines to try to ensure that this is an independent board that invests in the best interests of the contributors, that its investment policies are transparent, that it reports regularly. Our sense is that through those measures we can be assured that it will be investing at arm's length and in the best interests of the contributors and beneficiaries.

The Chairman: Mr. Jones.

Mr. Jim Jones: Can somebody tell me why it is important that we have to decide this by January 1? What's the importance of that date? We have to have it in place, I should say.

Ms. Susan Peterson: It comes down to the idea that every day you delay taking up those contribution rates, the more burden you put on younger generations. The objective is to get these changes started as quickly as possible so that the baby boomers, who have not been paying their way, at least do start paying a little bit more of their way before they retire. That's the objective of getting it done by January 1. If we miss the January 1 deadline, it's not that you could start a month later or two months later; it's that you would wait another whole year.

Mr. Jim Jones: There's no other legislation that kicks in if we don't make that date?

Ms. Susan Peterson: No. The Canada Pension Plan, both the financing.... Well, there is an existing act and what it provides for would carry on. You wouldn't get the contribution rate going up to have the baby boomers pay more towards their own pensions and you would not start moving towards a new investment policy and what have you.

Mr. Jim Jones: So if we don't make January 1 we lose a whole year. Is that what you're saying?

Ms. Susan Peterson: That's right.

Mr. Jim Jones: We can't go a month later or anything like that?

Ms. Susan Peterson: No.

Mr. Jim Jones: This is a lot of information to digest, and there's definitely a lot more information needed. I have a report here on the pay-as-you-go rates underlying how the CPP works. I'd like to have an update of this. This is January 1, 1997, and what I'd like to have the chief actuary prepare for the committee tomorrow is the annual cashflow and anticipated pay-as-you-go rate under the plan as it's now structured up until the year 2100, and then at the same time have it for the same cashflow under the plan as restructured in Bill C-2.

Mr. Réal Bouchard: You're talking about pay as you go, pre- and post-reform?

Mr. Jim Jones: No, the current and the new bill.

Mr. Réal Bouchard: I think you have that in the actual report.

Mr. Jim Jones: Where is it if it's here?

Ms. Susan Peterson: Page 13.

Mr. Jim Jones: I'd like to have this computer run here.

Mr. Réal Bouchard: I can't see what....

• 1905

The Chairman: Mr. Jones, just for the benefit of other members of the committee, which report or piece of paper are you referring to?

Mr. Jim Jones: Well, I have to bring it back now.

Mr. Réal Bouchard: I don't know where that's coming from, but certainly if you can share it with us, we can see what we can provide by tomorrow.

Mr. Jim Jones: Okay.

The Chairman: Well, can we know where it's coming from? I think it's important. We can't be discussing things without knowing what we're talking about.

Ms. Susan Peterson: Do you know where it's come from?

Mr. Jim Jones: I got it from somebody. I think it came from your area, from the Department of Finance at the start of this year. So we know that it can be cranked out.

The plan is going to have the 20% content—

The Chairman: Mr. Jones, we're still dealing with this piece of paper here. Is it okay if we reproduce this for the rest of the members?

Mr. Jim Jones: Sure.

The Chairman: It's hard to identify where it comes from, though. Okay, we'll deal with this. Thank you. Go ahead.

Mr. Jim Jones: We got it from the finance department. It was an earlier report that somebody had gotten earlier in the year.

The Chairman: Okay.

Mr. Jim Jones: It was a computer-simulated model.

Also, if investing in the market is good economics for the CPP, then it must be good economics for the government's other pension plans. Is it possible that we could have the chief actuary produce data to show what the effects could be on the earnings of the pension plans for the public service, members of the armed forces, and the RCMP, if those plans are also able to invest in the market? Would it be possible to get that information?

Mr. Bob Hamilton: I'd have to ask. I'm not sure if that information is available, but certainly we can ask the question.

Mr. Jim Jones: Okay.

A lot has been mentioned about the British model and the Chilean model.

Ms. Susan Peterson: Which was that—the British?

Mr. Jim Jones: The British and the Chilean models. I just wondered if it's possible that you could do a computer run based on that model and the assumptions of those plans based on the Canada Pension Plan fund.

Ms. Susan Peterson: I don't know what their assumptions are. I always find that when you look at other countries' pension plans, they are so different, and so I think what you're asking for is simply not doable. Each country's pension plans are very complex things and are very different. I don't know how we could model them.

Mr. Jim Jones: Maybe the Reform Party could table their information on this for the finance department to take a look at, if they haven't really evaluated it.

Mrs. Diane Ablonczy: Mr. Chairman, in response to that, we do not have the resources of government available to us, unfortunately. It would be nice if we did, and I've had discussions to try to get those. Unfortunately there are so many conditions attached that it makes it very difficult for us to feel comfortable doing that.

I think if we're going to do the best for Canadians, looking into some of these options makes perfect sense, instead of just saying someone else should do it. I agree with my colleague.

Ms. Susan Peterson: The Minister of Finance has said that if one could be extremely specific.... I mean, a chief actuary has to have extraordinary specificity about what it is he's being asked to model, number one. That would be the first condition—that you knew what it was you were being asked to do.

Number two, the only other condition is that public servants cannot do things like that on a confidential basis for anybody. So if we are going to do it, the fact that we were doing it, what we were doing, and what the results were would have to be known by everybody. Those are the only two conditions—oh, and that it's feasible.

• 1910

Mr. Jim Jones: This is a public meeting. I am not asking for this information on a confidential basis. I'm asking for this information for the pleasure of this committee so that we can make the proper deliberations on this plan over the next three or four weeks. I assume you have done this analysis, that you have compared other plans.

Ms. Susan Peterson: You can't say here's exactly how Chile's works, now make it work through the CPP. If you have an idea, if you have specifics about what you would like the chief actuary to look at, we can have a look at it, absolutely. But we can't specify what to do, because their plans are not comparable. If you could tell us what you wanted in enough detail that the chief actuary can actually feasibly do something, we can look at it. I don't know how complex it was, because we haven't seen anything.

Mr. Réal Bouchard: I have just one more comment. Of course, the chief actuary can only work from the existing Canada Pension Plan and his model can only work if you're making certain changes relative to the existing plan, what is happening. If you're asking something else on an entirely different system, the chief actuary obviously cannot use his model to simulate that. That's an entirely different task.

The Chairman: So you're basically saying the Department of Finance doesn't have the entire Chilean model or British model on hand.

Ms. Susan Peterson: Chile couldn't model the Canada Pension Plan, nor could any other country. Likewise, we can't model theirs.

The Chairman: That makes sense.

Mr. Jones.

Mr. Jim Jones: Based on the feedback I got, I'd like to have more information, then. Could the chief actuary prepare information for this committee on the benefits, the contributory earnings, and the pay-as-you-go needed to pay out all of the CPP benefits for each future year if the plan were to be shut down at the end of this year? We'd need that for the plan both as it is now and as it is proposed. Suppose that as part of the process of shutting down the plan, new entrants to the labour market were exempt. In that case, what premiums would be required for those already in the labour force to pay out all of the liabilities?

The next thing I'd like to see is a computer run on increasing the earnings. Will the chief actuary please provide the committee with the same cashflow information for the plan for rates of return of 4%, 5%, 6%, and 7% and what would happen under different investment return assumptions?

The last thing I'd like is another computer run on the impact of individual changes to the plan. As well as increasing premiums, Bill C-2 makes three main changes that affect the plans, costs, and revenues. These are the changes in the average earnings on which benefits are based, changes to disability benefits, and a freeze in the annual basic exemption. For each of these three other changes, will the chief actuary please produce separate computer runs as to the effect for each year until the year 2100, including the effects on benefits, contributory earnings, and the contribution rate? I will give you this request.

The Chairman: Mr. Jones, I think this would be an ideal Order Paper question that you can do through the House. I think it's great and you've obviously put a lot of work into it, but I think maybe you should use the House to get that information as a way of proceeding.

Mr. Jim Jones: I think we should ask the chief actuary to come to these meetings. I think he can probably grind out some of the stuff pretty fast.

The Chairman: Can the officials produce that?

Mr. Jim Jones: I would assume they have done this stuff. If they haven't done it, why haven't they?

The Chairman: Mr. Szabo.

Mr. Paul Szabo: Mr. Chairman, I think Mr. Jones is asking some interesting questions, and I believe most of that information is readily available. For instance, the question that would involve a substantial amount of work about how much it would cost to stop it today and pay it all out is well known. It approaches some $600 billion. I don't think we have to ask them to go and do a bunch of computer runs. I think the chief actuary has already submitted that.

With regard to something like the Chilean model, there are some elements of that. For instance, what rate do they use for premiums, what average industrial wage do they use, if they do, and what escalation or inflation assumptions do they make? To the extent that you would like to know those, those certainly would go within a range.

I believe that the officers from the department have already indicated that with regard to certain aspects, you could move the rate by assuming a different thing in terms of inflation by 0.2%, or something like that overall.

I really think that all members would like to be better informed about the magnitude of the issues, the sensitivities of certain rates and assumptions, and stuff like that. I suspect the staff have this either with them, or could get it quickly. But I'm a little concerned about shooting the shotgun, and getting a lot of paper that maybe doesn't get us quickly enough to the focus.

So, Mr. Chair, I would appeal to you to—

The Chairman: I just want to get a point of clarification. Mr. Jones, is there a timeline you're looking at? Everybody has been asking for things tomorrow.

Mr. Jim Jones: Tomorrow or the next couple of days, so that we can analyse it over the weekend.

The Chairman: Okay. That's of course a major concern. Of course, we have the ability. Do we have the capacity and the time to—

Mr. Jim Jones: Well, I think they probably have a lot of this information available today on computers—just throwing in the assumptions, the variables, and it takes a couple of hours on a computer to run it out.

The Chairman: So is there a deadline you want to place on the—

Mr. Jim Jones: Well, I'm going home Thursday night, so I'd like to—

The Chairman: Okay.

Mr. David Iftody (Provencher, Lib.): I'll have a thesis ready for you by that time.

The Chairman: Do you have a fax machine over the weekend?

Mr. Jim Jones: I think this might take a little more than a fax machine.

The Chairman: Mr. Crête, we'll deal with your question next.

[Translation]

Mr. Paul Crête: Does our problem not arise from the absence of the Chief Actuary? If the Chief Actuary were here, we could get fairly quick answers on what is feasible and what we can expect to have in the way of documents. Is it not possible for the Chief Actuary to attend the committee in the near future? When he is here, we could use the opportunity to settle the matter of documents to be tabled or requested, and do calculations fairly quickly so that we can ask questions and obtain answers directly. This would probably avoid delays.

[English]

The Chairman: Okay. That's been noted, Mr. Crête.

Mr. Jones, let's go back to your question.

Mr. Jim Jones: Yes, I have one final question on whether funds are available for investment. Could the chief actuary advise the committee what funds will actually be available for the fund to invest in the marketplace over the next three years. Of that amount, how much will be available for investment in the equities market, given the requirement that a fixed amount go to provincial bonds?

Mr. Bob Hamilton: Yes, we have a table. Over the next three years there will be—

Ms. Susan Peterson: This is what was tabled with you tonight; the answer is there.

Mr. Jim Jones: You know, you get mixed up when you first come. It's pretty hard to....

Mr. Bob Hamilton: It's a two-page piece of paper that looks like this. The second page is a table that shows the size of the CPP fund from 1998 through to the year 2007. In part, it depends on how much provinces take up of the existing funds, whether they choose—

The Chairman: Just for the record, are these the projected assets of the CPP and CPP investment board?

Mr. Bob Hamilton: Now, there's a table there that outlines the fund from 1998 to 2007. And if you look at the right-hand side, you'll see there are two scenarios. One is where provinces take all the rolled-over funds they already have. In other words, currently about $35 billion is loaned out to provinces. They will have the option of taking those up one time for another 20 years. So if they take those, that gives us less funding for the new fund, and if they don't take those, then more funds go into the new fund.

• 1920

But for the sake of argument, let's just take the middle two columns. Looking at the right-hand side of those middle two columns, you see that in 1988 there are no new funds to be invested by the board. Then in 1999 there's $0.1 billion. Then that continues to grow. So you can see the path of the funds that will be available for the fund to invest.

Mr. Jim Jones: Thank you. I have one final comment, Mr. Chairman. It would be a lot easier for us to do our analysis if we were given information right up front, before we came to this meeting, so that we could read this stuff. Obviously this information is already prepared, and I don't know why we can't have it available. Over the next ten days we can know what's going to be on each agenda, instead of getting it as we come to these meetings, and then having to ask questions.

We're talking billions of dollars here, important decisions, and I think the information should be given up front. They've had the information for a long time, and here we have to make decisions based on getting stuff—

The Chairman: Mr. Jones, your point is very well taken. I also want to bring to your attention, though, that I believe these documents were requested last evening, during the ministerial presentation. But I also want to point out that this binder, the briefing book on Bill C-2, was provided a few weeks ago to go through. I'm sure there's enough material here to keep us busy for at least this period of time.

But your point is well taken, and we'll do whatever is possible to make sure that material reaches you prior to the meetings.

Are there further questions?

Mr. Jim Jones: Well, another comment is that it would be nice if the scheduling of these meetings wasn't at the same time as that for the finance committee, and that somehow there was a lot more continuity at these meetings.

The Chairman: This is the finance committee.

Mr. Jim Jones: I meant, it seems like we're jumping all over the place in this building. It would be nice if we were in one place.

The Chairman: I understand.

Some hon. members: Oh, oh.

The Chairman: I feel your pain.

Mr. Iftody.

Mr. David Iftody: Thank you, Mr. Chairman. I wanted to jump in on one of the points raised by my very delicate member next door here.

Some hon. members: Oh, oh.

Ms. Paddy Torsney (Burlington, Lib.): Let's not go there.

Mr. David Iftody: Thank you, yes, let's not go there.

Mr. Hamilton, we're just looking at this document. On the front page it says that the total CPP assets are projected to be $94 billion in 2007, but in the actuarial report it says $135 billion. How do you account for the discrepancy between what the actuarial report says and what you're saying? Now, that's a significant difference. How do you account for that difference?

Mr. Bob Hamilton: I'm not sure I can fully explain that; perhaps one of my colleagues can. It's due to different assumptions that were made, the key ones of which were changes in the inflation assumption going forward. It had been assumed as 3.5% down to 2.5%. I believe there was a change in the assumption on the disability experience. But I will defer to my colleagues on that one.

Ms. Susan Peterson: The basic point is this: when the chief actuary does a report on the Canada Pension Plan, he's obliged to base it on the experience at the time of the report that we had available when we did the review. In the meantime, things change.

So we know there are certain assumptions, certain things in.... He did it the way he's supposed to do it. Indeed, he did it the way he's required by law to do it. But in the meantime, things change. So we wanted to get as accurate a view of what was going on with this as we could. That's why we've done these numbers, to take into account the more recent data.

Mr. David Iftody: What would the variables be? That is a significant difference between the two calculations. What kind of variables are operating there to make those calculations within a short period of time of the construction of those two reports? What kind of independent variables are there to throw those numbers off in such a dramatic way?

• 1925

Mr. Réal Bouchard: Let me add a comment. The report that was the basis for the review was as at December 31, 1993. That was the fifteenth actuarial report, and as Mrs. Peterson said, the chief actuary still had to use that basis to determine the impact of the changes being proposed.

So it means of course that since 1993, actual experience, like 1994 and 1995 and so on...since the first report was prepared in February 1995 there's been some actual experience on the benefits side, on the contribution side and so on, but they could not be taken into account by the chief actuary in order to do projections for the future. It means that the short-term assumptions contained in the actuarial report in the first couple of years do not necessarily give a very good picture of what is happening, particularly in the fund accumulation.

Now of course with the medium- and long-term, those projections are what is needed. But when we want to see the impact of the new investment policy over the next year or two or three, we need to reflect actual experience from the last one or two years. That's why we prepared that particular table.

Mr. David Iftody: I find it a bit extraordinary. Obviously, in terms of the difference between 1993 and 1997, the reduction in the potential assets would have to come from pay-outs. I would think, then, that the variable is a growing or aging population. I just find the percentage change quite dramatic.

But I have another question, if I might, please. It has to do with the disability portion of the CPP. As a member of Parliament—and I don't know whether my other colleagues are experiencing this as well—in the few years that I've been an MP, I've noticed a dramatic change at the local level in the number of applications under disability.

There's a dramatic increase. Ultimately I'm not quite sure what the reasons are. I'm told the provinces are pushing their workers' compensation into this category, and perhaps it's cuts in welfare payments as well. But presumably, with respect to this dramatic increase, we're going to see more of this, of course, with the clusters moving forward over the next 10 or 15 years who will be of retirement age and a growing number within that cluster, an overall percentage, an aggregate number for which I would assume we're going to have more claims.

Having said that, under this new proposed formula, the calculations you've used for the survivor benefit and the disability, if someone is collecting two.... For example, you are a senior woman, your spouse has died, you're collecting a survivor benefit and you're also disabled. Under the new formula some of those individuals apparently will be receiving less money than they would have under the old calculations.

Why did you reconfigure those calculations? And could you talk a little bit about your plans and assumptions within the bill about projections for an increase in the number of people, presumably women, who will be exercising their rights under the plan to claim disability?

The Chairman: Mrs. Drummond.

Ms. Cathy Drummond: With respect to the first part of your question about the numbers of people applying for CPP disability, the numbers did indeed increase quite dramatically in the early 1990s. There were a variety of factors, but it wasn't only Canada that was experiencing that increase.

I'm not sure that we can say exactly what all of the factors were that contributed to it. It had to do with high unemployment rates. It had to do with differences in the way we regard disability and what we regard as disabling conditions. It also did indeed have to do with social assistance from other levels of government. People were moving off that and on to CPP.

• 1930

However, we had a huge increase at the beginning of the 1990s. The numbers of applications have been dropping and the numbers of people on CPP disability have dropped and are levelling off. We feel we have to bring some different management practices to bear to keep those numbers fairly level. In terms of the projections we have, the incidence in disability in the Canadian population as a whole is not going up; it's been going down, although we do have an aging population. Obviously the two of them have to balance.

One of the things we're trying to do is particularly more rehabilitation. We had no rehabilitation program at all in the Canada Pension Plan earlier. We've tried a pilot, it's worked well, and we're going to expand that. We're hoping to work with partners. A lot of people are on both workers' compensation and CPP disability or on a private pension plan as well as CPP, and we want to start doing some case management with those partners to try to help people get back to work as much as possible. We're hoping that through new management techniques in the program we can keep those numbers fairly level.

Mr. David Iftody: When you use the term “management techniques”, is that another term for the reconfiguration and recalculation on the seniors' benefit? Are you coming to that?

Ms. Cathy Drummond: No, I'm not talking about that. I'm talking about the first part of your question about whether there will be an increase in the numbers of people on disability benefits.

On the calculation of benefits, I'm going to turn to my colleague here.

Mr. Rod Hagglund (Special Adviser, Social Policy, Department of Human Resources Development): I'm not sure about the last remark you made with reference to the seniors' benefits.

Mr. David Iftody: I'm sorry; I meant calculation of the survivor benefit with a disability.

Mr. Rod Hagglund: The rule that was instituted in the proposal is in fact in many ways a return to rules that existed earlier in the program's history and a rule that was more or less retained throughout its history by the Quebec Pension Plan on retirement benefits. The disability-survivor rule parallels that rule. Essentially what that rule says is that the CPP has quite a combination of different ways in which survivor benefits can combine with other benefits under the program.

When the program was created in 1966, it was felt that it was reasonable to limit the amount of expenditures that would go to any one individual. The survivor benefits were cross-subsidized by other contributors and were essentially to be aimed at persons who had a certain degree of dependency. So it was felt reasonable from the beginning of the program that there would be some limits placed on how much survivor benefit would be given to someone who had worked and was receiving a benefit of their own.

This rule essentially says that if you have any kind of CPP benefit, it has two possible components. It has an earnings-related component and a flat-rate component, the flat-rate component being for support and the earnings-related component reflecting how much was paid into the program and how much the earnings were that it was on. The combination rule that's instated to cover all those things is that if you have flat-rate components and if there's more than one, you'll receive the larger of the flat-rate components. If there's one of them, you'll receive that flat-rate component in full.

If you have earnings-related components in your benefits, such as survivor and disability, or survivor and retirement, then the calculation is based on giving you the larger of those two components in full and 60% of the smaller component. There is a reduction for the fact that you're receiving both of them. In addition, there is a ceiling on the amount of earnings-related components that can be received, and that's the largest possible of those earnings-related components. If it's a maximum retirement pension, for example, or a maximum disability earnings-related benefit, that's the way the calculation runs in the benefit rules that are proposed.

• 1935

The final touch on that is, in the case of early retirement benefits, there's also an actuarial reduction that applies to the retirement pension, and this also has to be factored into the calculation. That's done at the very last stage.

So what I've done is describe all the combined benefits. The disability-survivor combined benefit is just part of that package.

On the disability-survivor combined rule, you basically have an under-65 person with a survivor benefit, and it has an earnings-related component and a flat-rate component. That same person is also receiving a disability pension, and it has an earnings-related component and a flat-rate component. So they'll receive the larger of the two, which is the flat-rate component of the disability pension. It's much larger than the flat-rate part of the survivor benefit.

In addition, they'll receive the larger of the two earnings-related components. That usually will be the disability component, but it might be the survivor component, depending on how much they earned. If they had a very small job of their own, that disability earnings-related component might actually be smaller than the survivor benefit. Whichever one is bigger, they'll get that one in full, and they'll get the other one on top of it, to the extent of 60%, up to one maximum disability earnings-related benefit.

So that's the way the combination rule works. The underlying reasoning for that is that these benefits, particularly survivor benefits, are subject to cross-subsidy from other contributors. A single person who does not have a spouse pays the same contribution as a person who does have a spouse. Therefore, by the people who designed the program and throughout its history, there have been limitations placed on how much a person who receives a benefit in their own right and a benefit derived from someone else's contributions would receive.

The Chairman: Mr. Valeri.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman.

I want to make a couple of points, making reference to an article I read the other day, and get some clarification to deal with some of the issues that are out there.

One was the idea that future pensioners will be giving up guaranteeing returns on savings in exchange for a risky and costly bet on a volatile stock market. I'd like you to address that aspect of it, because it is an issue that's out there as well, in terms of the reforms.

The other issue I'd like you to touch on is this second round, and I think Mr. Nystrom made some reference to what some of those issues are. Maybe you can talk about how that second round actually developed and give us some background as a result of the negotiations with the province.

I'd also like you to make a comment—and again Mr. Nystrom made reference to this—on the fact that B.C. and Saskatchewan are not part of this particular agreement. But we are in the process, once this legislation in fact passes, to mandate the set-up of an investment board. Even though they may not be part of this particular agreement, can you clarify for this committee what type of participation both of those provinces would have with respect to the investment board?

Last, I refer again to this article, and it continues on to say that the changes would have a negative effect on women and the poorest of pensioners. I'd like you to make reference to that and give this committee an indication of the kind of impact those proposed changes would have.

The Chairman: Mr. Valeri, which article are you referring to?

Mr. Tony Valeri: I'm referring to the Calgary Herald, Tuesday, October 28, 1997.

The Chairman: Okay.

Ms. Susan Peterson: I'll ask Dr. Hamilton to deal with the first and third of your questions.

Mr. Bob Hamilton: Let me take the first one.

As we've seen in the last couple of days, the stock markets can be volatile at certain times. But I think it's important when looking at the investment policy that's proposed here, and indeed it's a policy that's similar to the one followed by a number of private and public sector funds in Canada, that you're looking at a long-range investment policy designed to earn a maximum rate of return, subject to it being a prudent investment policy over a long period of time. As I said earlier, we've assumed a 3.8% rate of return here.

That doesn't mean that from time to time there won't be bumps and wiggles, certainly in certain parts of the portfolio, but the idea of investing in a diversified portfolio of equities, bonds, and other securities is to make sure that, overall, the risk is minimized and one can still achieve a good rate of return. Indeed, I think the evidence is that in Canada, certainly, all of the major pension funds have followed this as an investment practice.

• 1940

So I think one needs to be comforted that this is a long-term investment policy one is adopting and one that diversifies a number of different asset types.

On the third question you raised, I would point out that all of the participating provinces, even the provinces of B.C. and Saskatchewan, have appointed members to the nominating committee. The nominating committee, as I said earlier, will be the group that puts names forward to be considered for the board of directors of the CPP investment board. They're very much engaged in that process.

Those are the first and third items.

Ms. Susan Peterson: I would add one point to your first question.

The big difference between the Canada Pension Plan and saving through RRSPs is that the Canada Pension Plan provides a defined benefit. You know how much you're going to get out of it, as opposed to a declined contribution plan, in which you put whatever money is called for and get out whatever you've been able to get by way of returns. So you don't know what you're going to get. The Canada Pension Plan is a plan designed to replace 25% of your wages. Each year you pay in according to that, and you know what you're going to get out at the other end.

It's the security, one, of a defined benefit plan and the security, two, of the fact that it's provided in a public plan and therefore provided at reasonable cost. As the document we tabled shows, the administrative costs of a public plan are considerably lower than the administrative costs of a multitude of private plans.

Moving on to your question about the second round, during the discussion with the provinces a number of issues came up. The key issue for the first round was how to make sure that the CPP could be sustained for the future. There are lots of other issues one can look at, but it was agreed that those are the ones to concentrate on.

Some were purposely put aside from the very beginning. For instance, in the information booklet on the CPP, it explicitly says the whole issue of how survivor benefits are defined under the CPP will not be part of this review. They'll be part of the next review, because the issues there are not about sustainability.

The issues are that the survivor benefits under the Canada Pension Plan were designed in an age when most women stayed at home and were financially dependent on their spouses in a way that is just not the case nowadays. The point is, exactly what role should the Canada Pension Plan play with respect to spouses when their contributor spouse dies?

From the very beginning this issue was always put over to the next review of the CPP. It's there for the second round.

In addition, during the course of the review other things that all parties agreed should be put onto that second round of reform came up. The key issues there were mentioned by Mr. Martin last night. They include looking at the question of splitting the pension credits that people earn. If they're married, it would be splitting those credits as they're earned, during the course of marriage. What happens today is that those credits are split on marriage breakdown and the actual pensions themselves are split when people come to retirement age, if they so request. This is a different idea. It takes it further and says, no, look at the idea of actually splitting those credits between spouses while they're married. That is part of the next round.

In addition, some years ago we used to have a system whereby, if you didn't have a job and you were under 65, for earnings replacement there was the unemployment insurance system, whereas if you were over 65 you had a pension system to replace income if you weren't working any more. The Supreme Court said it would be discrimination on the basis of age to have that age 65 years line. So now there's no clear policy. People who are over 65 can receive old age security, Canada Pension Plan pensions, private pensions, and what have you, on top of unemployment insurance, whereas people under 65 get only unemployment insurance. The idea is to see whether the way those two systems work together now is as fair as it should be or whether improvements can be made.

• 1945

There is the issue that Mr. Nystrom mentioned last night, about looking at expanding the coverage of the Canada Pension Plan above average wages. It's designed to replace 25% of earnings up to the average wage, and I presume the idea is to look at covering 25% of earnings above the average age. So you expand the coverage of the CPP.

Partial pensions—that's an important issue. People used to work until 65 and then retire, and there was a sudden change from being fully employed to being not employed. That's not the way things are any more. A lot of people move gradually into retirement. Indeed, some people never retire totally.

The point is, could the Canada Pension Plan help with that kind of gradual transition by providing partial pensions while people are partially retired and having them still contribute on their earnings? It's a very complex issue and one that we certainly could not attempt to wrestle with during the course of this review.

Did you have one other question, the negative effect on women?

Mr. Tony Valeri: It was about the impact on women, that's correct.

Ms. Susan Peterson: I can assure you that during the course of discussions with the provinces, the impact of various options from a gender perspective was taken into account. When the agreement was reached on the Canada Pension Plan with the provinces, this gender analysis was prepared.

Do you want me to take two or three minutes to explain the highlights? Would it be useful?

The Chairman: Absolutely.

Ms. Susan Peterson: Perhaps you can turn to page 3.

First let me make the general point that the approach to this gender analysis was to look at the situation of women and at what the Canada Pension Plan does that is of particular benefit to women. The fact is that women depend on the Canada Pension Plan for a larger portion of their retirement income than men do. In that sense the sustainability of the Canada Pension Plan is particularly important to women.

If you look at the table on page 3, it shows you that for the existing Canada Pension Plan—-we have to have a base case to measure what's being changed about the Canada Pension Plan. The base case is what it does for men and women now. Let's look at that and at the changes that were made in order to assess the impact of the changes. I don't know any other way of going about this exercise.

Page 3 shows you the existing CPP. It shows you the lifetime contributions for women and men on average and the benefits that the women and men who pay those amounts can expect to get out of the Canada Pension Plan. You see that women contribute on average $103,000 and receive on average $272,000 by way of benefits. You can see what the comparable numbers are for men; that's summed up in the ratio on the right.

It shows you that the way the Canada Pension Plan operates at the moment, given what women pay in, they get proportionately more out of the plan than men do. There are lots of good reasons for that. The main reason is that women live longer. They pay at exactly the same contribution rates as men, but they collect CPP for longer than men, so of course you'd expect to see numbers like this.

On page 5 it shows you the impact of the changes we're making on the contribution side of the CPP in Bill C-2. It shows you the projected contributions to the CPP in the year 2030 to show you when it's mature.

• 1950

Under the existing CPP women would be contributing $66 billion; under the proposed CPP, $52.7 billion. That's 20.2% less. For men, it's 21.9% less. The whole point is that there's not very much difference between the impact on men and the impact on women in terms of contributions.

On page 6, the next table shows you the impact of the proposed changes compared with the existing CPP on expenditures on men and women in the year 2030. You will see that the change in expenditure with respect to women is 9.7% and with respect to men is 8.9%. That's a small difference, but a difference.

The final table is the same sort of table as the one we saw for the existing CPP, the first one I mentioned to you. It looks at the lifetime contributions of women and the benefits they can expect to get compared with those of men. Women's lifetime benefits are far higher than their contributions, as they were with the existing CPP; men pay more in and get less out. In other words, the ratios have not changed.

Again, that's not surprising. Women live longer, which is the main reason, but there are other features of the CPP that also benefit women. You can see therefore that the ratio for women under the change is 2.56% compared with 2.62% under the existing CPP; for men, with the changes it's 1.36% compared with 1.34% under the old one.

That gives you a sense of how valuable the Canada Pension Plan is to women and shows you that with the changes being proposed, it still remains extremely valuable to women. They get very good value from the CPP compared with what they contribute.

Those are the essential features of this gender analysis, but you'll find more in it than that. It goes measure by measure as well. But when you add them all up, what do you find?

The Chairman: Thank you, Ms. Peterson; that was very helpful.

Mr. Szabo.

Mr. Paul Szabo: Thank you, Mr. Chairman.

We started this evening with Mrs. Ablonczy asking a few questions, which I thought were excellent questions. I thought they were exactly the questions that someone would ask given just a general overview of what's going on. We do have some answers. I thought if we understood these, we would not get a repetition of the same questions. There are some biases.

I wanted to deal with, for instance, an example of a 1948 person getting 5% and someone who's 10 years old getting only 1.1%. Please help me if I'm drifting here, but the reason you can't get intergenerational equity is that I, who was born in 1948, already have 30 years of my career behind me and my premiums have been paid. I have only another 15 years and can't catch up totally in the balance of my career, whereas somebody who's 10 years old will be paying fully at the escalated rate. So it's very difficult for me...unless I give up benefits or pay a higher rate than someone who is going to start working in the future.

I think I understand why you can't just flip a switch and have everybody be the same.

The second one, though, was kind of interesting. It had to do people who are going to opt out, if they get only a 1.1% return or 1.8% return. Quite frankly, that was an excellent question. They should have the option of opting out if that is in fact the case, as I understand it.

What's being proposed is not a pension plan. It's much more than a pension. In fact, your own document that you gave to us says that once it reaches the 9.9% that Canadians are going to be asked to pay, which will be phased in over the next six years, only 43% of that—it turns out just because it's close to 10% that it's 4.3% or 43% of the 9.9%—is for the pension that you actually get. Less than half of what we're going to put into the Canada Pension Plan is going to be for the pension. Where's the rest of it? These are the questions that Mrs. Ablonczy was asking, and we should answer the darn questions.

• 1955

Of the 9.9%, 1.7%, which represents 17% of the total that we're going to have to put in, is for the insurance. It's for the death benefit, the survivor benefits, the child benefits, the disability benefit, and all those wonderful things. Almost 2% is going to be administration, and that leaves 3.8% of the 9.9%, or about 38% of what we're going to be asked to pay. This is where our real question came in, and that has to do with why we have to pay.

The 3.8% is exactly what the officials were saying to us. We have to put in 3.8% more, 38% more, simply to sustain this plan. I think the issue here really gets down to the unfunded liability, which I think is what the Reform have been asked about so often. The 3.8% increase in the rate, to bring it from the 6.1% up to the 9.9%, is the increase in rate required to accumulate five years of funding. It's not full funding, but fuller funding, but it won't totally pay off the unfunded liability.

I think we have to understand that we're not trying to pay off the $600 billion, but we are trying to provide a cushion. Then the chief actuary can say with certitude based on actuarial principles that this plan can sustain itself and carry on and we can give that confident assurance to Canadians that it will be there for them and they will get statements that say here's how much you're going to be paid, come hell or high water.

We also have regular reviews and they may have to be fine-tuned if other things change. But assuming that all things are somewhat reasonable, that means that if we go to the 9.9%, 43% is going to pay for our pensions. That means that if I'm only getting a 1.1% return, having only paid a 4.3% contribution rate for the pension component of it, my rate of return actually is over 3%. It's more than a 3% real return after inflation, which I think is much more in line with what Mrs. Ablonczy was hoping to see. In fact, it is, but you still have to assume you have to pay for the insurance and you have to pay for some share of future sustainability, not full funding but more full funding.

I thought that was terrific. Now we know where the numbers are coming from. You just can't say, well, if I took the money and invested it in an RRSP I'd get a higher amount, because that would mean that what you're deciding today is to opt out of the insurance components and to opt out of any responsibility for the current unfunded liability. I think I understand that. Am I okay so far?

Ms. Susan Peterson: Yes. You're effectively saying let's compare apples to apples instead of something else.

Mr. Paul Szabo: Okay, that's good. Let's carry on here. The unfunded liability is going to be problematic with Canadians, though, I think. We're going to have to do a better job of explaining this to them.

In general terms the unfunded liability means—and Mr. Jones was trying to get at this—that if we stop today, what are their cumulative entitlements on a present value basis? They have future benefits, an annuity that goes out for the rest of their actuarial lives, but if we took the today value of all that, it comes out to about $587 billion, close to $600 billion.

In a corporation, if they had a pension plan and they had an unfunded liability, the law says you have to make it up. You have to have a plan to deal with that unfunded liability. Yet we're not asking the government to do the same thing, to fully fund it. I think I know the answer as to why we don't. I think the answer is that corporations do not have a certain life. They could go bankrupt tomorrow, and if they don't have that unfunded liability dealt with, the employees are left with zero. There's no guarantee the company will be there.

On the other hand, the Government of Canada is something different. It represents the country. It represents all the people of the country. We have a CPP plan that says this is a mandatory contributory plan of employers and employees and self-employed people, and as long as this country has that act in place, nobody can opt out. That means contributions are made by everybody who works in this country and earns income, subject to exemptions and all other good things. That means there is an absolute certainty of a future stream of funding for pay-as-you-go, which a company couldn't guarantee.

• 2000

So we don't have to discharge the unfunded liability, all we have to do is sustain it. So I think I understand that part of it.

The last thing—there is a question at the end of this and it has to do with the aging society. We know we're really faced with this urgency because we're going from five workers for every retiree to approximately three for every retiree. But if you look at the demographic chart of Canadians—our distribution by age—there's an echo, which is our kids and they're going to be a mini-baby boom. Even though we're going into retirement, we're going to put a strain and we're going to be the one in four Canadians collecting CPP, there's going to be a shift in that ratio. It won't go back to five to one, but there will be an increase in the ratio of workers to retirees after the baby boomers clear the system simply because we have this spikiness of our distribution in population.

If that's the case, is it fair to assume that the reason we don't want to fully fund an unfunded liability is because there will be better opportunities down the road where we have an increased ratio of workers to retirees? So there could be a greater level of funding, depending on what the three-year reviews would have. So that would be one question.

Second, 8 of the 10 provinces have signed on to this. They represent at least two-thirds of the provinces with two-thirds of the population. Is there anything I should know about why Saskatchewan and B.C. are not listed as supporting this thing absolutely? To what extent do we touch this thing without getting the approval of those provinces?

The Chairman: Thank you, Mr. Szabo. You have a pretty good understanding of this issue.

There was a question there, the last one.

Ms. Susan Peterson: Your point that there is a good reason to more fully fund the CPP in order to avoid high rates that otherwise would be there—yes, the 14.2% that the chief actuary pointed out will be there if we don't move towards fuller funding. But yes, the reason we don't go to full funding is that countries are not like companies; they can't be wound up, leaving people in the lurch. That's essentially correct.

If one wanted to go to full funding, the contribution rate increases in the CPP would be much more dramatic. Going to 9.9% is as low as you can go to get people to pay their own way plus this uniform share. To illustrate what it would mean to start paying down the unfunded liability, instead of adding 3.8% for the unfunded liability, you would add 8% to the 6.1%. So you would have CPP contribution rates escalating way more, and it was felt that there is a limit to the burden you can put on one or two generations. If you paid off the unfunded liability over the next 20 to 30 years, then the rate would fall, but in the meantime, over those 20 to 30 years, certain generations would pay extraordinarily high rates. So the idea was to even this out. So that's essentially correct.

Your idea that the baby echo is big enough and significant enough to change the 3:1 ratio down the road—it's simply not; you need more babies than that.

• 2005

Mr. Paul Szabo: Thank you. That's good to know.

Ms. Susan Peterson: The eight provinces?

Mr. Paul Szabo: Saskatchewan and B.C.

Ms. Susan Peterson: Would you repeat your question exactly?

Mr. Paul Szabo: I thought I heard the minister saying last night that they're sort of on-side. To your knowledge, does either B.C. or Saskatchewan have any significant difficulty with sustaining the CPP, increasing the rates or having an investment board? What elements of this do they agree with? Maybe it's easier to ask what they disagree with.

Ms. Susan Peterson: B.C. and Saskatchewan were partners to all the documents that were put out. They were partners to all the public consultations that took place. They were supportive of raising contribution rates quickly in order to get the baby boomers paying more. They were supportive of not having to go above the 9.9%. They didn't want to see contribution rates any higher than that. They were supportive of the new investment policy. So in that sense they supported the two key changes. What they did not support were the changes in some of the benefits and the change to the year's basic exemption. So they felt they could not sign onto the agreement.

On track two we'll be looking at the proposal that another way of coming at this is to have the CPP cover more earnings base than it presently does, although it would also have to pay out higher pensions to higher earners than it does now. So we're going to look at that.

Yes, I agree with the investment policy.

Mr. Paul Szabo: Thank you.

The Chairman: Great.

Mr. Assad.

Mr. Mark Assad (Gatineau, Lib.): Thank you, Mr. Chairman.

I know you can't compare the CPP to the American social security system, but I was reading not too long ago about their unfunded liability being an unbelievable $14 trillion. It seems incredible, but they don't seem to be worried about their problem.

As for the unfunded liability of $600 billion that we have, 15 or 20 years from now will that be constant? You were saying you didn't want to add on so much that the burden would be too much to eradicate this unfunded liability. Is that going to be in constant dollars? Will it be higher than $600 billion ten years from now?

Ms. Susan Peterson: Yes, it will, but it will be constant as a proportion of the liabilities of the Canada Pension Plan, and therefore it will be supportable by the 9.9% contribution rate. In other words, it will never grow so disproportionately that someone will have to pay higher than 3.8% for it. But in dollar terms it grows, just as expenditures under the Canada Pension Plan grow, but it's supportable because it doesn't grow proportionately any more.

Mr. Mark Assad: Do you mean as fast as it did in past years?

Ms. Susan Peterson: That's right.

Mr. Mark Assad: When we learned from Mr. Martin that we had to correct the problem—I realize that was quite a chore. When did the finance department realize that this problem was growing at a fast rate? I'm sure we didn't just discover this two years ago. When did the finance department begin to discuss this? You people in the department are constantly monitoring the economy and all the rest of it; when did you come to the realization that the hour of decision was going to be down the road? Would it go back as far as 10 years?

Ms. Susan Peterson: That is a fascinating question.

The Chairman: It requires a fascinating answer.

• 2010

Ms. Susan Peterson: Let me say this. Most of the countries with public pension systems pay for them on a pay-as-you-go basis—in other words, the way the CPP was. The money coming in today is not saved to pay for the pensions of the people who are putting in the contributions. The money that comes in today goes out to pay for the benefits that retired people are receiving. If it weren't for the fact that we have the demographics we do, if we didn't have a baby boom generation and if the economy didn't really change very much and what have you, that sort of system would be sustainable.

Over time, with the repeated actuarial reports coming in and showing that productivity was not being sustained at what it used to be when the CPP was put in place—the demographics were changing, what have you—it became clear there was a problem here. The awareness of the problem that pay-as-you-go systems are not sustainable because they imply such huge rates down the road for people yet to come is a gradual awareness. It's happening though in all countries now. It's not unlike an analogy with deficit financing in the sense that it takes a while for people to come to a collective sense that this just can't go on. There is a real problem here. It's the same thing with pay-as-you-go public pension plans.

Mr. Mark Assad: Okay. At the time when we began to realize there was going to be a problem down the road, it's not that we didn't know about the baby boomers. Reading Boom, Bust and Echo brought to our attention many of the facts that we probably ignored. Nevertheless, at that particular time we knew the baby boomers were going to be the greatest inheritors of any generation in the history of this country and the years coming up. They're going to inherit tremendous amounts of money.

If we go back some years, if the correction would have come 10 years ago—I'm using that figure arbitrarily—how much would the rates be affected today? Let's say we had been very avant gardist and we had seen this problem on the horizon. Let's say we knew the baby boomers were earning good money and they could afford to pay a little more starting back then. How would the rates have been affected?

Ms. Susan Peterson: I don't know the answer, but 10 years in this business is significant.

Mr. Mark Assad: May I have one last short question, Mr. Chairman, please.

The Chairman: Sure.

Mr. Réal Bouchard: Allow me to make a qualitative rather than a quantitative comment.

As we indicated earlier in the memo that was distributed, the actuarial fair cost of the pension is something in the neighbourhood of 6%. The difference between 6% and 9.9% is really that you have to pay for the commitments so far.

The fact that we're acting now on these proposals allows us to be at 9.9% rather than the higher number. If we'd acted 10 years ago, this would have allowed us a uniform rate over the next 100 years under the same kind of philosophy that we now have as far as the package is concerned. By building the fund sooner, that uniform rate would probably have been slightly lower than the 9.9%. It could have been 9% or it could have been 8.8%, but somewhere between the 6% and the 9.9%, of course, depending on how soon you were able to build a fund and to act.

Because it's relatively late to put a steady state system in place means that we're able to build a fund that corresponds to about 17% funded, relative to what a fully private pension plan would require. If we had acted sooner and had people pay their own way sooner, the degree of funding we could have achieved under a steady state system would have been higher than 17%. It could have been 25% or 30%. This would have allowed that ultimate rate to be slightly lower than 9.9%.

• 2015

So the sooner we would have acted the lower the rate would have been, but the window is closing. We have to do it now, otherwise the ultimate rate will be unsustainable. It will be way too high.

Mr. Mark Assad: I realize that.

Due to the fact that we're concerned about low-income earners, in your discussions, in your models, was there any possibility that we could have locked in lower rates for people who were earning less than, let's say, $17,000 or $18,000 a year, or even $20,000?

Ms. Susan Peterson: The way we looked at that when we were discussing this with the provinces is that if you're looking at Canada's retirement income system you have to look at the different parts of it. You have to look at what is the job of each of the parts of Canada's retirement income system.

The job of protecting low-income workers, of making sure they have a decent retirement income for very low-income earners is the job of the OAS-GIS system.

The key redistributive part of the retirement income system is OAS-GIS. The job of the Canada Pension Plan is to say every worker will pay the same amount towards their pensions based on what they earn. Therefore it's a wage replacement thing. There are cross-subsidies for lower-income people built into it, but its job is not basically and fundamentally to redistribute income. It's to make sure that everyone is forced to save towards their retirement based on what their earnings are. It treats everyone fairly, uniformly in that respect. It's the job of the other part of the system to really accomplish what you have in mind.

The Chairman: Thank you, Mr. Assad. Ms. Redman followed by Ms. Torsney.

Mrs. Karen Redman (Kitchener Centre, Lib.): Last night while we were listening to Mr. Martin's address, Mr. Solberg put a human face on this. At the heart of all of this reform is the fact that we want life to be better for Canadians. I believe it was a letter by Margaret Snell that he was talking about.

I would like to hear from any one of you who wants to respond. My reaction to hearing that letter was that it was full of angst and suffering, and we heard that as we went across the country on these pre-budget hearings. Isn't a Margaret Snell exactly the kind of person who needs to have a CPP there for her and her husband later on because they're not the kind of people who would buy RRSPs?

Ms. Susan Peterson: Yes, this guarantees them a risk-free, fully indexed basic pension related to their earnings when they retire.

The Chairman: Okay, thanks. Ms. Torsney.

Ms. Paddy Torsney: Under what conditions, and is there any possibility that the 9.9% could be reduced at some point in the future?

There's been lots of talk about the productivity not being what was anticipated or not matching the 1970s. I was wondering which components go into productivity. Is it just wage growth? Is it also the income that you're earning on the funds?

On the steady state, the 9.9%, what certainty is there that this is in fact the steady state forever and ever? What certainty is attached to the assumptions? What are the assumptions we're less certain about?

We talked about what we would need in current terms of taxes or CPP rates, GST doubling or whatever else, to pay off the unfunded liability. But what if we just wanted to maintain $600 billion? What would we have to incur in terms of an increase in GST, or an increase in the CPP just to establish it as the constant debt that exists in the fund?

Ms. Susan Peterson: Could the 9.9% be lower? All projections into the future are projections based on the wisdom of those people whose job it is to do those sorts of things. As I said, it's part of the actuarial profession to do things like that and we leave those judgments to the chief actuary.

• 2020

If the returns on investment are better.... I mean, he's chosen a prudent assumption about the rate of return. We certainly hope it is prudent. It would be very nice if, over the long term, the CPP fund did better than that. If so, one of the possible results would be, okay, the 9.9% some day could be a little bit lower than 9.9%. So, yes, that is possible.

How sure are we that it's really going to stay steady, i.e., how sure are we that it's not going to go higher? Again, based on prudent assumptions, that doesn't guarantee that those assumptions are correct, but we have erred on the side.... The chief actuary is, by profession, cautious.

But it doesn't depend just on his assumptions. It also depends on how well administered the Canada Pension Plan is. It depends on not just his assumptions but on other things too. That's why the ministers of finance want a review every three years. Indeed, they want to keep a close watch and have annual reports on how things are going to see whether experience is proving that this 9.9% is secure. If it looks as though, for any reason, something's going wrong, they're going to want to take immediate corrective action.

As for the question on productivity, I will leave that to someone else.

Mr. Réal Bouchard: I can try to answer the last question, on unfunded liability. If I understood your question correctly, you wanted to know what would happen to the rates if we were to maintain, let's say, $600 million in nominal dollars. Was that your question?

Ms. Paddy Torsney: Yes.

Mr. Réal Bouchard: Essentially, over time, as Mrs. Peterson said earlier, if we were to pay the unfunded liability over, say, a 30-year period, that would require an additional 8% rate over and above the actual fair rate of 6%.

If we were to maintain the unfunded liability at $600 million on, let's say, a nominal basis, after 30 years, because in real terms the $600 million would effectively fall, that 8% would not be that different. In other words, to maintain the unfunded liability in nominal dollars of $600 million, after 30 years, say, you probably would have required an additional rate just to achieve that, which is very close to the 8% we're talking about.

So it's almost akin in the long term to paying the unfunded liability to maintain it at $600 million in nominal dollars.

Ms. Paddy Torsney: You didn't answer the productivity one, and which assumptions we were less or more certain on which the 9.9% is based.

Mr. Réal Bouchard: I apologize. Can you repeat your question on productivity?

Ms. Paddy Torsney: Productivity is not what it was anticipated from the seventies, on which today's rates were established. What are the components of productivity? Is it just that wages have not increased as much as anticipated? Is it also that the investments have not made as much money as anticipated? What are the components?

Mr. Réal Bouchard: When we refer to productivity we're primarily referring to the real increase in wages relative to prices per worker. So here we're talking about 1%. The assumption that's being used for the long term relative to the 2.5% we used 20 to 30 years ago is 1% today.

No, it's not the interest rate. The interest rate is another economic assumption. The real interest rate, as was mentioned, being used, the rate of return on investment, is 3.8% and so on. This is not the same as the productivity.

Ms. Paddy Torsney: Okay. Maybe you can get me the assumptions later.

The Chairman: Thank you, Ms. Torsney. Mr. Solberg.

Mr. Monte Solberg (Medicine Hat, Ref.): Thank you, Mr. Chairman.

Last February, when the federal government and the provinces released their discussion paper, was there any mention or any kind of discussion in that document about a mandatory RRSP program?

Ms. Susan Peterson: Last February was the agreement with the provinces. Are you referring to this one, which came out in February 1996?

Mr. Monte Solberg: Yes, sorry.

Ms. Susan Peterson: No, there was no discussion in this document about getting rid of the CPP.

Mr. Monte Solberg: This was the paper that was used to gather input on how to fix CPP. That's correct, right?

Ms. Susan Peterson: This was the basis of the consultations, yes.

• 2025

Mr. Monte Solberg: Right. So if I understand correctly, the government with the provinces consulted about 400 Canadians, somewhere in that range. Is that so?

Ms. Susan Peterson: Do you want to know how many people appeared at all the hearings?

Mr. Monte Solberg: Yes. I think it was around 410, something like that.

Ms. Susan Peterson: I don't have the number at my fingertips.

Mr. Monte Solberg: It's in the briefing book.

Mr. Réal Bouchard: It represented a substantial number of Canadians, though.

Ms. Susan Peterson: Yes.

Mr. Monte Solberg: At least 410. We also know that given their druthers, Canadians routinely invest in RRSPs.

In fact, yesterday I think there was some misinformation spread about the committee. I think it was suggested that 25% of Canadians invest in RRSPs. That may be true, but if I remember right, according to the Canadian pension managers who appeared before the committee, if you take out people who are over 65, people who are under 25 and people who are already in a company pension plan, and if you take out people whose incomes are too low to be able to contribute into an RRSP, it's about a 77% take-up rate. It's quite high.

I then noted in the paper this morning that there's been an increase in the participation rate in RRSPs of about 11% over the last couple of years.

The point I'm making is that the government didn't really look at this option at all. For all the rhetoric we heard, it's not in the information paper and couldn't, therefore, have been really considered by some of the people who were asked to make presentations on it.

How in the world, especially now that it's been revealed that the government has not really studied some of the mandatory RRSP plans around the world, despite the fact that we have a study by the government of a hypothetical mandatory RRSP program that's based on such weighty evidence as an article that the writer read in the Economist, can we make the determination, based on that type of flimsy process and poor evidence, that Canadians don't want a mandatory RRSP system?

Mr. Paul Szabo: What about the insurance program? What about the employment liability?

Mr. Monte Solberg: Really, Paul, I wasn't asking you.

The Chairman: Who were you asking?

Mr. Monte Solberg: Generally at committee you ask the witnesses, Mr. Chairman.

Ms. Susan Peterson: The Minister of Finance said last night that this government believes RRSPs are a critical and vital part of Canada's retirement income system; indeed, as soon as circumstances permit, he wants to improve the tax assistance for RRSPs.

So there's no question. I don't think the issue is whether RRSPs are an important vehicle—

Mr. Monte Solberg: No, you're right. That's not the issue. The issue is that Canadians, when they have a choice, like to invest in RRSPs. I assume they like the idea of getting a better rate of return. They probably like the idea of having the account in their own name.

My question is, when we know that, why in the world didn't the government include that as part of the discussion paper?

Ms. Susan Peterson: Before the discussion paper was put out, the federal government met with the provinces and discussed the issues facing the Canada Pension Plan. It said, okay, we have a Canada Pension Plan that provides retirement pensions, that provides what's called the child-rearing drop-out so that parents aren't penalized if they take care of kids under six. They don't get lower pensions for that reason. It contains survivor benefits, includes disability benefits, includes a death benefit.

We said, okay, is this the kind of vehicle we think Canada needs? It was agreed between the federal government and the provinces that, yes, we want to preserve that range of benefits.

Mr. Monte Solberg: But surely other countries provide those benefits in their mandatory RRSP-type plans.

Ms. Susan Peterson: I don't know how you provide a child-rearing drop-out and how you provide disability benefits through a mandatory RRSP.

Mr. Monte Solberg: It's part of the premiums you pay into a mandatory RRSP program. Some of it would be devoted to the types of things Mr. Szabo is concerned about.

Ms. Susan Peterson: If you know of a country that does that, I would be interested to know which one.

• 2030

Mr. Monte Solberg: I think with the resources of the finance department perhaps you could canvass the world and look at many of the plans. For instance, in Australia they have a plan that is similar to the one we're talking about, a mandatory RSP program. As we've already pointed out, the U.K. and many countries have variations on the theme, countries like Denmark, for instance. Singapore has a plan like that. Japan has sort of a variation on that theme.

The point we're making is it really doesn't sound like the government or the department has considered this very seriously at all. It certainly hasn't made it an option to Canadians. There's probably no point in debating this any more, but I would like to ask some more questions.

Does the department have any kind of an analysis of the impact on jobs of this hike in CPP premiums?

Mr. Paul-Henri Lapointe: Yes. As we said earlier, it will be tabled tomorrow.

Mr. Monte Solberg: Okay.

Presumably this will hurt young people the most. I would suggest that typically when there's a hike in payroll premiums it means employers are more reluctant to hire, and the people who typically get frozen out when we're in that kind of situation are young people. Isn't that correct?

Mr. Paul-Henri Lapointe: We did not do the analysis by age group. What we did was an analysis of the overall impact on growth and on the total level of employment. We did not go into analysing the impact on various age groups.

Mr. Monte Solberg: But in the past when payroll taxes have gone up the government, certainly within the finance department itself, has done studies of the impact of increases of payroll taxes. We know young people are the most vulnerable in those sorts of situations, which is why we always have a higher youth unemployment rate than we have for the general population. I think that's correct, isn't it?

Mr. Paul-Henri Lapointe: I would not say that the higher rate of unemployment among youth is due to payroll taxes.

Mr. Monte Solberg: Well, typically it's a “last hired, first fired” sort of process. I guess the point I'm making is that to me it's simply common sense that if premiums are going to go up and that is an impediment to job creation, the people who will suffer the most are the people with the highest unemployment rate, who are youth. Youth are also the ones who are going to have to pay the huge burden of this CPP premium hike over the course of their life but will receive a very low benefit.

I guess the point I'm making is simply that young people are going to be the ones who really face a double whammy because of this plan. Isn't that correct?

Ms. Susan Peterson: I would like to answer that question. The whole motive behind these changes to the financing of the Canada Pension Plan and taking up rates quickly is to relieve young people of the burden that would otherwise be facing them down the road.

We will stop the premium rates at 9.9%. The chief actuary shows that if we did not do this, those rates would go all the way up to 14.2%. The very motive behind this is to not pass on that burden to young people. In other words, if we don't do that it's going to be far worse.

The short-term impact of increasing the rates is designed purposely to relieve the burden on young people, which would just get worse and worse. People say we would like to not have the rates go up right now and we would like young people to get a better deal than this proposal will give them. Well, then the issue becomes how.

We cannot square the circle in developing policy unless one says they are going to ignore the unfunded liability. If we ignore the unfunded liability we could design a pension plan that gave people a better return. Of course we could, but it was agreed with the provinces that the federal government and the provinces are not prepared to ignore that unfunded liability. They're not prepared to renege, and for that reason they can of course not design a plan that would give as good a rate of return as if that unfunded liability did not exist.

Mr. Monte Solberg: I would certainly agree with that. We don't want to ignore the unfunded liability. If we're going to try to find a way to deal with the unfunded liability, shouldn't we consider all of the options?

• 2035

Ms. Susan Peterson: A lot of questions were discussed with the provinces before we put out the information paper. They were well aware. People asked what it would cost if we paid off the unfunded liability so that the next, yet really younger, generation had to pay 6.1% only, which is the actuarially fair cost of their own CPP pensions for all the benefits they get. For the retirement pension and the disability, 6.1% is the fair amount. People asked if there was any way they could go about making sure that young people didn't have to pay more than 6.1%. The answer was, yes, that's tantamount to paying off the unfunded liability.

Well, we did look at it, and we've explained here today that if you're going to pay it off in the short run, that would take an extra levy on top of the 6.1% of 8% instead of 3.8%. If one doesn't like the kind of—

Mr. Monte Solberg: Based on what assumptions?

Ms. Susan Peterson: If one were going to levy it on the same contribution base as the CPP, it would be equivalent to 8%. If one were going to levy it through raising other revenues, it would be equivalent for that period of time to doubling the GST or increasing personal income taxes by 25%.

We've done that work. It's in the memo. We haven't avoided doing it. We've done it. The province has looked at it and said they don't want to have rates go so high in the short term that they'd have to have people paying fully for their own pensions plus paying off that unfunded liability over the next twenty to thirty years.

It was agreed that the fairest way was to spread it out. That's how you get 9.9% instead of 14% or 15%. That's how you get 9.9% instead of 6.1% plus a 25% increase in personal income taxes.

So it's wrong to say that we haven't looked at those options. We have.

Mr. Monte Solberg: I would love to see the information that you share back and forth with the provinces on the mandatory RRSP. The memo you just referred to was produced on October 22 of this year, so I don't see how they could have seen that memo. I don't expect that's what you meant to say.

Basically, here's the situation, Mr. Chairman. We've had a government who has been notoriously terrible at forecasting demographic trends over the last thirty years, which has meant that we have premiums that are much higher than they were ever supposed to be. They were supposed to go to 5% and that was it, or 5.5%, something like that. Now they're at 9.9%.

We know that basically the finance department has no studies, or at least none they've yet been able to produce, of mandatory RRSP-type systems around the world. We know it was never considered, or allowed for other Canadians to consider, in the discussion paper. We had 400 people comment on it, most of whom represented special interests.

We know also that those 400 people are going to be making, in part, decisions for 30 million people or so, and tens of millions more down the road, the people who have to be part of this plan. We know that Canadians, when they have a choice, want to opt into RRSPs. We know that last spring we even had the chairman of the committee going around on behalf of the provinces saying that he wasn't sure that we might not have to revisit the plan in 15 years based on the changes they were talking about. It was widely reported in the newspapers.

So I guess my point is that given the sorry record of the government in making these types of predictions; the fact that we only talked to 400 people; and the fact that we didn't even consider all the options, I have concerns that we're moving ahead on very flimsy evidence.

I'll leave it at that. I don't expect that to be answered.

Before I allow Diane to say anything, I have a question about the investment plans of the government. Now, my understanding is that the provinces will be able to roll over any bonds they currently have for another twenty-year term. If they've just rolled them over, just today rolled them over, and they mature in twenty years, they'll be able to roll them over again for another twenty. Is that correct?

Mr. Bob Hamilton: Let's say they already rolled them over last year, and they come due in another 19 years. They can take one more roll-over.

Mr. Monte Solberg: So we're talking about the bonds going out 40 years potentially, in some cases. Is that right?

Mr. Bob Hamilton: I don't think any have just rolled them over in the last couple of years. Five years is the figure.

Mr. Monte Solberg: Okay, 35 years.

Mr. Bob Hamilton: If they choose to.

Mr. Monte Solberg: They would go out at below market rate, still?

Mr. Bob Hamilton: No, they would go out at market rates, the same rates they would pay for their own borrowings. That's one of the key changes to the investment policy, that instead of at the federal government rate, any new borrowings will be at the province's rate.

• 2040

Mr. Monte Solberg: Okay. My second question is, am I correct in saying that the provinces, along with the finance minister, are essentially going to choose the investment board?

Mr. Bob Hamilton: There's a nominating committee that's going to put forward the list of names. The federal and provincial finance ministers will choose the board.

Mr. Monte Solberg: Is there any mechanism to prevent these people, who are chosen by the provinces and are somewhat beholden, I guess, to the provinces, from pumping money into things that specifically benefit those provinces instead of on the basis of...? I know there are mechanisms in here initially for passive investing and things like that, but ultimately, is there any mechanism that will stop them from investing money into, for instance, if you're in B.C., B.C. Hydro, or into Sprung greenhouses in Newfoundland, or some of the regional development things that have gone on in the past—the sorts of things that have caused taxpayers no end of heartache?

Mr. Bob Hamilton: The legislation is clear that the investment policies are to be made in the best interests of the CPP beneficiaries and contributors. There's no secondary motive that it should be geared toward economic development.

Mr. Monte Solberg: But how do you know that?

Mr. Bob Hamilton: It is provided in the legislation. Those are the objects of the board. Their specific mandate is to invest in the best interests of the contributors and beneficiaries. We have also put in accountability provisions to make sure that their investment policies are transparent. They do regular reporting.

Mr. Monte Solberg: Couldn't they make the argument that they are—

The Chairman: Just one second. Ms. Torsney has a point of order.

Ms. Paddy Torsney: I think there's been a misunderstanding. The nominating committee makes the recommendations for who's appointed to the board. The nominating committee members were each proposed by the governments. So there are 11, because there are 10 provinces and 1 federal government appointee. That board is out there seeking members. They will nominate members to the board.

So they are not necessarily representative of each province. A board normally has to make board decisions, so it wouldn't be Bob in B.C. voting for a B.C. investment. There are some laws about investing that they would probably have to follow.

Mr. Monte Solberg: My question, though, is how do we know that people aren't making these investments based on regional interests?

Mr. Bob Hamilton: We've made it as clear as we possibly can in the legislation that this is not part of their mandate. Their mandate is explicitly to make investments that will operate to the best interests of the beneficiaries and contributors and maximize the returns, subject to them being prudent. There is no mechanism in here to allow them to invest for reasons other than that, by having transparent policies and forcing them to be accountable publicly.

We felt that was the best mechanism to try to make sure that the board had a clear mandate and that it would be well known to everyone what are their policies, and for which they'd be held accountable.

Mr. Monte Solberg: Thank you.

I yield to my colleague, the critic.

The Chairman: Mrs. Ablonczy.

Mrs. Diane Ablonczy: I was looking at Scott Clark's memo, which was referred to last evening by the minister and given to the media. It purports to be a conclusive analysis that individually owned investment pension accounts are not feasible.

I'm not quite sure who Scott Clark is.

Ms. Susan Peterson: He's deputy minister of the finance department.

Mrs. Diane Ablonczy: Monte knew that. I didn't know that. Now I know.

In terms of this so-called analysis—and I'm not trying to be unkind, but I guess I am a little peeved—what purports to be an analysis seems to be a facile dismissal of an option that a number of very mature and successful developed countries have adopted.

For example, at the top of page 2, the point is made that proponents of this system should make it clear how they expect to deal with the outstanding obligations of the CPP.

Then, on page 3, it talks about there being no legitimate grounds to argue that private investments can earn better returns than the CPP. This is kind of interesting, considering that the CPP, over the long haul, has earned about 2.5%. I don't know of too many private investments that have been as bad.

• 2045

On page 4, the second-last paragraph then says: “The key issue that those who propose to scrap the CPP must address is whether and how...the CPP's...commitments to date” are going to carried. It's just fascinating to me that an analysis would say there can't be a better way unless somebody proves that there's a better way, instead of saying what I would have thought analysis would do: we have explored this option, recognizing that it has been successfully or positively explored by other countries, but for these reasons it is not a feasible option to offer it to Canadians, in our view; we do not believe it is in Canadians' best interest to give them this option. It is simply saying that if somebody says this is a good option, they have to prove it to us.

This is the Government of Canada saying this, with all of its available resources. I just find that very strange. Quite frankly, it's a rather disturbing approach when you consider what we're asking our kids to put up with under the present proposal. I'd be interested to know why I should find this acceptable, why this is good evidence for Canadians to say there can't be a better way.

Ms. Susan Peterson: There seems to be a continuing misunderstanding.

We have looked at the key issue of moving towards a mandatory RRSP system. That issue is not one of how to provide the benefits that the CPP now provides for 6.1%. There are alternative ways of doing that. But the key issue is how you are going to deal with the unfunded liability.

We have looked at other alternatives. In fact, we have a working paper that is not as readily comprehensible as this note is, but we do have one. The key issue for any system, given the size of Canada's unfunded liability.... I don't know what Chile's was, but I do know inflation helped to get rid of its significance for that country. We have to deal with the size of Canada's unfunded liability. We know what it is. We know what it would take to pay for it in various ways; we looked into all those options. And we know that if we wanted to pay it off over the next thirty years, the CPP rate during those thirty years would be 14% instead of 9.9%.

Now, 6% plus 8%, or 14%, is exactly that rate we're trying to avoid ever having to go to. We said that if you wanted to fund your pensions and your benefits, and also pay off your unfunded liability, we know that you would have to go all the way to 14%. Nobody wanted to do that. If we didn't do it on the same contributions base as the CPP, you could look at how else we could raise the revenues in order to make good on that, so that people could have their own pensions separate from this issue of the unfunded liability.

People would have to pay fully for their own pensions, and they'd have to pay in some other way for the unfunded liability. This note says that our analysis shows that to do that would require taking personal income taxes up 25%, or doubling the GST. No one wanted to do that, so they looked at this and said no, if we wanted to do that, it would require these things, unless we were going to renege on the unfunded liabilities. We don't want to renege on the unfunded liabilities. We don't want to raise personal income taxes or the GST by that amount. We are therefore going to try to come up with a solution that is the fairest possible way of handling the unfunded liability. That's the proposal you have before you.

It's not that someone was derelict in looking at these other options, but we know what the size of the unfunded liability is in Canada, and we know what the various options are for taking care of it. It doesn't much matter what the size of the unfunded liability is in Chile. The very issue that you cannot get away from is the size of the unfunded liability here, and we have done our analysis on what it would take to deal with it in various ways.

Mrs. Diane Ablonczy: Is that analysis in the briefing book?

• 2050

Ms. Susan Peterson: It is in this note showing you the amount of revenue that you would have to raise. We also have a working paper that is a survey of the economics of a public versus a private Canada pension plan. You may find something there that's of interest to you too, so we can make that available to you.

Mrs. Diane Ablonczy: I would appreciate that.

Ms. Susan Peterson: It gives the wrong impression that we were derelict, that we never looked at those issues. That's just the wrong impression.

Mrs. Diane Ablonczy: I appreciate that. That's why I am asking the question. I don't want to just assume, but certainly from this note that we were given, there was no evidence that anything else had been looked at.

The other question I have is on the options you mentioned for covering the unfunded liability. They were all raising additional revenue. Did you look at allocation of the fiscal dividend that's coming, for example? We know the government is saying there is a fiscal dividend coming, so we can put in place a pharmacare program or we can do this, that or the other thing. Has there been a consideration of investing some of those dollars in preserving and protecting the CPP, but in a way that relieves the burden on our children somewhat?

Ms. Susan Peterson: For the past two and a half years, we have been working with the provinces on how to solve the Canada Pension Plan problems. We have looked at the kinds of options, and at what it would take in terms of raising revenues if you weren't going to take care of the unfunded liability through the Canada Pension Plan itself.

There is no fiscal dividend now. The amount of money needed to pay down the unfunded liability is $600 billion.

Mrs. Diane Ablonczy: That isn't all outstanding today.

Ms. Susan Peterson: Yes, it is.

Mrs. Diane Ablonczy: Today?

Ms. Susan Peterson: That is the value of the outstanding commitments of the CPP.

Mrs. Diane Ablonczy: But that relates to a lot of people who are still working and paying into the plan. That is not just the people who are off the plan.

Mr. Monte Solberg: Those people coming in today aren't people coming in at 18 years of age.

Ms. Susan Peterson: On a year-to-year basis, to pay off the outstanding obligations as they come due would require eight percentage points on the CPP, to begin with. What is that equivalent to in billions of dollars?

Mr. Réal Bouchard: It's $16 billion.

Let me just add one thing as an example in regard to that $600 billion. Rather than having a new levy or payroll tax of 8% over thirteen years, one could decide to pay it almost on a pay-as-you-go basis as the expenditures are being incurred. That would mean that over the next sixty or seventy years—until the last 18-year-old dies—you would have a flow of expenditures. That was almost the question asked by Mr. Jones earlier, when he wanted to see what would happen to those commitments if we stopped the CPP today.

You basically would have to start paying something like what was levied on the same earnings basis as the CPP now, but on a pay-as-you-go basis. You would initially need 8%, because that's basically what the expenditures are now for the current retired population. That's $16 billion. That 8% would gradually decrease because, as the population dies and the new 64-year-olds become 65, some of it would be from the old system and some of it would from be the new.

Over the first thirty to forty years, that 8% would drop slightly, perhaps to 6%. Over the following thirty to forty years, until the last person died, it would then drop rapidly. After seventy years, it would basically be gone. So perhaps you would not have to build a new fund, but it's essentially the same thing. You have certain liabilities and you have to pay for them. You could raise the payroll tax or you could have other revenues to pay for that ongoing expenditure.

• 2055

There are different ways of expressing it. This is one of them. Another one is simply to say that if you were to have a flat rate over the next thirty years in order to build a fund that would be sufficient to pay for the liabilities over the next seventy years, it's that 8% referred to earlier. So it's 8% over thirty years, or it's 8% now, gradually dropping to 6% over the next thirty to forty years, and then dropping to 5%, 4%, 3%, and then 2% over the following forty to fifty years. One way or the other, the revenues have to be raised. Whether it's through GST, personal income tax, the fiscal dividend or whatever, you still obviously need that income to pay for those expenditures.

Mrs. Diane Ablonczy: We all agree on that. I'm just trying to explore it.

I know some members may think I'm just trying to be difficult, Mr. Chairman, but I'm really not. I really am struggling with this, because I know that in twenty years my kids and all of their kids are going to come to us and ask us what we did to prop up this fund. They'll wonder if this was the best we could do for them.

If I'm honestly convinced it's the best we can do for them, then I'll happily vote for it. But I cannot believe that the best we can do for them is to take the equivalent of 10% of their earnings for their whole working lifetime and give them less than the real value of their contributions. That's what we're offering them.

With all the resources of government, I'm just trying to press you and ask if there are other options that ought to be, could be and should be explored but haven't been. We need to be able to honestly face our kids when we're retired and have our hands out for these CPP cheques. We need to be able to say to them that we did the right thing, we did the best thing; and tell them we did what they would do if they were in our place, so that they're going to say, yes, this is wonderful, this is right, this is the way it should be, so that they're willing to pay for this in order to keep this system afloat because it's a good system.

Quite frankly, at this point I cannot honestly say that I would have that discussion with my kids or my grandkids in twenty years. I need to be convinced, that's all.

The Chairman: Mrs. Ablonczy, in a nutshell, you're saying that no efforts were made to come out with a best possible plan, and that somehow the government and the officials have an interest in coming out with a lousy plan for future generations.

Mrs. Diane Ablonczy: No, I would never say that. I'm sure they tried to come out with the best plan. I'm just saying that I'm not convinced it's good enough and can't be improved.

The Chairman: Well, that's something we want to do with the committee. If anybody has input, please feel free. I also don't want to be part of the group that my kids are going to say did a lousy job.

Mrs. Diane Ablonczy: Yes, that's right, and neither do the officials.

The Chairman: You're right, but we need to promote better ideas that will improve on this plan.

Mrs. Ablonczy, do you have any further questions?

Mrs. Diane Ablonczy: No, I'm happy to defer to my colleague here.

The Chairman: Mr. Jones.

Mr. Jim Jones: Under the proposed investment board, the amount of assets under management will be more than $100 billion within ten years. That means they will have more assets than the seven largest mutual funds in Canada. The potential for abuse is enormous. The president of the investment board will have powers that are almost equal to the Prime Minister's. We saw how a pension plan could abuse today or down the road, its powers two years ago, when the Caisse de dépôt et placement du Québec went to the market and propped up the Canadian dollar to the tune of $5 billion or $6 billion. Also, the caisse once mentioned that the creation of a second caisse de dépôt should be considered to ensure a greater rate of return. The investment board could be split in two, three or possibly four different entities, totally independent of one another. Returns could be compared, as could management.

Do you have any comment on whether we should have multiple plans versus just one plan, either today or down the road? What dialogue have you had with the Caisse de dépôt on its experiences, and what advice has the caisse given you on what you should be doing for the future, from a management standpoint?

Ms. Susan Peterson: I'll ask Mr. Hamilton to address your questions, but as this one-pager we gave you today shows, the amount of funds available to the investment board in ten years' time will be somewhere between $57 billion and $76 billion, not $100 billion. So just with that, we can address the issue.

Mr. Bob Hamilton: I'll try to take on all of your questions, although I may miss something.

Yes, that's true. Just to get the factual part correct, that's how much we're expecting the fund to grow over the next ten years. I would also say that some of the larger pension funds in place now—I think of the Ontario teachers, the Caisse de dépôt—will be growing over that time, too. One could expect that a plan like that of the Ontario teachers could well be in excess of $100 billion at that time.

• 2100

That's not to deny that this would be a large fund. There would be other funds close to that size, but it would be a large fund. That's why there was a lot of attention paid to try to make sure that this was independent and at arm's length and had governance procedures that assured those investments would be made in the best interests of the contributors and beneficiaries, as I indicated earlier.

We did talk to a lot of people about this in the course of the consultations. We talked to investment advisers, people who advise pension funds on a very regular basis and to teachers, the Caisse de dépôt and others and we really sought their views, because they are large pension funds operating in the economy. What are the lessons they have learned on governance? What are people who are advising pension funds saying?

The product of those consultations is what we've put forward here, which has limited the mandate of this board to investing in the best interests of the plan and not for economic development or other secondary objectives, as I indicated earlier.

We've tried to have rules and accountabilities in place to ensure that they deliver on that and that what they are doing and what their policies are is transparent in the reporting.

As well, we've started slowly by saying that the fund will invest passively. The board won't be picking individual stocks over the first three-year period, at least. It'll invest passively and in broadly based indexes.

That will be reviewed after three years. As this fund grows and one gets experience with it in the Canadian economy, I think it should be reviewed from time to time to make sure that Canadian capital markets are able to handle a fund of this size. Right now there's no reason to think that it can't, but coming back to your original point, this will be a large fund. I think it's one that we paid attention to in devising the governance scheme for the board and I think it's one that we don't want to lose sight of now as we go forward.

It's something that we're going to have to come back to with review periods to make sure the board is functioning in the best interests of the plan. If any adjustments need to be made in terms of the guidelines it's operating under, we may have to look at them. I think that's at least three years down the road, but we have made a provision to review them on a regular basis.

Mr. Jim Jones: The other question I have concerns limitation of the 20% foreign investment content. The side effect of foreign content rules is a reduction in the competitiveness of Canadian companies. Knowing they can count on a secure pool of capital, they have less incentive to be efficient. And it keeps Canadian workers from realizing a proper return on their investment savings, pushing them into a stock market that represents only 3% of global stock market capitalization.

Would you please comment on the fact that Canadian taxpayers are hard hit? The foreign content rule reduces pension earnings by $700 million a year. Should this rule be removed, Canadians stand to gain an increase in the value of their retirement portfolios of 20% to 25%.

Why is this rule not amended to allow for a greater return on funds?

Mr. Bob Hamilton: Again, to come back to this fund, the rules that will apply to the CPP fund are in broad terms the same ones that will apply to any other pension fund in Canada. So yes, it will be subject to the 20% limitation on foreign investment. That's the approach this fund is going to take.

Coming back to the broader question they're asking, which is why that rule would be in place or whether it should continue to be in place in the future for this fund or any other pension fund in Canada, as the minister has indicated on several occasions, I think, while we're in a situation where there is a lot of net foreign indebtedness in Canada he would not feel comfortable removing the 20% rule.

There is also the case to be made that these funds are subject to tax preferences right now. There are tax preferences for the contributions into these funds, and as long as they are there, the board should be investing as much as possible in the Canadian economy.

On the other side of the argument, the point you have made is that by allowing some investment offshore, there is a chance for greater diversity, and that can have an impact on the rates of return. But I think the minister has been clear as to where he stands on the 20% rule.

Those are some of the arguments on either side. And for this fund in particular, we've basically said it will abide by the same set of rules as other pension funds in Canada.

Mr. Jim Jones: I also heard somebody say that every three years the finance ministers will get together, get an evaluation from the actuary and determine whether this plan is sound.

• 2105

First of all, who's going to audit the management, the plan, the investment of the funds? Does the Auditor General have any role in the management of this plan? Is it a role similar to other departments'?

Mr. Bob Hamilton: Maybe I'll deal specifically with the investment fund for the moment. There may be broader questions that Susan would want to take on.

As I've indicated, we've put a lot of provisions in place to make sure that this fund is accountable for what it does. We'll have to make its investment policies public. It will be releasing quarterly financial statements. It will have to prepare an annual report and it will have to hold public meetings in each participating province at least every two years.

In coming up with this we've tried not only to set the rules in place such that they make good investments and there's good governance but also to make sure there's accountability as well for what the board is doing, to the public and to Parliament.

Mr. Jim Jones: Who's going to audit this operation? It doesn't say in the document.

Mr. Bob Hamilton: I'm not sure.

Is the Auditor General going to do it?

Ms. Susan Peterson: They'll appoint their own auditors.

Mr. Charles Seeto (Senior Chief, Financial Markets Division, Department of Finance): They will be able to appoint their own auditors, but the Minister of Finance could have a special examination done of this fund.

Mr. Jim Jones: I want to go back to what happened in 1995, with the Quebec Pension Plan intervening on the Canadian market to buy Canadian dollars. Will this plan be able to do that, from a political standpoint?

Mr. Bob Hamilton: I cannot foresee where that would be in the best interests of the contributors and beneficiaries. This plan would not be allowed to do that for that sole purpose.

Mr. Jim Jones: Therefore the government of the day would not have any control over this plan. They're going to be totally anonymous.

Mr. Bob Hamilton: Independent, arm's length; they will be taking their actions in the best interests of the plan. They wouldn't be taking—

Mr. Jim Jones: Autonomous, I meant, not anonymous.

Mrs. Diane Ablonczy: I might refer my colleague to section 10 of the act, where it says that the directors of this fund will be appointed, on the recommendation of the minister, to hold office during good behaviour. So it's hardly autonomous. It's completely at the will of the governor in council, through the recommendation of the minister, that these people serve.

The Chairman: Mr. Valeri.

Mr. Tony Valeri: Although that might be part of the act, the comments Mr. Hamilton is making are with respect to the investment board's management of the funds. You're making the assumption that because those people are being appointed by the minister in various provinces, they have no fiduciary obligation to the minister to in any way manage those funds other than the way it's outlined in the act. The way it's outlined in the act is such that those funds need to be managed for the benefit of the Canada Pension Plan fund.

Mrs. Diane Ablonczy: I agree, and I think that's a good provision. Are we just responding to Mr. Jones' query as to whether there would be any kind of political influence that could be brought to bear on the people running the fund? Clearly, it could be if government chose to do that.

Mr. Tony Valeri: I'm responding to your statement, saying that there would be no political influence, and it was set up the way it was to ensure that there was no political influence. You're making an assumption that there may be. I'm telling you that the way the act is set up, there would not be.

Mrs. Diane Ablonczy: No, I'm not saying there may be, I'm saying there clearly can be, because the minister decides who gets to sit on the board and how well they perform. In other words, if there's no “good behaviour”, then presumably the person can be dismissed from the board.

Mr. Paul Szabo: There has to be collusion.

Mrs. Diane Ablonczy: The minister decides whether that person continues to stay on the board. I mean, that's in the act. Tell me if I'm wrong, but....

Mr. Tony Valeri: I think I just did, but I'll leave the technical matters to Mr. Hamilton.

Mr. Bob Hamilton: There is a technical definition of good behaviour. It's not just at the whim of the minister. If someone is negligent, then action could be taken.

But there are strong provisions in here that say when you're a member of this board making decisions, you will act in the best interests of the plan, the objects of it. I think it's section 5. It's quite clear in that respect. Indeed, that was one of the very strong points people made to us through the consultations. We've devoted a lot of effort to it. This legislation has gone through the scrutiny of a number of experts in this area with just that in mind.

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The Chairman: Mr. Solberg.

Mr. Monte Solberg: Thank you, Mr. Chairman.

Is the board subject to access to information?

Mr. Bob Hamilton: No, I don't believe they're subject to access to information.

Mr. Monte Solberg: Why would that be?

Mr. Bob Hamilton: I'm not sure of the technical reason why that's the case, although I can probably find it if you give me a moment.

Mr. Monte Solberg: Okay. In the meantime, though, I'll pose another question.

It was decided by the feds and the provinces in the genesis of this whole thing that Canadians shouldn't be subjected to having to scrutinize a mandatory RRSP plan, seemingly because it was decided that the premiums would be too high. But it's possible, too, that Canadians might have embraced that type of plan for other reasons.

For instance, many people are concerned about the idea of the government investing their money for them, whether or not you agree that you can get a better rate of return. Many people do have that as a reason; they just don't like the idea of the government investing their money for them.

Another reason I think would be that people know money accumulates in their RRSPs and they'll have a lump sum. When they pass on, it can go to their family, to their spouse, for instance. In Canada, of course, we provide a very meagre survivor benefit—$465 a month, or something like that—which is why we have a pretty high incidence of elderly widows living in pretty strait circumstances.

So the point I'm making is that while I appreciate the argument made in this paper about the premiums being too high, if we live with the assumptions that Mr. Clark has made in here—and I'm not saying we do—what about the other benefits? Were those considered? A better rate of return isn't the only benefit of a mandatory RRSP.

Mr. Lorne Nystrom: On a point of order, Mr. Chairman, I had a number of other questions I was going to ask, but I thought we were adjourning at 9 p.m. so I deferred when you were telling me to perhaps look at the clock. Are we going on to 10 p.m. or 11 p.m.?

The Chairman: I always assume that members of this committee will use their good judgment in all sorts of things, including how long we're going to go. If you think this question you're about to ask is extremely important—

Mr. Monte Solberg: The answer is important.

The Chairman: Is it possible to stay for another five to ten minutes?

Ms. Paddy Torsney: Will it be five minutes? Initially it was from 6 p.m. to 9 p.m. Now it's 9.15 p.m. At 9.20 p.m., is it going to be 9.30 p.m.? There has to be an end to this. We all have a meeting at 9 a.m. You know, we can beat the horse to death, but....

The Chairman: Well, I'm just asking.

Mr. Tony Valeri: Given the fact that it is 9.15 p.m., perhaps we could ask all members of this committee and particularly Mr. Solberg, given that you've posed the question...if you feel that it's crucially important to the work of the committee, perhaps you could submit that question in writing to the witnesses, who can then submit a written response to this committee with respect to your particular intervention, and we can move on to adjournment.

Mr. Monte Solberg: I would accept that proposal—from Mr. Hamilton, I think it is.

But the other one is more about process. I'm curious to know. It's one of those ones that I think would be better to—

An hon. member: Do it quick.

The Chairman: Can you do me a favour? We've spent a minute debating this. Can you place your question? Then you can get an answer.

Mr. Monte Solberg: It has already been placed, Mr. Chairman.

The Chairman: Go ahead.

Mr. Monte Solberg: I'm waiting for the response.

The Chairman: Let's get the response then.

Ms. Susan Peterson: I'll try to be quick.

In the public consultations there was a very clear message that Canadians do not want to bear the risk of investing for themselves on their basic pension. They want the security that the Canada Pension Plan offers them with respect to their basic wage-related pension. They want the security of a defined benefit, which RRSPs cannot give them. They want the security that the Government of Canada stands behind it; it's not subject to the risks that individual investments are.

It's not that Canadians said RRSPs are for the birds. It's that the overwhelming opinion was that they want the CPP fixed because it provides them with that security. RRSPs do have an important part to play in the system, as I said earlier.

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So they both have a role, but Canadians certainly were not of the opinion, by and large, that they wanted the whole thing to be RRSP-like. They wanted a basic part of it that was a secure, defined benefit as provided by the Canada Pension Plan.

The Chairman: Yes, Mr. Jones.

Mr. Jim Jones: On a point of order, I'm leaving my question with the chair. I would like to have a written response by early next week. If you have any questions on it, you can phone my office and I will be glad to clarify. Thank you.

The Chairman: I want to thank all of the members of the panel for their answers. We have learned quite a bit and it will help us with the study of Bill C-2.

The meeting is adjourned.