Flaherty: Wait Till Next Year

Two documents that can have an important effect on our economy were released in the past week. One of them expresses a considerable sense of urgency. The other is in no hurry. Oddly enough both could be right.

The report of the Nova Scotia Commission on Building Our New Economy chaired by Ray Ivany is worth reading more than once, as much for its analysis as its recommendations. Above all it is a call to action by all participants in the Nova Scotian economy. On the other hand federal Finance Minister Flaherty’s budget charts no new directions, nor does it add much to the initiatives previously announced.

Flaherty’s speech began with a number of quotes about fiscal prudence from Sir John A. Mac Donald and his contemporaries. But really he seemed to be channelling Bill Davis. Davis enjoyed a fourteen year run as Premier of Ontario. When asked to explain his success he liked to reply “Bland works.”

The Conservative government’s political future relies heavily on its credibility for economic and fiscal stewardship. Until the financial crisis in 2007-2008 it was gradually reducing debt as a percentage of GDP. Canada weathered the crisis relatively well, but progress on debt reduction was interrupted by a fair dose of needed stimulus spending. That has now concluded and the debt burden is about to resume its decline.

The Conservatives like to point out that Canada has done well compared to other countries in the G-7. On the other hand, with the exception of Germany, the competition in this department is rather weak.

The biggest new initiative reflected in the budget will save $7.4 billion over six years. Civil servants will now have to pay half the cost of post-retirement health benefits rather than a quarter, an annual increase of about $290 per person.

These changes will be disappointing for the civil servants, particularly those already retired. On the other hand they still have benefits almost unknown to workers in the private sector.

Federal civil servants will also now contribute half the cost of their pensions and the retirement age for new hires will be 65. In this they are following the lead of several provinces including PEI and New Brunswick, and Nova Scotia for civil servants though not yet for teachers.

The budget provides new initiatives to help apprentices, people with disabilities or autism, older workers, veterans, and many others find jobs, but altogether the cost of these does not amount to much in the context of a $280 billion budget.

So Flaherty can be on cruise control and pretty confident that there will be a surplus in 2015-2016, and perhaps in 2014-2015.

As always much of this seems to be governed by electoral timing. For the NDP government in Nova Scotia “Back to Balance” was too little too late, and treated with considerable skepticism. Flaherty risks having too much too early. He would rather have the transition to surpluses in an election year.

If Flaherty is so relaxed why does the Ivany commission feel Nova Scotia needs urgent and transformational change?

The Canadian economy is ticking along at a satisfactory though not exciting pace. The core of the success is not the traditional manufacturing sector in Ontario. For example Chrysler, which took $2.9 million of loans and grants in 2009 when it was sick, now says it needs a further $700 million in handouts just to maintain the existing number of jobs.

Rather the national economy’s success is built around western Canada’s resource sector whose biggest problem is getting its abundant product to market. Meanwhile Nova Scotia’s policy toward many resource industries, particularly onshore oil and gas, has been diffident at best. Too much of Nova Scotia’s economy is based around the public sector.

Nova Scotia’s finances are in a precarious state, and paying for our debt will become far more difficult when interest rates return to more normal levels. Canada’s debt level is very manageable at higher interest rates.

Most importantly, Canada’s population continues to grow by more than 1% per year, adding over 400,000 people in the most recent year. Nova Scotia’s population has started to age and decline. The working age population will decline even more quickly. In the absence of radical change we will have too few workers and too little income to support both our provincial debt and our growing population of seniors.

Flaherty was not unhappy to hear his budget characterized as ”boring”, although given Bill Davis’s track record he might have preferred “bland.”

Bland and boring will not meet the challenges identified by the Ivany report. Next week’s article will look more closely at it.


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Reference Material

Pensions in Crisis

Voters trying to understand the various positions being advocated for the Canada Pension Plan have every reason to be confused.

The initial incarnation of CPP required only 3.6% of pensionable earnings as contributions, and provided benefits to people well before they had been earned. This was eventually repaired in the nineties; otherwise, the plan would have gone broke.

Today’s CPP provides a pension at 65 of up to $12,780, for which employees and employers annually contribute a combined 9.9% of pensionable earnings. It is simple and cost-effective, but even when combined with Old Age Security (OAS) it does not provide an adequate pension.

After fruitless discussions with the federal government, Ontario proposes to go it alone. Details are not yet finalized and the scheduled start is not until 2017, no doubt reflecting a hope that federal policy will change and save them the trouble. Ontario’s plan, mandatory only for those not already in a pension plan, would require a worker to contribute for 40 years in order to receive an unreduced benefit. The only examples provided on the Ontario website are for employees who work the full 40 eligible years.

The Canadian Labour Congress (CLC) has one of the many proposals to increase the existing CPP. The CLC loves to quote a 2014 Nanos survey in which 88% of Canadians support “increasing the benefits Canadians receive through the Canadian Pension Plan.” Of course the survey does not mention the corresponding need for a substantial increase in contributions, nor the 40 year wait for unreduced benefits. (The same survey makes the shocking discovery that most Canadians would like lower taxes.)

The strongest support for improving benefits was from the oldest respondents, who would get only small benefit from the CLC proposal. There is one group who should actively oppose it. Low income workers are typically able to receive the Guaranteed Income Supplement when they retire, in addition to OAS and a small pension from the present CPP program. An increase in CPP will be largely offset by reductions in GIS. This needy group will be paying something for nothing.

As a result, some proposals for reform, otherwise similar to that of the CLC, do not require contributions or provide benefits on earnings below $25,200. These proposals have considerable merit as a cost-effective and comprehensive improvement to retirement savings for Canadians. 

But that virtue will be much clearer to actuaries and economists than to voters. Most Canadians, given a clear and detailed understanding of proposed changes, would be much more tepid in their enthusiasm for a program that takes so long to mature.

Hence, the rather vague communications from the three political parties. One can search their websites in vain for any indication of what they have in mind.

The Conservatives have argued, incorrectly, that CPP contributions are just another tax. Unlike unemployment insurance, the CPP funds have for five decades been operated entirely outside of government accounts and are only used to pay CPP beneficiaries. Having been opposed to any change, the Conservatives now say that they are willing to consult Canadians about a possible optional program.

How that might work is anyone’s guess. It appears to be just creating a different RRSP opportunity. Are there limits on how much can be contributed? Is it optional for employers too? Are contributions locked in until retirement as is the case for the base plan? This “plan” does not offer much.

The Liberals favour a mandatory program. Liberal Critic for Seniors John McCallum points out that changes would require the agreement of two thirds of provinces with two thirds of the population, so an agreement would have to be negotiated. Their position would tilt toward a large amount of excluded earnings to protect low income earners. Good.

More troubling is that they are not committed to adequate funding, which suggests that they might , as happened with the original CPP, cheat young contributors by paying older ones more benefits than their contributions have earned.

The NDP, which might be expected to follow the CLC recommendation, is so far silent about what exactly they have in mind—although it will clearly be a mandatory program. Caucus Press Secretary Greta Levy promises that “The exact figures on CPP will be announced before the election as part of an NDP government’s approach to retirement security.”

So voters actually trying to understand this complex issue don’t have much to work with.

The Conservatives are trying to fog the issue by musing about a no-hoper voluntary plan.

The Liberals appear to prefer a mandatory plan, but have not drawn any lines in the sand about how it must look. They may be willing to consider an irresponsible funding choice, or to be pushed that way by the provinces.

The NDP say they have advocated a CPP expansion for years—as well as strengthening GIS and reverting the age of OAS to 65. This adds to a growing list of expensive promises with no indication of how they are to be paid for.

Today’s CPP plan is appropriately funded and provides a cost-effective but modest portion of retirement funding. A long term reform is possible that would allow that portion to become more substantial.

The Conservatives have no real intention of making any changes. The Liberals and NDP say they do, but if they choose a wrong model they could do more harm than good.

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