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Trevor Tombe: French pension protests prompt the question: How secure is the Canada Pension Plan?

Commentary

Large-scale protests erupted across France in recent days and President Macron’s government only narrowly avoided collapse. The reason? A move to raise the retirement age from 62 to 64.

For a country whose population is ageing and where public pensions already account for 14 percent of the economy, compared to only 5 percent in Canada, this is hardly a radical move. But clashes with police and hundreds of arrests resulted nonetheless.

This is far from a uniquely French affair. Germany’s pension system is heavily strained and the government is contemplating big changes. A majority of advanced economies will soon see retirement ages increase.

Closer to home, the U.S. Social Security system’s days appear numbered.

By 2033, the Trust Fund that sustains the retirement incomes of elderly Americans will run dry. Payroll tax revenues levied on current workers fall far (far!) short of benefits paid to retirees, so taxes will have to rise or benefits will fall. 

It is difficult to overstate the scale of their problem. The Congressional Budget Office estimates taxes on workers will have to immediately and permanently increase by 4.9 percentage points to sustainably fund retirement incomes. Alternatively, benefits received by retirees would have to be cut by between one-quarter to one-third. That’s not a typo

Worse, it is problem largely ignored by politicians in a system where compromise is a four-letter word. The further this can is kicked down the road, the heavier it will become.

So where does Canada fit into all this? Can younger workers today—some of whom will live to see the 22nd century!—rely on the Canada Pension Plan to withstand the test of time?

Fortunately, our system is an island of stability both today and well into the future.

Every three years, Canada’s Chief Actuary conducts a thorough analysis of the financial future of the pension plan. The latest assessment, completed a few months ago, reveals that despite an ageing population, lengthening life expectancies, a declining labour force participation rate, and other factors, the current payroll tax rate and benefit levels are sustainable over any reasonable horizon.

The reason is simple: investment income.

Within a few years, contributions by workers will be insufficient to cover benefits paid to retirees. Since the late 1990s, however, we have been over-contributing and accumulating the excess into a fund now worth over half a trillion dollars. By 2035, it is projected to double to more than $1 trillion.

These savings are invested and should fund roughly half of the future retiree benefits, more than compensating for the shortfall from workers. 

Of course, much depends on demographics and investment returns, and nothing is set in stone. But regular reviews and a significant cushion mean any future reform to ensure sustainability (if ever required) would involve a modest nudge rather than wholesale change.

If the investments earn a 6 percent average annual return—much lower than the ten-year average return of over 10 percent—the fund will grow faster than benefits, and cover a gradually increasing share of pensions.

It wasn’t always like this. We are benefiting from reforms in the late 1990s. 

Back then, the CPP was set to run dry by 2015. So governments across the country—including Jean Chrétien’s, Ralph Klein’s, and Mike Harris’, who did not see eye-to-eye on many things—agreed to some gradual changes to secure our public pensions.If you are interested in this history, I highly recommend Fixing the Future. It’s a 2008 book by Bruce Little that dives into details and includes interviews with all the key players.

Hard work by Paul Martin, Alberta’s Jim Dinning, and Ontario’s Ernie Eves nailed down the details and brokered compromises. A combination of modest benefits reductions and contribution increases successfully charted a new, sustainable course for the CPP.

Not all were on board, to be clear. Eight of the ten provinces agreed while British Columbia and Saskatchewan did not.Two-thirds of provinces representing two-thirds of the national population are required for changes to the CPP. The move to secure the CPP even sparked interest among some in Alberta that the province should go its own way. Payroll tax increases were particularly unpopular among Conservatives, although even provincial New Democrats campaigned against benefit cuts. A separate Alberta Pension Plan remains a stated (though potentially unserious) priority for the provincial government even today

None of this means reform should be off the table in Canada. 

Some want improvements in the CPP fund’s management, given its relatively high cost. And increasing the retirement age may be defensible. The federal government’s previous move to reverse an increase in the eligibility age from 67 to 65 in our Old Age Security system, for example, was effectively adding a financial burden on taxpayers equivalent to raising the GST by one point

But Canada has the luxury of enacting reforms at its own pace. The current system is by all analyses sustainable, so reforms are unlikely ever to be required.

Our past success in CPP reform demonstrates that governments can work across party lines within our sometimes fractious federation to implement smart policy focused on our long-term future. Something we see too little of today.

It’s an incredible success story that distinguishes us from countries struggling with difficult reforms enacted under immense pressure. 

It’s an achievement we should celebrate more.

Opinion: Government policies are helping to push grocery prices higher

Commentary

The CEOs of Canada’s largest grocery chains recently appeared before Parliament to answer questions about rising prices for groceries. With food prices up 10.4 percent over 12 months, Canadians are feeling the pinch and parliamentarians are reacting. However, much of last week’s political theatre ignored an important factor contributing to the rising cost of food—namely, government policy. 

For example, the federal carbon tax, which affects food prices by raising the costs of transportation and other “inputs” integral to our food system. According to one study, at $50 per tonne (the current minimum level set by the federal government), the carbon tax would increase food prices by 3 percent. The carbon tax is set to rise to $65 per tonne in April, ultimately soaring to $170 per tonne in 2030, meaning the carbon tax’s upward pressure on the price of food (and other goods) is just beginning. 

The federal government may also soon ban certain types of fertilizer as part of its broader climate policy agenda, which would further increase costs for farmers by limiting access to fertilizer products. When federal policy makes food production more expensive, grocery store prices will climb. 

Now consider Canada’s longstanding system of supply management, which restricts imports to allow domestic producers of milk, eggs, and poultry to maintain higher prices for their products than would otherwise exist in a competitive market. Government dictates who can produce, what can be produced, when, and how much, while also restricting the ability of Canadians to access certain food products from foreign suppliers. Not surprisingly, research finds that supply management raises food prices—according to a pre-pandemic study, the system costs the average Canadian household an estimated extra $300 to $444 annually. 

And if you’ve done any grocery shopping lately, you’ve seen the consequences. Price increases for dairy products and poultry have generally outpaced those for food overall. For instance, between January 2022 and January 2023, prices have risen 12.7 percent for fresh or frozen poultry, 11.4 percent for fresh milk, 19.1 percent for butter, and 15.6 percent for eggs. Again, these increases are noticeably higher than the 10.4 percent increase for food overall. 

Unfortunately, supply management is only one example of Canada’s many problems with competition policy. For example, another recent study published by the Fraser Institute found that government policies, including interprovincial trade barriers and occupational licensing rules, help shield 35.1 percent of the Canadian economy from competition. The same study ranked Canada very low (48th out of 62 peer countries) on foreign investment restrictions, which also contribute to higher consumer prices.

Many factors determine the price of food. Supply chain challenges, changes in the cost of inputs (fuel, for example), weather, labour market conditions, etc. But more competition leads to lower prices as firms respond to customers having more power in the market and more choice in what to purchase. While parliamentarians may have valid reasons to examine the possible concentration of market power in the grocery industry, they need look no further than federal policies (and provincial policies) for ways to improve the competitive landscape. 

At a time when many factors are pushing food prices higher, Ottawa is actively contributing to the problem by limiting competition and making things more expensive. Members of Parliament, including those who recently questioned Canada’s grocery CEOs, would do well to look inward and reconsider these policies if they want to lower food prices for Canadians.