April 2005: Another Reason To Be Glad We're Not Americans

Our CPP is safe from Bush—so we can make it even better
April 1, 2005

George W. Bush has made the privatization of the U.S. public pension system the legacy issue of his second term. He has warned that Social Security (the equivalent of our Canada Pension Plan) is headed toward bankruptcy, and pledged to begin dismantling it by creating individual retirement accounts for younger workers, instead of guaranteed public pensions.

Bush’s red flag about Social Security bankruptcy is about as believable as his claims that Iraq had weapons of mass destruction. Indeed, it serves exactly the same purpose: scaring Americans into radical actions they wouldn’t otherwise dream of. In reality, the U.S. system has $1.5 trillion in reserves, and a surplus of $150 billion per year.

But Bush’s team turns these numbers on their head with funny-money accounting gimmicks. By projecting the balance sheet into an infinite future (a technique that must sit uneasily with those fire-and-brimstone Bush supporters who believe the Apocalypse is coming), and allowing no increases whatsoever in premium rates, he claims Social Security actually faces an $11 trillion shortfall. His proposed solution—converting assured public pensions into individual RRSP-style accounts—won’t save money (in fact, it will cost trillions during the transition). But it will be a huge gift to a financial industry drooling at the prospect of managing all those individual accounts.

Every time America embarks on some new radical adventure—cutting taxes, deregulating industries, or slashing social benefits—there’s usually a loud and loyal cheering squad here in Canada, urging us to follow suit. This time, however, the silence from our own right bench is deafening, and likely to remain that way. Why?

First of all, the big bankruptcy scare won’t carry any weight in Canada. The Canada Pension Plan has a rock-solid financial footing that’s the envy of actuaries around the world. Current contribution rates (about 10% of qualifying payroll, split equally between workers and employers) are considered sustainable—even to Bush’s infinite time horizon.

Canadian actuaries and pension planners have lots of reasons to lose sleep these days: the volatility of millions of RRSP accounts, for example, or the sustainability of private pension plans. But the bankruptcy of the CPP is not one of them. In fact, it’s about the only thing in Canada’s pension system right now that we can rely on.

I think there’s another, deeper factor, however, which will also prevent Bush’s manipulative pension gambit from catching on up here. U.S. Social Security could be made as fiscally sound as our own CPP with only modest increases in premium rates, phased in sometime over the next couple of decades. In America, thanks to the vested economic and cultural power of the very rich, the idea of proposing an increase in taxes to fund a universal public program—even one that has successfully lifted 40% of American retirees out of poverty—seems to be a non-starter. Here in Canada, on the other hand, we’ve already done it: with no muss, and almost no fuss.

CPP premium rates increased by over 50% between 1998 and 2003, when the federal and provincial governments struck a deal to solidify the plan. There was some requisite whining from business lobbyists about the nefarious impact of payroll taxes. (Meanwhile, even as CPP premiums were rising, Canada’s job-creation record was matching, and now surpasses, that of the U.S.) From individuals’ perspective, it’s hard to imagine that many even noticed the increased premiums—which captured an extra 1.75% of qualifying earnings, and just 0.5% of total personal income. But I bet they notice and appreciate the fact that at least one piece of their retirement puzzle is in place, especially the more they read about the latest escapades of private-sector financial icons like Nortel and Stelco.

The increase in CPP premiums was so positive to the long-run stability of that plan, and so beneficial to the well-being of run-of-the-mill Canadians, that I humbly suggest we do it again. Let’s increase total premiums by a similar amount over the next five years—not to stabilize the system this time, but rather to finance its expansion. After all, the existing CPP is designed to replace only about 25% of an average worker’s pre-retirement income. Why don’t we modestly increase that replacement rate, and also lift the maximum earnings ceiling? We could do that with further premium hikes no worse than the ones we’ve already digested.

There’s no pension alternative in Canada that’s as efficient, portable, and secure as the CPP. Its low administrative costs are an embarrassment to the profligates of Bay Street. We increased premiums and hardly noticed. Let’s have more of the same. George Bush won’t celebrate. But Canadians should pop the champagne corks over this example of how we make our lives a little better, by agreeing to pay a little more in tax.

(Jim Stanford is an economist with the Canadian Auto Workers and a CCPA Research Associate.)