Pension Reform: A Hard Look at the Role of Ideology

Federico Vargas

On the sunniest day of the year, Canadians learned of a final agreement reached among all provincial ministers and the federal government, with the exception of Manitoba and Quebec, to significantly expand the Canadian Pension Plan (CPP). This long overdue expansion of the CPP took place in a particularly tense and politicized environment. The agreement was hastily reached under strong political pressures from an Ontario government that seemed determined to achieve pension expansion, with or without the rest of Canada. High pressure from a young federal government, eager to simultaneously please a demanding middle class constituent base and to reward those provincial partners supportive of its various proposals during the federal election, also contributed to the resulting agreement. To complicate matters, CPP reform required that two separate but interconnected thresholds be met: approval by at least two thirds of Canadian provinces, and representation from at least two thirds of the country’s population.

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Unfortunately, when it comes to pensions, politicians seldom put aside ideology and personal predilections in exchange for evidence-based options. Former Canadian Prime Minister Stephen Harper’s stringency to even consider pension reform is an excellent example of party political ideology about individual responsibility, and personal preferences about the role of government, trumping evidenced-based policy. The evidence for reforming the Canadian Pension Plan at the time was overwhelming: 76% of workers in the private sector had no pension plan. The rationale for CPP expansion was also resounding: as young workers (the main beneficiaries of CPP expansion) became ever more mobile in an economy characterized by declining traditional industries and the bifurcation of the labour market, pension reform appeared to be the only way to reduce both intergenerational and inter-class inequality. Even for highly skilled workers, the rise in income-to-debt ratios and income-to-housing price ratios, particularly in big cities, was worrisome and reinforced the need to help young workers save for retirement. Unfortunately, the Harper government was not alone in its inadequate response to pension reform.

Kathleen Wynne’s use of article 94A of the Canadian Constitution, which stipulates that provinces may establish their own pension plans anytime, proved to be an irresponsible and expensive gamble to gain public support before an election. However, as the CPP expansion goes forward and details emerge on how $70 million dollars was spent on a now defunct Ontario Retirement Pension Plan (ORPP), Wynne’s government may find that they have expended not only financial capital but also valuable political capital. A similar situation was observed when the Federal Liberal Party announced that they would lower the retirement age for Old Age Security from 67 to 65 during its election campaign; a move made to cater to key baby-boomer voters. This political move went against the orthodoxy and trend of most advanced industrialized nations, and will have long lasting consequences beyond short term political gain for the Liberal Party. As life expectancy continues to increase, it makes economic sense for Canadians to remain active members of the economy for longer to contribute to GDP and taxes.

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Let’s face it, changes to pension or retirement schemes will never be universally popular, and governments will often be reluctant to make such difficult but necessary decisions. Any expansion in pension schemes is nearly always subject to an immediate backlash from business and industry associations, who are concerned that new “payroll taxes” will result in increased costs of doing business. This is often followed by a chorus of doomsday statements about unemployment increases, wage depression, and the injustice of taking away much-needed income from low-income earners. These are valid concerns for Canadians. What often gets lost in the discussion is the higher goal of the Canadian retirement income system: to give Canadians the opportunity to have a dignified retirement that is funded through their lifelong pension contributions, rather than an uncertain retirement that is reliant on income supports. Research shows that humans often suffer from psychological obstacles in the form of present biases, which impedes them from taking decisions that will benefit their long term goals, and not simply serve their current desires.  These psychological obstacles may ultimately pose the greatest challenge for governments and form the raison d’être for the existence of mandatory pension plans.

Make no mistake — pension plans are one of the most important and ambitious public policy projects that governments undertake.

The bottom line: Pension reform is too important to be left at the mercy of personal predilection, party ideology, and the uncertainty of political office. Make no mistake –pension plans are one of the most important and ambitious public policy projects that governments undertake. For Canada, it is undoubtedly a grand national project that affects not only millions of present-day Canadians, but also future generations to come. In leviathan terms, citizens entrust their future livelihood (in the form of lifelong savings) to the state in a social contract in which they give up their natural right to manage their own future. Elected political leaders should not, and cannot, disappoint Canadians after they have entrusted such an important aspect of their lives to their governments. Canadians should not have to wait until 7 of the 10 provincial governments are politically and ideologically aligned with a federal government to go forward with such an important national project.  Canadians should expect that when their provincial and federal representatives meet, they will strip themselves of their ideological burdens and take the necessary evidenced-based decisions to meet their retirement needs.

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Federico Vargas is a 2017 Master of Public Policy candidate at the University of Toronto’s School of Public Policy and Governance. He previously completed an Honours Bachelor of Arts degree in International Relations and French at the University of Toronto and holds a certificat d’études politiques from the Institut d’etudes politiques d’Aix-en Provence (Sciences Po Aix). His areas of interest include immigration policy, international trade, social policy, cities and foreign policy.

 

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