Key policy areas for the new finance minister: part 1 – Canada Pension Plan

Key-PolicyThe appointment of Bill Morneau (pictured above) as minister of finance is particularly interesting because of his involvement in the world of public policy think-tanks. In recent years, the Fraser Institute and the C.D. Howe Institute (where Mr. Morneau recently served as Chair) have both produced important research that provides insights that can help guide the policy decisions of the new finance minister on a number of different files.

This series of blog posts will highlight a number of key policy areas where Mr. Morneau’s think-tank experience can be especially useful. In this post, we examine the policy choices facing the new government surrounding retirement savings.

During the campaign, the Liberal Party committed to pursuing an agreement with the provinces to expand the Canada Pension Plan (CPP). However, a number of major recent studies by think-tanks, including the C.D. Howe Institute have demonstrated that the case for doing so is exceedingly weak and often outright mistaken.

In June of this year, for example, the C.D. Howe Institute published a study by leading pension expert Malcolm Hamilton evaluating the state of retirement savings. The study demonstrated that the hand-wringing over a retirement savings crisis was based on a misunderstanding of how savings are calculated. Hamilton specifically stated that the “reports of under-saving for retirement are exaggerated.” He concluded that Canadians are generally well-prepared for retirement, and that for most Canadians the greatest financial challenges actually come earlier in adult life when people are trying to buy a new home and support young children.

In addition, a recent report published by our think-tank demonstrated quite clearly that increases in the mandatory CPP will be almost completely offset by reductions in voluntary savings such as RRSPs. In other words, expanding the CPP will not increase overall retirement savings but simply shift it from private, voluntary accounts to the public CPP.

The policy implications are clear—because most Canadians are well-prepared for retirement, our priority should be providing targeted assistance to the small number of people who are slipping through the cracks and facing penury in old age. A broad, one-size-fits-all approach such as expanding the CPP will not efficiently help the individuals in greatest need, and takes money out of people’s pockets when they need it most.

Over the past 18 months, leading Canadian think-tanks have produced substantial research showing that there is no retirement savings crisis in Canada, and that expanding the CPP will not achieve its goal of significantly boosting overall retirement savings. Hopefully Mr. Morneau will keep these research findings in the front of his mind as he works to craft policy surrounding retirement security for the new government.

KEY POLICY AREAS FOR THE NEW FINANCE MINISTER: PART 2-TOP TAX RATE

A robust body of economic research shows that high personal income tax rates are harmful to economic performance. One of those studies, which examined the tax rate increases in Ontario under Premier Wynne, was published by the C.D. Howe Institute in 2012. It concluded that the tax rate increases in Ontario would “likely create more economic costs than benefits” because of the negative incentives such tax rate increases impose on investors, entrepreneurs, business professionals and skilled labour. Indeed, the study further stated that behavioural responses to the tax rates would likely reduce government revenue in the long-term by more than the province would collect.

Although the behavioural response to a federal tax increase would not be as strong as a provincial tax increase (because it is harder to change the country you report income in than the province), the C.D. Howe paper correctly observed that higher-income taxpayers respond to higher taxes by reducing their labour supply. This would be equally true for a federal tax increase as a provincial one, with the consequences of reduced economic growth and weaker-than-expected revenue gains from higher personal income taxes.

Page 20Our own work in this area buttresses the conclusions of the C.D. Howe report. For example, a recent paper on personal income taxes showed that Canada fared poorly compared to the United States and a number of other industrialized countries in terms of both our tax rates and the income levels at which they apply. In other words, our personal income tax rates were judged to be comparatively high and effective at relatively low levels of income. This research strongly suggests that further increases to personal income tax rates would make Canada less competitive, negatively influencing investment, savings, entrepreneurship and overall economic growth.

Increasing the top marginal income tax rate would hurt the economy and could bring in a disappointing amount of new revenue. Mr. Morneau should carefully review the recent research from his own think-tank and others and form tax policy that is informed by this evidence.