Expanding the CPP Won’t Kill Jobs

I think I may lose it here.  If I read just one more article about someone saying expanding the CPP (Canada Pension Plan) will kill jobs because it is like a tax hike…. I think I might throw up.  Let’s ignore the fact, it won’t be a tax at all and really a savings plan, and go right for the heart of this insane defense: raising taxes will kill jobs.

In effect people arguing that a tax hike will reduce GDP(Gross Domestic Product) and thus reduce the number of jobs, but of course this really doesn’t hold any water.  Money that goes into the federal government doesn’t just turn into mud and be utter useless.  The government spends the money…shocking I know.  With all the services they provide and the infrastructure they have to keep up the government really does have to spend money.

For example, the federal government pays their employees to do work and guess what those employees spend their money on housing, utilities and even beer and popcorn.  Is government money magically different and doesn’t get added to the GDP?  No of course not.  So when the government gives a grant to build a water treatment plant, does that not help the GDP? Of course it does.  Or if the government starts a new program and hires staff does that not create jobs?  Of course it does.

It really doesn’t matter who spends the money: business or government.  As long as it goes out the door it will help the GDP and create some jobs as well.  It’s like arguing that leaving by the door on the right if different then the door on the left…both get you outside so there really isn’t any difference.

Yet, if it goes into a savings it won’t be spent, so won’t that kill jobs?  Um, do you know where all that excess money that the CPP gets right now goes?  Oh right, the CPPIB invests the money into businesses, which will usually take the money to grow their operations and grow the GDP…of course if the company is outside Canada it won’t directly help our GDP, but if our trading partners are doing better that also helps us.

Long story short: raising a tax won’t kill jobs…it will likely shift some around, but not remove them from the total.  So don’t hide behind that as an excuse to avoid changing a program that will help the majority of people save for retirement.  It’s not like the boomers did a great job saving for their retirements, so I think we have enough evidence that the current set of programs aren’t working well for the majority of people.

So what are you thoughts on PEI’s proposal to expand the CPP?

14 thoughts on “Expanding the CPP Won’t Kill Jobs”

  1. It’s funny I never complain about paying taxes (though occasionally do question government spending, but that a whole other ball of wax) because when I was working for the military my salary was made up entirely of other peoples tax money. So I was getting much more from the government then I was giving it!

  2. Well the way I understand it, it’s the businesses who are complaining because they have to match the 4.95% contribution from the employee. So if the income cap is raised, so does their costs.

  3. As small business owner, I have to disagree on a couple of points; The government doesn’t ‘create’ jobs or wealth, they simply shift it around in a quasi-socialist way, which looks good on paper until you run out of other people’s money to spend. Business creates wealth and jobs and the more they are taxed to support government programs, they less they have for expansion, wealth creation, and yes, job creation. Expanding CPP will do nothing for Boomers, and many progressive businesses who want to retain the best employees will already offer a matching defined benefits contribution plan. The absolute last thing small business owners want or need is some beak saying, “We’re from the government, and we’re here to help”. The government is not an industry in and of itself and unfortunately many bureaucrats have lost sight of the fact that if it wasn’t for the small business guys slogging away in the trenches day in and day out, fueling growth, and diligently paying taxes, there would be ZERO government jobs. To suggest that it doesn’t matter who spends the money, whether business or ‘government industry’ is ludicrous and laughable. Yeah, I guess that Greece story with all that ‘industry of government’ didn’t have such a happy ending.

  4. Uh , from a business owner’s perspective , yes it is a tax . Calculated as a percentage of the employee’s wages and mandatory , not optional to pay. To me that reeks of a tax. To small business owners operating with an already thin margin of profitability , a doubling of the the cpp premiums will be enough to cause a lot of business owners to just throw up their hands and close shop.I’m not speaking of all businesses, just the ones operating on the edge mind you. Now I am not against changes to the system but put more onus on the employees to put away more or pay more in the “tax”. Just don’t expect me as the business owner to continue to match you dollar for dollar. I’m already maxed out as far as this tax is concerned.

  5. This is an interesting topic, and some of the comments above have highlighted that.

    I think its very important to differentiate short and long term economic effects. As well it is important to differentiate the macro and micro effects here.

    In the short term, this will definitely hurt the economy. All tax increases and savings increases will hurt the economy in the short term (unless there is a proportional increase in gov’t spending). It is the same effect as Canadians saving 5% more on their own, or increasing tax by 5%, or increasing CPP by 5%. That’s 5% that consumers were spending, and now they aren’t.

    In the long term this is actually very good. You now have money that is being invested, instead of being consumed. This investment is what causes long term economic growth. Without it the long term growth is zero. The government itself is the source of a huge amount of this investment, but savings programs like CPP play a role as well.

    Now onto the micro effects. There was a comment that businesses “on the edge” will be forced to close shop. This makes sense in theory, but practically it doesn’t work out. Remember that businesses compete against each other and not some imaginary line. So if I have to raise my prices over a CPP hike, so do my competitors. If my competitors can afford to keep prices the same and I cannot, then there’s a problem with my business. Also this add’s value to the salary package employees receive. So in the long term, the market will even itself out (i.e. wages will go down). So eventually the effect will go away.

    I work for a big business, and I can say exactly why everyone is complaining. The short term effect is less economic growth and higher costs. In business today, short term is everything. If I meet my targets this year, I get a promotion. If I miss them, I get fired.

  6. @John The Contractor – I agree government doesn’t create wealth they do shift it around, which was the point of my post. The money still gets spent in the long term. While there will be a short term impact from the change in the long run I think all of society will be better off (after all a larger number of retirees on GIS will still require a tax hike to cover the cost).

    @diharv – Good point from the business owners point of view it just goes out of their and their employees pocket. Yet business adapt all the time to shifting supply and demand, so why is a government regulation change any different? It isn’t and it happens to everyone. If you feel bad, check out the impact of the governments GHG regs to coal generation utilities…it is a $1 billion plus impact on each facility.

    @Matthew – Thanks for the excellent comments. I agree there will be a short term impact, but sometimes we need those to fix a systematic issue. It’s easier to justify on the 3rd quarter results if everyone has the same issue.


  7. Contrary to what the small business owners say, expanding the CPP would be a great idea, even if it was only the employee portion that got expanded. At the end of the day, thanks to the Human Rights Commission, society can’t let people starve in the streets, even if it is because of their own stupidity. You will be paying for people’s irresponsibility whether through higher taxes to pay their welfare/disability/GIS anyway, it makes more sense to get these people to pay as much as their own way as possible. Or old people who didn’t save enough can live off cat food under a bridge, I’d be happy with that too.

  8. While I agree with sonofczar that we’re upping this to help pay for people who didn’t plan and/or who have been completely stupid and wasteful with their cash, I don’t want it. There should be an “opt out” check box where if you show your financial position is incredibly solid because you’ve been wise, you don’t have to pay any increase. I agree–get people to “pay their own way” but in the manner they see fit.

  9. I think it’s heinous.
    No apologies, but if the gov’t actuaries couldn’t see this coming 30, 40, 50 years ago…tough. Don’t make me pay for failing to do your job.
    And tough on the same citizens who also couldn’t see the very obvious retirement tsunami and prepare accordingly (ie. save). Life’s a bitch.

    As for your comment:
    “…the federal government pays their employees to do work and guess what those employees spend their money…”

    Not so fast.
    For example, all those Fed employees have an automatic pension deduction, I’ll say ~8%, which the gov’t probably matches; thus ~16% of my new CPP contributions are sucked away to pay for gov’t pensions, only to be seen perhaps 20, 30, 40 years down the road.
    (I know it’s not 16% of all contributions but it is definitely NOT a ‘$1 in = $1’ out scenario.)

    Do all the reforms you wish, I won’t vote for any of them unless, as previously commented, there is an Opt-Out clause.

  10. I did a simulation a while back and found that investing the amount of the CPP contributions, and getting the eventual benefits, was equivalent to a return of around 3-4% (it’s been a while so I’m not sure what the exact amount was). In large part this seems to be because part of the contributions go to paying back the previous mistakes and keeping the plan stable.

    However it already has a very large asset base at $170B+. As that grows I’m not sure how it will maintain the return since a star mutual fund manager usually loses their touch with under $10B in assets (even the ones that aren’t just getting lucky). Add to that the political temptation of having all those assets in one place and a centralized plan turns into a very concentrated risk.

    I have arranged my income to avoid the CPP. I would rather manage it myself. Unfortunately I know most people would benefit from even a low return on a forced savings plan. I’m hopeful for the PRPP system, although it doesn’t guarantee a consistent level of performance for everyone. On the plus side, as an employer I may be able to set up a plan that has only high-quality investment options.

    The best option would be a “CPP 2” that’s managed the same way but has benefits based only on actual contributions. After all many people are now getting more CPP benefits than they would have expected due to the periodic increases over its life. There isn’t really much of an excuse for needing another sudden increase that they didn’t pay for. Look for me to change my opinion in about 30 years 🙂

  11. It seems to me at least part of the argument for increasing CPP often comes down to ‘people can’t be trusted or people aren’t smart enough to prepare for their own retirement’.

    I’m not attacking CPP as it exists today as it appears sustainable and will provide a basic level of support in retirement , but I’m against increasing it substantially. It seems like we’re too willing to give up personal responsibility in favor of government reliance.

    If increasing CPP makes sense to folks, why not simply go ‘all in’ on government management of our retirements and mandate that an additional $5,500 + 18% of our earned income is automatically set aside from every paycheck for CPP instead of suggesting Canadians take advantage of TFSA and RRSPs.

  12. @Mitch — “…government management of our retirements and mandate that an additional $5,500 + 18% of our earned income is automatically set aside from every paycheck for CPP…”

    This would set up pretty much everyone for a very comfortable retirement, but the 45 years prior would be a very miserable lifestyle for most.

    Could you imagine being a median Canadian earner ($27,500 gross) and having a whopping 38% of your income lopped off even before taxes? Yikes!
    And what of those on the wrong side of that median?
    50% of citizens would be living in poverty…

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