Is mandatory expansion of the CPP a tax hike?

Yes— a compulsory contribution is technically a tax increase

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(Andrew Rich/Getty Images)

“What we will not do is reach into the pockets of middle-class Canadians with a mandatory payroll tax like the Liberals and NDP would do.” — Finance Minister Joe Oliver in the House of Commons, May 26.

With the fall federal election approaching, political parties have already begun positioning on what’s becoming a key ballot-box issue: how best to boost retirement nest eggs through the Canada Pension Plan.

The New Democrats and Liberals have called for a mandatory add-on to the CPP, while the Conservatives have pledged to consult the provinces and other stakeholders on introducing a voluntary expansion to the public pension program. That dialogue, the Tories have promised, would begin after the October federal election.

Senior Conservative ministers, including Prime Minister Stephen Harper, have repeatedly warned that any forced increase to the CPP would essentially be a tax hike on Canadians and businesses.

The Liberals have defended compulsory CPP expansion, saying it’s no tax increase.

They say the extra contributions, like those funnelled into the existing CPP, would not end up in the government’s piggy bank. The increased contributions, they argue, would be managed independently by the CPP Investment Board and would produce benefits for Canadians.

The debate over the CPP prompts the question: Is mandatory CPP expansion a tax increase — or not?

Spoiler alert: The Canadian Press Baloney Meter is a dispassionate examination of political statements culminating in a ranking of accuracy on a scale of “no baloney” to “full of baloney” (complete methodology below).

This one earns a rating of “no baloney” — depending on how you define the word “tax.”

Here’s why.

THE FACTS

The major political parties all say they’re open to creating an add-on to the CPP, but there are differences when it comes to how.

Last month, the Conservatives surprised the House of Commons by announcing they would explore ways to give Canadians an optional way of increasing their contributions to the pension plan.

The move, which appeared to be a Tory effort to wrestle some ground away from their political rivals, was a departure from the Harper government’s previous position: no expansion to the CPP.

“We are open to giving Canadians the option to voluntarily contribute more to the Canada Pension Plan to supplement their current CPP retirement savings,” Finance Minister Joe Oliver told the House of Commons.

Following Oliver’s announcement, the New Democrats reminded reporters how they have long supported a mandatory enhancement to the CPP to help people sock away more cash for retirement.

The Liberals, who campaigned in 2011 on introducing both mandatory and voluntary CPP expansion, said they would introduce a compulsory add-on if they win the election. Leader Justin Trudeau said the Liberal plan would be “of the type that (Premier) Kathleen Wynne put forward in Ontario.”

The debate over CPP enhancement — and whether it should be over voluntary and mandatory — promises to be a contentious one. Seniors advocacy groups like CARP support mandatory expansion, while organizations like the Canadian Federation of Independent Business oppose it, preferring the optional one.

WHAT THE EXPERTS SAY

The dispute over whether mandatory pension contributions are indeed a tax increase reaches beyond the political arena.

The argument has also spilled into academia and varies from country to country, says Daniel Beland, the Canada Research Chair in Public Policy at the University of Saskatchewan.

“I think there are a lot of semantics about this,” Beland said of the debate.

He said some people argue CPP contributions are not a tax in the traditional sense of the word because the money is deposited in a specific fund managed by the CPP Investment Board, not the government.

On top of that, Beland said people who pay into it know what it’s for.

But on the other hand, some economists call it a tax because everyone is forced to pay into it.

“Language here is important because the word ‘tax’ is not very popular, right?” Beland said.

“If you say to people, ‘I will increase your taxes,’ it’s likely that people will not be that enthusiastic about it. If I tell you, ‘I will increase CPP contributions,’ it may not sound as threatening and people will understand it’s tied to a program.

“But in the end we are talking about exactly the same thing.”

Malcolm Hamilton, a senior fellow with the C.D. Howe Institute think-tank, said he doesn’t have a “clear, definitive, unambiguous answer” whether mandatory CPP expansion can be classified as a tax increase.

When the CPP was created in the 1960s, Hamilton said there was deliberate confusion on whether payments into the plan made by employees and employers were a payroll tax or pension contributions.

“I think you can argue it either way,” he said.

“The Canadian public, I think, views it as a pension contribution. The government on the other hand, in the national accounts, accounts for it more like a tax.”

Looking at the definition of the word “tax,” the Oxford dictionary says it means: “A compulsory contribution to state revenue, levied by the government on personal income and business profits or added to the cost of some goods, services, and transactions.”

THE VERDICT

Mandatory expansion of the CPP, which would see the government collect additional cash from individuals and businesses for the pension program, can indeed be considered a tax.

There is, however, a reasonable argument to be made against this definition, since CPP contributions do not go directly into the massive pot of government revenues, along with other sources such as income tax. Instead, they are dedicated to the specific purpose of boosting retirement savings.

Still, since the compulsory CPP add-on can be seen in both ways, one could call it a tax.

For these reasons, Oliver’s statement contains “no baloney.”

METHODOLOGY

The Baloney Meter is a project of The Canadian Press that examines the level of accuracy in statements made by politicians. Each claim is researched and assigned a rating based on the following scale:

No baloney — the statement is completely accurate

A little baloney — the statement is mostly accurate but more information is required

Some baloney — the statement is partly accurate but important details are missing

A lot of baloney — the statement is mostly inaccurate but contains elements of truth

Full of baloney — the statement is completely inaccurate

3 comments on “Is mandatory expansion of the CPP a tax hike?

  1. Your ranking has some baloney in it. Oliver’s statements are clearly intended to mislead and deceive the public about the actual nature and purpose of the payments. That’s full of baloney in my deli.

    Reply

  2. I agree with Philip. In addition, my Oxford defines tax as a contribution to government revenues, and a review of various definitions suggest two components, namely an involuntary payment used for government activities. CPP contributions are used to fund lifetime retirement income for the contributor; it’s not financing government projects.
    This definition debate however misses the point. Since it takes about 2 times the contribution from a defined contribution style of plan (like an RRSP) to produce the same dollar of retirement income as you get from a defined benefit type of plan (like CPP) I’d rather be paying more to CPP whether you call it a tax or not. Whether you call it a tax or forced savings, the bottom line is that I will get more bang for my buck with an expanded CPP. That makes more money sense to me.

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  3. With this “expanded” CPP, we’ll watch even more companies close up shop in Canada; a company owner gets no benefit from paying the compulsory 4.95% employer’s portion of the tax. Goodbye, jobs, as even more work floats off to other, less expensive jurisdictions. It shall be a very rude awakening when Canadians finally have to face up to that reality …

    Reply

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