I vividly recall one summer session when my economics professor stopped mid-sentence, turned from the blackboard and locked a distant gaze out the window. “Ah, there it is,” he uttered in a longing fashion, then slowly turned back toward the handful of us in attendance.
You see, he and an old college mate had agreed anytime either was back at their alma mater, he would raise a cold one — or a warm one, being British — at the local pub. It was at that moment with chalk in hand that my prof had sensed he was being toasted. And with that, at his behest we adjourned to the patio of our own campus watering hole for the remainder of the day’s lesson so he could reciprocate.
True story. But apropos of what, you might ask?
Well, in the midst of reading yet another article on the condition of our retirement system, and specifically on the state of the Canada Pension Plan, I had my own ‘Ah’ moment.
If and how to improve CPP
For some time now, and certainly since the 2009 release of the Retirement Income Adequacy Research papers, our pension and retirement system has been under the microscope. Whether this scrutiny arises out of a true crisis, or is merely coming to the fore due to the demographic truth about boomers breaking 65, this public dialogue will be with us for years and decades to come.
In due course the CPP has garnered attention, both in terms of what it currently offers and what it may offer prospectively in response to any determined shortcomings. Chief among the issues under consideration are whether we’re saving adequately, investing effectively and living within our means, both before and during retirement.
To show my colours, I’m firmly a fan of the CPP. It delivers forced savings, eliminates the necessity for investment decisions, and provides a guaranteed base level retirement income.
To some this may smack of paternalism. And if our entire retirement system were so prescribed, I would agree wholeheartedly. In its current form, however, I believe it provides both individual and community benefits, and does so well within the borders of trampling on personal prerogative.
But what about an expanded CPP? In the article I was reading, the author referred to CPP premium cost being shared equally between employers and employees. And that’s when it hit me: ‘Ah’ and I was back on that patio.
Incidence and payroll tax
Now I can’t say for certain what topic we drank to on that sunny afternoon, but the event was sufficiently memorable to remind me of tax incidence — the concept that a party who pays a tax may not be the one who bears its full cost.
The true burden depends on elasticity of demand and supply, such that there may be a shift between parties based on relative economic power.
Carry this over to the employment context. It’s a long-standing debate whether payroll taxes imposed on employers may actually be borne partially or entirely by employees over the long term — the notion being that there may be a corresponding suppression of long-term wage increases. I leave it to economists whether, and to what degree, this may apply in our system generally, and in a given workplace specifically.
On the face of it, an expansion of the broad-based CPP intuitively appeals to a sense of fairness. It is not so clear, though, how the ultimate cost will be borne. Even if the net effect across the economy is neutral, the dynamics of each workplace will be varied.
Indeed, it is conceivable for some employees that it will serve to invisibly siphon future pay raises over to CPP. That’s not necessarily a bad thing, just something to be understood.
I continue to root for CPP improvements, but remain open to sober reflection as the dialogue lingers.
Doug Carrol JD, LLM (Tax), CFP, TEP, is Vice President, Tax and Estate Planning, Invesco Canada.