Trudeau faces pressure over payroll tax

Trudeau faces pressure over payroll tax

Trudeau faces pressure over payroll tax (Bloomberg) --

Canada’s most populous province is willing to water down its demands in hopes of reaching a deal to expand the national pension plan, with Prime Minister Justin Trudeau’s Liberals facing resistance in their bid to increase payroll taxes.

Finance Minister Bill Morneau and his provincial counterparts meet Monday in Vancouver to try and reach agreement on how to “enhance” the C$278.9 billion ($215.9 billion) Canada Pension Plan. Federal officials, speaking on condition of anonymity, say talks progressed this week and the chance of a deal is roughly even.

Driving the timeline is Ontario’s threat of going it alone. Home to 38 percent of Canadians, it plans to create its own topped-up pension program unless a national deal is reached. Ontario Finance Minister Charles Sousa said the province is willing to put water in its wine in exchange for expanding CPP, which currently costs employers as much as C$2,500 per worker each year.

“Ontario’s got no choice but to proceed,” Sousa said in an interview. “We are looking forward to having a robust discussion that will include some compromise but, in the end, provide greater benefit to the people of Canada, not just Ontario.”

Officials have been negotiating CPP expansion since December. Morneau is “cautiously optimistic” a deal can be reached, spokeswoman Annie Donolo said, while other provinces have rejected some or all of Ontario’s pitch -- in part due to an ongoing commodities slump.

Ontario Top-Up

Seven of Canada’s 10 provinces, representing at least two thirds the population, have to sign off on any change, Donolo said. Many are wary, including second-most-populous Quebec, which has its own pension program mirroring CPP.

Under the existing national plan, Canada imposes a mandatory tax of 4.95 percent for both employers and employees on a worker’s first C$54,900 of annual income. That makes the current maximum contribution for each party C$2,544 per year.

Ontario is proposing its own mandatory plan on top of that, with employers and employees contributing 1.9 percent each -- for a total of 3.8 percent -- on the first C$90,000 of earnings.

Ontario residents would pay as much as C$1,710 more each year, and Premier Kathleen Wynne said Wednesday she’d settle for “sort of two thirds of the value” of her proposal if it meant securing a nationwide deal.

Rationale for Reform

Some observers question whether expansion is necessary. “Personally, I don’t think there’s enough evidence for a broad mandatory reform,” said Alexandre Laurin, director of research for the C.D. Howe Institute, a non-partisan think-tank once led by Morneau. “If it is actually better, make it voluntary.”

Both Trudeau and Wynne, however, have pushed for expansion in response to waning private-sector pension coverage -- particularly a decline of defined-benefit plans -- and growing risk that Canadians will out-live their savings.

With young workers graduating and starting families later in life, government action is needed to address a looming retirement-savings crunch, according to Keith Ambachtsheer, director emeritus of the International Centre for Pension Management at the University of Toronto’s Rotman School of Management. “There’s all kinds of good reasons it should happen nationally instead of just in Ontario,” he said.

Quebec Conditions

Quebec Finance Minister Carlos Leitao said “any change that were made to the CPP must necessarily be reflected” in the provincial plan. Quebec is open to the idea under certain conditions.

“We want the increase to be targeted, we want it to be modest, and we want it to be gradual,” Leitao said in an interview. Ontario’s current proposal kicks in after C$3,500 of income, he said, and “we can’t agree with this.”

The federal government is pushing for consensus, rather than an Ontario-only deal, to maintain portability of pensions across provincial borders, Leitao said. Sousa maintains Ontario’s plan would be portable, but Quebec doesn’t expect a deal Monday. “We are not there yet,” Leitao said.

That skepticism is mirrored elsewhere. Ontario’s current proposal “would not be acceptable to the province of Saskatchewan,” according to Finance Minister Kevin Doherty.

Existing Measures

While Saskatchewan and other provinces cope with an economic slump, Doherty said Canada has already introduced tax-free savings accounts and pooled registered pension plans aimed at smaller firms and self-employed workers. “We ought to give those things an opportunity to work,” he said.

British Columbia believes CPP expansion is “viable” but can only be introduced when the economy is “stable enough,” according to Jamie Edwardson, a spokesman for B.C. Finance Minister Michael de Jong.  Alberta’s government wants all seniors “to have a dignified retirement,” spokeswoman Leah Holoiday said, offering no specifics on whether the struggling oil producer backs Ontario’s push. Other provinces also declined to specify their positions.

Ontario’s proposal would exempt workers who already have a workplace pension that meets a minimum value. Employers would begin enrolling in 2017 and begin contributions in 2018. 

Short-Term Drag

With those contributions passed on, in effect, to employees through lower wage growth, the Conference Board of Canada found the proposal would have a “small negative effect” on the Ontario economy. According the research group’s cost-benefit analysis, it would knock at most 0.2 percent off provincial gross domestic product in 2025 before beginning to boost growth in the longer term.

Various scenarios are being discussed, including what concessions Ontario would accept, Sousa said. The Ontario finance minister declined to say whether the province would still proceed with its own top-up if a more modest federal enhancement was agreed. 
“You’re asking me to play my cards. What we want to do is find a national solution,” he said. “The degree of benefit will have to be meaningful.”