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Beefing up CPP will hurt economy longer than disclosed: document

A deal to give Canadians bigger payouts under the Canada Pension Plan will hurt the economy longer than the government has previously disclosed.

CBC News has learned that internal Finance Department projections show the recent agreement between Ottawa and the provinces will act as a drag on the economy until 2030.

And the impact on jobs will be even longer, suppressing employment growth until 2035.

hi-Dan-Kelly

Canadian Federation of Independent Business president Dan Kelly says the CBC News disclosures of longer negative impacts on the economy from CPP enhancement are reason to push the pause button on the deal. (CBC)

The Trudeau government has been coy about releasing negative projections for the so-called enhanced CPP, which is to be gradually phased in starting in 2019. The expanded plan is expected to give pensioners a maximum annual benefit of about $20,000, up from the current $13,000.

Some provinces and business groups warn the move is a job-killer, but the federal finance department has countered that the negative impact will be only short-term, after which the economy will benefit.

But government officials have never provided clear timelines, and last month released bare-bones projections suggesting any bad news for the economy would be over by 2025.

But the Finance Canada briefing note, dated two months before a June 20 deal with the provinces was reached in principle, indicates that an enhanced CPP could still dampen the economy even 20 years after implementation.

“The positive GDP impact of enhancing the CPP is expected to outweigh the negative impact mid-way through the 40-year transition period between the current benefits regime and the new benefits regime,” says an internal analysis for the deputy minister, dated April 27.

CBC obtained the heavily censored document under the Access to Information Act.

Overstates impact

Finance Canada officials say the April document overstates the negative impact because the final deal with the provinces had a longer phase-in period than the initial proposals from Ottawa.

But they acknowledge that revised projections based on the final deal show the negative impact on GDP will persist until 2030, and that employment levels will continue to be suppressed until 2035.

“This (GDP) effect dissipates after 2025 and gets to zero around 2030,” said department spokesman Jack Aubry. “After 2025, the impact on employment dissipates and becomes positive after 2035.”

Neither timeline has previously been made public, even to the federal finance committee, which had demanded more information for a hearing last month with Finance Minister Bill Morneau as witness .

The head of the Canadian Federation of Independent Business says the new disclosures vindicate the group’s criticisms that an enhanced CPP will hurt the economy longer than Canadians have been told.

Higher wage costs will reduce demand for labour
– Internal Finance Canada briefing note on the negative impact of improving the Canada Pension Plan

“It was quite a shock when they cooked up this deal, and they only after the fact put out the tiniest sliver of information to the public to suggest the negative economic and employment consequences would be very minor,” president Dan Kelly said in an interview.

Kelly said he hopes the new information will encourage provincial finance ministers to “press pause” on the deal, which was introduced as Bill C-26 in the House of Commons on Oct. 6.

The agreement will also need the formal approval of at least seven provinces representing two-thirds of Canada’s population.

The increase in premiums under the new plan will be split between workers and employers.

Ditched consultations

The Liberals promised a CPP enhancement in the 2015 election campaign. And in their first budget on March 22, they promised the government “will launch consultations to give Canadians an opportunity to share their views on enhancing the Canada Pension Plan.”

But the government then ditched the public consultations and went straight to the provinces to get the deal largely done by June.

Finance officials stress that the negative impacts of the CPP enhancement on jobs and economic growth will be modest, peaking in 2025 and dissipating over the next 10 years until there are actually positive impacts on both employment and GDP.

CPP Wynne 20160621

Ontario Premier Kathleen Wynne abandoned her province’s plan to go it alone on pension improvements after a new national agreement to enhance the Canada Pension Plan was announced June 20. Internal analyses from Finance Canada project that the new plan will dampen job growth until 2035. (Mark Blinch/Canadian Press)

“In the short run, raising CPP contribution rates for both employers and employees  will reduce workers’ take-home pay and increase employers’ wage bills [blacked out]

,” says the briefing note.

“Higher wage costs will reduce demand for labour. Lower demand for labour and lower workers’ take-home pay will reduce aggregate demand. Lower take-home pay could also reduce the number of hours workers are willing to work.”

The Liberal government has justified an enhanced CPP by noting that more employers are abandoning traditional pension plans, leaving more of the risks of saving and investment to workers.

The previous Conservative government resisted pressures to improve CPP, saying an ailing economy could not handle the added costs. At the time, the finance department released analyses that stressed the short-term costs of enhancement with little reference to the long-term benefits to the economy.

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Article source: http://www.cbc.ca/news/politics/canada-pension-plan-gdp-morneau-cfib-finance-canada-liberals-1.3822865?cmp=rss