Canadian Pension & Investment Summit

October-23-05

Canadian Pension and Investment Summit
Remarks by John McKay, MP Scarborough-Guildwood
Parliamentary Secretary to the Minister of Finance

 

Toronto , Ontario
October 23, 2005

Good morning/afternoon everyone. Thank you for the invitation to address this summit.

On behalf of my colleague, the Minister of Finance, Ralph Goodale, I would like to extend greetings to everyone from the Government of Canada.

The main theme of this summit is “challenge meets opportunity” and I can rarely think of a more appropriate way to describe the current situation facing Canada ’s pension sector.

The challenge facing your industry is a formidable one and stems, in large measure, from the ageing of our population and the responsibility to plan ahead to meet the retirement income needs of this large demographic segment, many of whom will be reaching retirement age within the next decade. This situation has been further complicated in recent years by the development of serious shortfalls in many defined benefit pension plans.

Clearly, this challenge calls for action, and our Government has taken steps to deal with this issue on a number of fronts.

First, we have ensured that one of the key pillars of our publicly funded retirement income system, the Old Age Security and Guaranteed Income Supplement plans, are and will remain on a sound financial footing. The fact that our retirement income system is both sustainable and effective makes Canada unique among most industrialized nations. To ensure that these benefits continue to keep pace with increases in the cost of living, the Government announced an increase in benefits under the Guaranteed Income Supplement in the last federal budget. These increases will see maximum monthly GIS benefits rise by $36 for single seniors and $58 for couples. More than 1.6 million GIS recipients will benefit from this move.

Second, through the joint efforts of all stakeholders, the Canada Pension Plan, which represents the second pillar of or retirement income system, is now fiscally sustainable for the next several decades. Over the past several years, the Canada Pension Plan Investment Board has been charged with investing surplus funds that are not immediately needed to pay CPP benefits. Since 1999, the CPP’s reserve fund has doubled in size to its current level of $87 billion and more than 60 per cent of that increase has come from investments gains. The Chief Actuary of Canada estimates that over the next five years, the reserve fund will grow to more than $147 billion.

Finally, we have taken a number of actions to provide support for individual Canadians to help them build their own private retirement savings – which represents the third pillar of our retirement income system.

·     We have raised the contribution limits for both RRSPs and RPPs. These limits were initially increased in Budget 2003 and, in his most recent budget, my colleague the Minister of Finance announced that annual maximum contribution limits will rise to $22,000 per year for RPPs in 2009 and for RRSPs in 2010. In subsequent years, contribution limits will increase at a rate that’s tied to wage growth rates in the Canadian economy.

·     Recognizing the need for stronger returns and increased diversification, our Government eliminated the Foreign Property Rule in Budget 2005. By getting rid of the 30 per cent cap on foreign investment in registered pension funds, everyone from individual Canadian investors to large pension funds now has access to a full range of global investment opportunities to help generate stronger returns.

·     As well, our Government has launched an extensive and wide-ranging consultation on strengthening the legislative and regulatory framework for federally regulated defined benefit pension plans in Canada . Last May, we released a consultation paper that looks at a number of issues that directly affect the long-term viability of pension plans in Canada , including surplus distribution, proposals to extend the solvency funding period to ten years and the establishment of a pension guarantee fund by the federal government.

 

We have received more than 120 responses to our request for submissions – a figure that is far higher than we had anticipated. They came from a wide range of stakeholders, including a number of people in this room today. I want to assure you that we will take the views of all stakeholders into account in our deliberations as we work towards developing a package of legislative and regulatory reforms that will strengthen Canada ’s federally regulated defined pension system.

I want to turn now briefly to an issue which I know is of great interest to all of you – that is, the matter of income trusts. Last month, the Minister of Finance asked the Canada Revenue Agency to postpone providing advance rulings on income trusts and other flow-through entity (FTE) structures, an issue you are no doubt familiar with.

 

This step was taken because our Government is concerned about how the increased use of this type of business vehicle may affect Canadian economic growth and tax revenues.  In fact, these matters are the subject of a consultation launched by the Department of Finance earlier in September.  We want to make sure that government tax revenues are appropriately safeguarded, but even more importantly, we want strong and vibrant Canadian enterprises of all sizes in all sectors contributing to a dynamic and growing economy.

Indeed, the impact of this kind of investment on the economy is by no means certain.  Some have argued that the tax treatment of flow-through entities leads to greater economic efficiency – at least for certain types of businesses – while others have argued that this tax treatment distorts investment decisions and leads to reduced economic efficiency.

Whatever the impact this much is clear; while these consultations are underway and until the Government announces what action it may take, it would be inappropriate for the Government to issue advance tax rulings on these matters. 

The point of these consultations is to gain as much perspective and insight as possible on this complicated area of tax policy so that any decision made will be in the best interest of all stakeholders – government, private sector, as well as the average Canadian investor. 

All of you here today, no matter which organization or business you represent, know the inherent value of working together to achieve a broader policy end.  And with that in mind, I invite any and all of you to participate in these consultations in the weeks and months to come. 

That is a brief overview of our initiatives in the area of pensions and pension reform. Our overarching goal in these efforts is to ensure that all Canadians, regardless of where they live, have access to a comfortable and secure retirement.

However, without a strong economy and a solid plan to maintain our economic growth in the future, our best efforts to achieve this goal will be in vain. Simply put – a strong economy is the foundation for a better quality of life for all of our citizens, regardless of their age.

With this in mind, I would like to outline some of the economic and fiscal challenges that we, as a nation, face in the coming years and the steps that our Government is taking to meet them.

First, we must acknowledge that we begin our efforts from a position of strength. Canada has enjoyed eight consecutive balanced budgets and, once again, we were the only G-7 nation to post a surplus in the last fiscal year. Add to that strong job growth, low interest rates and inflation that remains within the one to three per cent target range set by the Government and the Bank of Canada, and you can see that our current prospects are promising.

Nevertheless, there are several factors that could cause some significant problems for the Canadian economy over both the short and medium-term.

Clearly, energy prices are at the front-and-centre of any assessment of economic risks facing our country. Although Canada is a net energy exporter and does see the benefits of oil and gas revenue, higher energy prices also have the effect of dampening both consumer and business confidence, in addition to putting upward pressure on inflation.

 

As well, the continued climb of the Canadian dollar has put additional pressure on our export-oriented industries by making Canadian goods and products more expensive. This challenge is even more daunting at a time when new international players, particularly China and India , are having a larger and larger impact on global supply and demand.

But perhaps most importantly, we must recognize and deal with the challenge of an ageing population – the demographic time bomb that threatens to go off within the next five to ten years as the “Baby Boom” generation begins to retire from the workforce in large numbers.

Not only will your industry see a growing demand for its services, but there will also be increased pressure on our health care system and the various age-related programs that are built into our social safety net. At the same time, a smaller workforce will be left behind to pay the nation’s bills and to attempt to maintain the level of economic growth necessary to pay for our much-vaunted social programs.

The issues are clear – and so too is the solution. We must develop a increasingly smart and technologically sophisticated economy that will allow us to continue to compete and succeed against the best in the world with a relatively smaller workforce.

To achieve this goal, our Government is working to form partnerships with business, labour, the academic community and Canadians from all walks of life to develop the framework policies that will allow growth and entrepreneurship in Canada to continue to flourish.

This framework is backed up by a commitment from our Government to solid fiscal discipline and to continue to post balanced budgets or better through the foreseeable future. We have made it clear that Canadians have worked too hard to achieve our current fiscal success to see it lost. Our books will remain in the black and we will continue to reduce our long-term debt.

At the same time, our Government remains committed to reducing the tax burden on individuals and on business as our fiscal resources permit. We have reduced the tax burden on Canadians each and every year since 1997 and, in last February’s federal budget, we committed to another $13 billion in tax reductions over the next five years. And despite what you have heard in the media in recent weeks, we still intend to implement the corporate tax reductions announced in the budget as soon as the appropriate opportunity presents itself.

Another key to our framework for prosperity is the establishment of a strong and effective regulatory regime that supports the smooth flow of goods, services and people within Canada . We also need to ensure that our borders are closed to terrorists and criminals, but open to investment, trade and immigration. This has been the impetus behind our Smart Regulation campaign, which aims to replace outdated or outmoded regulations with ones that reflect our modern business reality.

At the same time, we continue to look for ways to make our capital markets more efficient and effective. Late last month, the Minister of Finance met with the provincial and territorial ministers responsible for securities to discuss a broad range of capital market issues, including securities regulation. Further meetings are planned for the months ahead.

But looking beyond these basic framework issues, our Government has also made significant investments in other areas that will help ensure Canada ’s long-term economic prosperity.

 

For example, since balancing the budget in 1997, we have invested more than $12 billion in a dozen different infrastructure programs across the country to help Canada ’s communities rebuild their roads, sewers and bridges, invest in public transit and create new parks and community centres. The total leveraged value of these investments is approximately $30 billion.

These investments, coupled with our recent commitment to provide a portion of federal gas tax revenues to municipalities, will continue to help make our communities excellent places to live, work and invest, while improving the quality of life for all Canadians.

Our commitment to providing first-rate infrastructure for Canada ’s cities and towns is matched by our commitment to innovation. Over the past eight years, we have invested more than $11 billion to help promote research and development at Canada ’s colleges, universities and teaching hospitals. These funds have helped lead to new breakthroughs in areas ranging from new health care technology to resource development in Canada ’s heavy oil sector.

This commitment has moved Canada from number six to number one among G-7 nations in terms of research and development investments at publicly funded facilities. But this type of government-sponsored research, in and of itself, is not enough to ensure that Canadian science-and-technology continue to remain world class.

Towards this end, our Government continues to seek partnerships with private sector firms to promote increased spending on research and development and to encourage these companies to take of the generous R&D incentives which our Government has put in place to ensure sustained investments in science and technology. Keeping Canada at the forefront of these areas is a key element in keeping us competitive in the 21st century.

And while infrastructure and innovation are crucial to our long-term economic prosperity, our investments in people have and will continue to represent the driving force behind our new agenda for growth in Canada .

Our nation already has an excellent track record in this area. Among G-7 nations, we have the highest proportion of citizens with some type of post-secondary education. Our high school students have among the best scores in the G-7 in subjects such as math, science and reading.

This is good news, but it is not good enough.

While the provinces and territories continue to maintain sovereignty in the educational field, our Government contributes more than $10 billion annually to help support the nation’s education system. This includes $2 billion per year to the provinces and territories through the Canada Social Transfer and more than $5 billion in direct support for students through bursaries, scholarships and support for federal agencies to promote innovation at Canada ’s post-secondary institutions.

And because we want all Canadians to enjoy the benefits of life-long learning, we have made significant investments in workplace training programs, support to help new immigrants integrate into the workforce and to help ensure that foreign credentials are recognized to help ease some of the shortages in skilled trades.

Ladies and gentlemen, our goal with all of these initiatives is nothing less than the transformation of the Canadian economy into a more dynamic and flexible instrument to ensure that our country can take on the world and win in an increasingly competitive global marketplace.

With an ageing workforce and greater competition from emerging economic powerhouses around the world, Canada cannot afford to be complacent about its future. Make no mistake- these are not issues that can be avoided or put off for the next decade. They can and they must be addressed now.

As Canadians, all of us aspire to leave behind a better country, and indeed, a better world for our children and grandchildren. By taking steps now to ensure that our economy remains strong and prosperous, we can ensure that our children will inherit a nation with strong social values, a cleaner and greener environment and that wields a respected and effective voice in global affairs.

That is the kind of 21st century Canada we aspire to achieve.

It is within our grasp. And I ask for your support to help make it a reality.

Thank you.