Pension Plan & Employee Benefits Plan


International Foundation of Employee Benefit Plans
Remarks by John McKay, MP Scarborough-Guildwood
Parliamentary Secretary to the Minister of Finance


Ottawa , May 5, 2005


I am pleased to be here today and to have the opportunity to address such a distinguished audience of pension specialists from both the public and private sector.

Let me first acknowledge Mr. Raymond Koskie, for helping to organize this event, and more importantly, for his hard work and dedication in advancing labour and business interests.  It is largely thanks to Mr. Koskie’s efforts that paramedics now have the same opportunity to retire earlier with an unreduced pension as other worthy professions already on the list of public safety occupations. 

Your organization, the International Foundation of Employee Benefit Plans, plays an important role in bringing together experts in employee benefits and compensation from all over Canada and United States to allow them to share timely and accurate information about the latest trends in this important industry.

As the North American population continues to age, challenges in areas such as employee benefits and pension plans will become more important than ever – not just to experts, but also to individuals and employers. Your organization will, I’m sure, be at the forefront in dealing with these important issues.

Earlier this year, my colleague, the Minister of Finance, brought forward a federal budget that, in a number of ways, builds on our Government’s efforts to position Canada to face these fundamental challenges posed by an ageing population.

I’d like to take a few moments to talk about these efforts generally, and to touch on some of the issues that directly affect the employee benefit plans that the members of this organization represent.

But, before doing so, allow me to talk briefly about the economy and the nation’s finances because I believe you would agree that a growing dynamic economy and healthy government finances are a necessary foundation for dealing with the challenges of an aging population.

Canada ’s economic and fiscal turnaround in recent years has been nothing short of remarkable.  When our Government first came to office in 1993, we faced an annual deficit of more than $40 billion, unemployment was at approximately 11 per cent, and there was weak economic growth and low business and consumer confidence.

Clearly, strong action needed to be taken, and that’s exactly what we did.

Our Government undertook a series of measures to reduce spending and bring our fiscal house in order. The medicine was, in some cases, very difficult to swallow. But Canadians, by and large, supported our efforts and made real sacrifices.

It was thanks to these sacrifices that we were able to eliminate the deficit in 1997-98.  This led to low interest rates and rising consumer and business confidence. This, in turn, led to much stronger economic growth and the creation, year in and year out, of hundreds of thousands of well-paying jobs.

In his budget speech last February, Minister Goodale announced that we are on track for an eighth balanced budget when the books are closed on the 2004-05 fiscal year this fall. This is the longest streak of consecutive surpluses since confederation in 1867.  Moreover, we are forecasting further balanced budgets or better in the foreseeable future. We have reduced Canada ’s federal debt by more than $60 billion and our country’s Triple-A credit rating has been restored.

But, our government has never seen healthy finances as an end unto itself.  We have used healthy finances to reduce taxes more than any other federal government in history and to invest in the priorities of Canadians – priorities such as health care, education, infrastructure, research and innovation, national security and the environment.

But there can be no doubt that our job as a government is far from over. Indeed, after putting the country’s fiscal house in order and rebuilding one of the most successful economies in the G-7, Canada now faces a new challenge – the ageing of our population. 

Over the 30-year period from 1974 to 2004, the number of people who had left the workforce as a result of age was well within manageable limits for the economy to handle. Indeed, the number of people aged 65 or older, when compared to working age population between the ages of 15 to 64, rose by only 6 percentage points to approximately 20 per cent of the population.

But in the next 25 years, this ratio is expected to climb by 19 points – to almost 40 per cent of the population, as the Baby Boom generation enters retirement. While that sounds like a long time, consider that significant numbers of “baby boomers” will begin retiring in 2010, which is less than five years away.

This demographic shift is not unique to Canada ; the United States , and several other developed nations are all faced with the social and economic challenges of rapidly aging societies.  This shift has serious implications for the economy and for future generations of workers. This is because the ageing of a nation’s population can directly reduce both economic and living standards growth.  This reality is especially relevant in Canada , where the population is expected to age faster than in other comparable nations.

Simply put, as more and more people retire, the size of the working population shrinks while the number of those who are no longer employed continues to grow. This means that a smaller workforce will have pay a larger burden of taxes in order to support those retirees. In addition, as a percentage of our population above the age of 65 continues to climb, our health care system and other social services will have to deal with increasing pressure to meet the demands of older Canadians.

Experts have already charted the impact of this demographic shift on our economy. They believe, on average, that a gradual decline in the proportion of Canadians working could shave as much as half-a-percentage-point a year from real GDP growth per capita over the period from 2010 to 2030.

Given this challenge, the efforts of both government and the private sector must focus on finding ways to improve the productivity of our economy. This means that we must all concentrate on the mutually reinforcing ‘drivers’ of productivity growth:  human capital, physical capital, and innovation.

Human capital investment means increasing the capability and effectiveness of our workers. Physical capital investment means providing them with more and better equipment – and effective national infrastructure -- that allows them to produce more goods and services.

And binding these together is innovation – the improved technology and production practices that enhance the way workers do things, and that provide the opportunity for entirely new kinds of goods and services to be produced.

The challenge is clear. If we want to continue to see improvements in our standard of living, both for ourselves and for our children and grandchildren, we must be prepared to take action now.

And let me say categorically that we are taking the first steps to tackle this problem head-on. Our recent federal budget contained a number of measures aimed at addressing this demographic challenge, while providing support for existing workers who will soon be joining the ranks of the retired

For example, Budget 2005 confirmed $41.3 billion in new federal funding for health care over the next 10 years.

Second, Guaranteed Income Supplement benefits for low-income seniors will be increased by $2.7 billion over five years as a result of increases in monthly benefits of $36 for singles and $58 for couples by January 2007.

Third, Funding for the New Horizons for Seniors program will be increased from $10 million to $25 million a year to promote voluntary sector activities by and in support of seniors.

Fourth, we continue to invest substantial amounts of money in post-secondary education and training programs. The Government supports post-secondary education through transfers to the provinces, but it also spends $4.7 billion annually in direct support through financial assistance to students, measures to encourage families to save for post-secondary education and tax breaks that help offset the cost of a college or university education. In addition, Budget 2005 has committed additional funds to help workers enhance their skills, including $125 million for the Workplace Skills Strategy to help employees keep pace with changing job requirements.

And to promote a strong foundation for future productivity, our Government is committing $5 billion to the establishment of a national Early Learning and Child Care initiative with the provinces and territories. This will ensure that all children, regardless of where they live, will have access to the opportunities to get the best possible start in life.

Fifth, we continue to boost our spending on research and innovation in Canada , seeking ways to develop new technologies to help Canadian industries become more efficient and cost-effective. You may have seen some media reports in recent months lamenting the state of research and development work in this country. But it may surprise you to know that Canada leads the G-7 in terms of publicly performed research at universities, research hospital and government laboratories as proportion of our Gross Domestic Product.

Our most recent budget provided additional funding of $1 billion in support of research and innovation. This money will be used, among other things, to boost support for our three federal granting councils and to help offset indirect research costs at universities and research hospitals. In total, the federal government has committed more than $11 billion to university-based research since 1997-98.

Finally, we have taken measures directly to help reduce the tax burden on individuals and to encourage Canadians to take a more active role in saving for their retirements.

Our government has reduced taxes in each and every year since the federal deficit was eliminated in 1997. This includes the five-year, $100-billion corporate and personal income tax reduction plan announced in 2000, which continues to provide benefits to Canadians today. More recently, Budget 2005 proposed to increase the amount of income that all Canadians may earn without paying federal income tax to $10,000. This would remove about 860,000 taxpayers from the tax rolls, including almost a quarter of a million seniors.

With respect to reducing taxes for corporations, you are all no doubt aware of the recent changes to the 2005 Budget bill.  Specifically, the Government will propose amendments to the Budget Implementation Act, Bill C-43, to eliminate the surtax for small and medium-sized businesses only and to remove the reduction to the general corporate tax rate proposed in Budget 2005.  

But rest assured.  The Government will bring forward separate legislation at the earliest opportunity to re-introduce those measures eliminated from Bill C-43, including extending the surtax elimination to all corporations.  These measures are important in maintaining our tax rate advantage relative to our biggest competitor, the United States .

But there are two measures contained in the 2005 federal budget of particular interest to your organization. They are the decision to raise annual contribution limits on Registered Retirement Savings Plans (RRSP) and Registered Pension Plans (RPP) and the elimination of the 30 per cent Foreign Property Rule for individual and corporate pension plans.

Our government has long recognized that private domestic savings plans play an important role in our economy. They support investment, which is a critical element in boosting our productivity and maintaining our current level of economic growth. These savings allow Canadians not just to plan a comfortable retirement at the end of their working lives, but also to save for other needs, such as purchasing a home or financing their children’s education.

Clearly, boosting RRSP and RPP limits will contribute to the ability of Canadians to better control their long-term financial future. It will also give employers better opportunities to attract and retain skilled workers, while also giving a boost to self-employed professionals, entrepreneurs and small business owners, for whom the RRSP is their primary retirement savings vehicle.

For these reasons, our government proposed, in Budget 2005, to raise RRSP contribution limits from the current level of $18,000 per year to $22,000 per year by 2009. Corresponding increases would be made to the maximum pension limit for defined benefit RPPs, rising from the current level of $2,000 annually to $2,444 by 2009. Starting in 2010 and 2011, the contributions limits for RPPs and RRSPs would be indexed to the average growth in wages of Canadian workers.

Increasing these limits will support savings and investments by hundreds of thousands of current and future workers. This will contribute to higher productivity levels and stronger economic growth in the years to come, while helping to support the demands of an ageing population.

The second element involves our decision to eliminate the 30 per cent ceiling on foreign investment by Canadian pension funds. This is a decision that I know pleasantly surprised a lot of people. But our rationale for removing this restriction on individual investors and for larger pension funds is really quite simple.

The Foreign Property Rule was originally implemented to support the development of Canadian capital markets. With stock exchanges and venture capital markets fully entrenched in Toronto , Montreal and Vancouver , we can now say quite emphatically that this original policy goal has now been met.

At the same time, our capital markets make up only 2 to 3 per cent of the global capital marketplace. With a limit of only 30 per cent on offshore investments, this has posed a real problem for individual investors and large corporate and public pension plans that want to maximize their returns by increasing the percentage of foreign holdings. By the way, when I talk about large public pension plans, I’m also referring to the Canada Pension Plan, in which most Canadians have a stake.

Given these concerns, it made eminent good sense to us to remove the restriction on foreign property limits and give Canadians, through their RRSPs or corporate pension plans, the opportunity to achieve greater diversification, reduce risk and save more effectively for their retirements.  I know many have asked what would happen if Budget 2005 does not pass, particularly to investors who have already exceeded the 30 percent limit. 

Let me just say that the issue here is one that is common to many budget proposals that are expressed to have immediate application but still require Parliamentary approval to take effect.  In these cases, the Canada Revenue Agency generally administers the law on the basis of the proposed change, but a taxpayer remains potentially liable to the effects of the current law in the event that the budget change is not ultimately adopted. 

Nonetheless, we remain optimistic that this measure will soon be passed and that Canadians appreciate the value of measures like this in helping people meet their retirement goals. 

So in summary, let me say this – Canada , like most countries in the industrialized world, must confront the dynamics of an ageing workforce now or risk being left behind when the current generation of workers begins to retire in the coming years. It is a challenge we simply must meet. 

Ladies and gentlemen, we meet today at a time of considerable political uncertainty in our country.  But no matter what happens in the weeks and months ahead, I and my colleagues will continue to seek ways to ensure that Canada remains on the path to greater prosperity and security.

We owe that not only to the taxpayers of today, but especially to the generations who will follow us.

Thank you.