Past Session:

Proceedings of the Standing Senate Committee on
Social Affairs, Science and Technology

Issue No. 13 - Evidence - December 8, 2016

OTTAWA, Thursday, December 8, 2016

The Standing Senate Committee on Social Affairs, Science and Technology, to which was referred Bill C-26, An Act to amend the Canada Pension Plan, the Canada Pension Plan Investment Board Act and the Income Tax Act, met this day at 10:30 a.m. to continue its study of the bill and to conduct the study on a clause-by-clause basis.

Senator Kelvin Kenneth Ogilvie (Chair) in the chair.

[Translation]

The Chair: Welcome to the Standing Senate Committee on Social Affairs, Science and Technology.

[English]

I'm Kelvin Ogilvie from Nova Scotia, chair of the committee. I am going to invite colleagues to introduce themselves, starting on my left.

Senator Marshall: Elizabeth Marshall, from Newfoundland and Labrador.

Senator Fraser: Joan Fraser, from Quebec.

Senator Dean: Tony Dean, from Ontario.

Senator Seidman: Judith Seidman, from Montreal.

Senator Stewart Olsen: Carolyn Stewart Olsen, from New Brunswick.

The Chair: Thank you very much. We are here today dealing with Bill C-26, An Act to amend the Canada Pension Plan, the Canada Pension Plan Investment Board Act and the Income Tax Act.

We have with us today two organizations and their representatives. We have Herb John, President, National Pensioners Federation; and Alexandre Laurin, Director of Research, C.D. Howe Institute. Welcome to you both.

I'll go over our process for the morning. This is a panel that will end no later than 11:30. We will do, by rounds, one question per senator on each round. Senators, I ask you to be efficient in asking your questions, and I would ask our witnesses to be equally efficient and clear in their responses.

We will first invite our witnesses to present, and then I will open up the floor for questions. By earlier agreement, I am going to invite Mr. Laurin to present first.

Alexandre Laurin, Director of Research, C.D. Howe Institute: Thank you very much, Mr. Chair and honourable senators.

I am delighted to be able to speak to you today on the topic of CPP expansion. I'm only going to speak about one aspect of Bill C-26, which is before you, and that is, in my opinion, the lack of clarity with respect to the acceptable level of investment risk involved in the pursuit of the financing requirement, including provisions for what happens if downside risks materialize in the future.

A key selling point of the proposed CPP expansion announced by federal and provincial finance ministers in June 2016, and described in the backgrounder in September, is that the additional CPP benefits will be fully funded. Alongside statements that the CPP provides a secure, predictable benefit that is fully indexed to prices, this looks like a fine deal considering the relatively low contribution rates required.

To most people, fully funded implies an ability to pay obligations with assets on hand. The expanded CPP and base CPP, for that matter, is not designed to be fully funded in that sense. Bill C-26 itself does not use the term "fully funded.'' It requires that projected contributions and investment income are sufficient to fully pay the projected expenditures of the additional CPP over the foreseeable future. And, importantly, the regulations that will govern this definition do not yet exist.

Projections critically depend on the assumed future rate of return on the expanded CPP assets. In fact, the required rate of return on investments to satisfy the funding objective, as calculated by the Chief Actuary in his recent report, exceeds, by a very large margin, the yield currently available on the kind of sovereign-quality debt that people might think appropriate to back a secure, predictable benefit that is fully indexed to prices. So let's look at the numbers for a quick moment to give us a sense of the risks involved.

Canada's Chief Actuary calculates that the expanded CPP can pay its benefits as long as assets invested with the CPPIB earn a real, inflation-adjusted rate of return of at least 3.4 per cent, net, of investment management expenses over the long run. So that's 5.4 per cent, nominal. Assuming investment management expenses of 1 percentage point, this translates in a required gross-of-fees, real rate of return of 4.4.

How much investment risk is required to generate this kind of return? The federal long-term real return bond currently yields about 0.4 per cent. Therefore, invested assets must earn a risk premium of about 4 percentage points above the Canadian long-term bond rate. That's a sizable premium.

Looking at historical returns as a guide, the Chief Actuary's assumed portfolio does yield average returns over the long run superior to the required threshold. But one must not lose sight of the fact that this result requires an asset mix embodying a fair amount of investment risks and uncertainty. And with risk and uncertainty comes a likelihood of lower returns or higher returns.

The expanded CPP funding status is very sensitive to rates of return assumption. Take, for example, the real return bond yield as a guide and contribution rates would need to more than double or benefits cut by more than half. So then, what happens if returns do turn out lower than assumed? Who bears that risk? This is a question that is not well- answered in Bill C-26.

Bill C-26 says that contribution rates may be increased in the future subject to provincial consent. Future rate increases, however, are limited to no more than two tenths of a percentage point per year, which in itself may be insufficient to entirely cover potential funding shortfalls. Reflex number one, it seems, then, is to shift the cost of insufficient funding to future generations, as was done in the past for both the CPP and the QPP. In the event that provinces and the federal government cannot agree to raise contribution rates, Bill C-26 leads us to two as-yet unwritten regulations, the parameters that will dictate how and when benefit levels or contribution rates may change. Such regulations will also be subject to provincial consent.

But in drafting these regulations, the provinces and Ottawa, in my opinion, should adopt a model designed to guard against intergenerational transfers, so common in pension plans that ended up hiking contributions to pay insufficiently funded benefits. The investment risk strategy for the assets backing an expanded CPP should be conservative, or at least conservative enough to protect a basic level of benefits relatively well — say 80 per cent of the benefits, nine times out of ten, in simulations of stochastic scenarios — statisticians do that very well — with benefits above this basic level allowed to adjust.

Achieving this would most likely mean adopting a less-risky asset mix than that assumed by the Chief Actuary, and thus launching an expanded CPP with higher contribution rates as a consequence.

To summarize, contribution rates for an expanded CPP set out in the bill are such that assets need to earn a rate of return achievable only by taking on a fair amount of investment risk. So, an expanded CPP will not make a secure promise, exposing participants to more risk than they know. For all to make an informed decision, including you, Bill C-26 should contain clear rules governing the asset management strategy — and thus the level of risk involved — and clear rules governing benefit or contribution adjustments should significant downside risk materialize. Thank you. I would be happy to take any questions.

The Chair: Thank you very much. We will now turn to Mr. John.

Herb John, President, National Pensioners Federation: Mr. Chair and members of the committee, thank you for the opportunity to present here today.

My name is Herb John, and I'm President of the National Pensioners Federation. The National Pensioners Federation is a national not-for-profit, non-partisan, non-sectarian organization of 350 seniors' chapters, clubs, groups and organizations and individual supporters across Canada with a collective membership of one million seniors.

While seniors need help with their health and financial concerns today, they are also concerned about the financial security of tomorrow's seniors. Without reservation, the National Pensioners Federation commends the federal and provincial governments on reaching an historic agreement to increase the Canada Pension Plan. We welcome the proposal in Bill C-26 to implement the increase and to amend the Income Tax Act to facilitate deductions for the increased CPP and QPP contributions, but especially for the increase to the working income tax benefit to allow low- income Canadians to participate.

The National Pensioners Federation held our annual convention this year in Vancouver where the delegates applauded this rare example of federal-provincial cooperation. It is important to note that all of the delegates at that convention understood that none of them would benefit from the increase to CPP. Rather, they were concerned that their children and grandchildren do not have workplace pensions. Two thirds of working Canadians do not. The increased CPP is vital to helping them save for retirement. They know how hard it is to make ends meet in retirement, even though some of them have workplace pensions.

The CPP increase is coming just in time. No new defined benefit pension plans have been established in years. Many workplaces that have defined benefit plans are switching to defined contribution plans in which the investment risk is entirely borne by the employees.

This is happening even in the unionized environment. GM, Ford and Fiat Chrysler Automobiles auto workers made an unprecedented concession recently to allow the companies to close the doors on their defined benefit pension plans and require new employees to participate in defined contribution plans.

Many of our members have also been affected by business bankruptcy like Nortel's which left the pensioners with heavily reduced pensions, if they had any left at all after the dust settled. This is an ongoing result of not having legislative protection of pension plan assets during bankruptcy.

Weakening this important employment pillar of retirement income puts more necessity on the other pillars. Sustainability of the CPP, clarified by the fact that the Chief Actuary has declared the CPP will be able to pay CPP benefits for at least the next 75 years, is very important to seniors, again for their children and grandchildren.

The changes announced, which were the first increase in half a century, will take years to phase in. Even so, the increase is modest. And while very welcome, does not ensure Canadians an adequate retirement. What it does do is bring the maximum CPP benefit to $20,000 in 2016 which is approximately equivalent to the poverty line.

The National Pensioners Federation would recommend that a review of future increases, including a voluntary layer to the CPP, be initiated as soon as possible, especially given the length of time it took to get this increase.

NPF would almost recommend that the child-rearing and disability drop-out provisions be applied to the CPP expansion as well. Equity for these individuals has been addressed in the CPP calculation since day one for disabilities, and since 1977 for child-rearing. Single women are currently the seniors with the lowest incomes, and the next generation of women seniors would face a larger income gap if these provisions are not included.

We believe that a number of positions taken in the debates in the House of Commons at second reading need to be addressed. Voluntary savings vehicles such as RRSPs and TFSAs are adequate to enable people to save for their retirement. While this is true for the well off with sufficient funds to invest, it is not true for middle income families, and certainly not for lower income people. The net result cited by various researchers is that nearly a quarter of middle income workers will sustain a substantial drop in their standard of living upon retirement because they have not or could not save enough.

The CPP contribution is a payroll tax that will cause job losses. This same argument was made when the contribution rates were doubled in 1986 with no attendant increase in benefits and there were no job losses. There is no evidence that job losses will happen at this time.

Employers will be paying thousands more. The absolute maximum additional contribution payable by an employer is $1,100 in today's dollars, and is not payable until increases are fully phased in in 2025, and only in relation to an employee earning $82,700. So to raise the fear that small businesses will be burdened with thousands of such payments is unwarranted. Average incomes are closer to $55,000 or the YMPE in 2016.

In 2025, the annual employer contribution is $515 — or $43 a month — or less than $20 a paycheque. So as far as the job loss argument, why would an employer terminate an employee over $20 a paycheque?

Low income workers will lose their GIS benefits due to increased CPP. Low wage earners should absolutely participate in the increased CPP, even if their income supplements are replaced by CPP benefits, not least is the dignity of having paid for one's own retirement. The increased WITB is a welcome measure to ensure that low wage earners can participate. If legislators are concerned about the low income, they can exempt the increased CPP benefits from the GIS calculation. Our children should not have to pay for our retirement.

This concern is actually prevented by CPP legislation. All future benefit increases must be fully funded. Each generation is funding its own retirement in relation to these increases. Furthermore, as with all large, well-managed defined benefit pensions, contributions pay for 20 percent of benefits. The rest is funded from investment returns. Those are our recommendations and I would be pleased to take questions.

The Chair: Thank you very much. Senator Dean, sponsor of the bill, to ask questions first.

Senator Dean: Thank you both for thoughtful presentations and for being here today. The question is to both of you, but I think predominantly perhaps to Mr. John.

We were reminded yesterday that there has been no change to the level of replacement income suggested by the CPP since its inception in the 1960s. It's still at 25 per cent. There is a proposal to move it modestly to 33 per cent, and this is in the context where there is a decline of workplace pension plans.

There seems to be consensus that there is a problem or an issue to be addressed here, if we think about this in policy terms. We have heard some different reactions about whether this is the right thing and the right instrument to address it. On the one hand, we have heard that it's a step too far, that it will have a negative impact on the economy and employers. On the other hand, we hear that it hasn't gone far enough, that some have argued for a doubling of replacement income in retirement, some for 40 per cent. There was a compromise reached between the ministers in the middle somewhere. Is this middle ground the right ground? Is it a step too far or perhaps not far enough?

Mr. John: Well, if you look just at the Canada Pension Plan, it's probably not far enough. If you look at the overall picture of income equality and the distribution of wealth in Canada, which is getting more skewed as time goes on, to address the issue of poverty and income security in retirement really should look at all of those questions.

To look at only the CPP as the proper instrument to do that, standing alone by itself causes some concerns. It needs to be part of the retirement income security, but it can't be the only mechanism. It's unfortunate to see the deterioration of workplace pensions. When CPP was first initiated, it was done as part of an income security package, which included workplace pensions which at that time were on the rise. Maybe there was an expectation that that would continue. Between 1966 and 1970, there was actually a surplus in the funding for CPP. There are many different ways that funding has changed over the years.

Mr. Laurin: I could talk for a long time about a lot of what you said in your remarks. You ask is this the right instrument. I don't think it is if at the end the cost is shifted to future generations. I think we must ensure that at least this doesn't happen.

Senator Stewart Olsen: Thank you. My question is for Mr. Laurin. I'm actually quite worried about the risk, too. It's taxpayers' money. So we're taking on this proposition, CPP2 is taking on enormous risk to taxpayers' money. They fund it. I'm a bit worried about the CPP2 fund, the separate fund being set up, and what will happen with that. You made the point that there are no clear rules governing the asset administration. We did ask the minister, and the minister responded that "It's not me; it's up to the board.'' I'm wondering what you think of that.

Mr. Laurin: It's up to the board. It must come up with enough investment income to finance a plan with contribution rates of 2 per cent and 8 per cent. This is the constraint they will be facing. So the CPPIB will need to take the necessary risks in their investment strategy to generate enough returns based on the contributions they are getting.

That's where I think more work could have been done in advance, when these negotiations were taking place, to at least come up with some arrangement as to how this is going to be handled. That's what a pension plan is; it's a way to manage risks.

In this situation, who are the sponsors? Is it the 10 provinces and the federal government? And they represent whom? You just said the taxpayers. So really it's taxpayers funding their own pensions.

Senator Stewart Olsen: That's right.

Mr. Laurin: Will future generations be funding the pensions of the current generation if things go sour? If things go well and there is a surplus, then great; the current generation will get higher benefits because there will be a big surplus. They will lobby for it and they will get it.

Is that what should happen? You are asking future generations to take on the risk. They have a cost. Risk is costly. Someone must assume the cost of that risk, but they don't get compensated for it. Future generations will only get compensated for that risk if they get the benefit from things going better than expected. And if things go better than expected, that would mean they would pay lower contributions in the future. Because there is a surplus, right? So contributions lower than the real value they are getting.

In my opinion, that's not likely to happen, because when there is a surplus in the pension plan, usually the ones who stand to retire get the benefit. They lobby for it and they get it. So I think there is an asymmetry here.

We're late in the game; I realize that. These could all be set in regulations, but we haven't seen the regulations, so we don't know what the mechanisms will be. Now you are asked to vote on something that is really unclear.

Mr. John: I want to try to clarify something that I think a lot of people don't see clearly, and it's the fact that this is not a taxpayer-based issue. People who have a job pay taxes and they contribute to CPP, but CPP contributions from employees and employers is what funds the plan and the investments in that plan. It's not an issue restricted to taxpayers. So I think we need to be clear that when we talk about how this gets funded, and the future obligations and liabilities, it's on the Canada Pension Plan, not on taxpayers in general.

Senator Seidman: I would like to pursue exactly this subject matter with Mr. Laurin, if I could. You said in your presentation that, "To most people, fully funded implies an ability to pay obligations with assets on hand. The expanded CPP and base CPP, for that matter, is not designed to be fully funded in that sense.''

For Canadians, these are very basic matters. I think most Canadians — myself included, perhaps — don't really understand the essence of CPP.

So my question to you is this: Could you explain CPP1 and CPP2 in that sense, exactly how is it constructed? We contribute to it from our paycheques. Is it sequestered? Is it a pot of money that goes into general revenues? So that we all understand the risk, what really happens to our money?

Mr. Laurin: I'll try to be brief. CPP1, the real CPP, was set up as a social security program. That's how the OECD would qualify it. It was to be funded as a pay-as-you-go program. That's totally fine if there are no demographic shifts, but there were demographic shifts. Current contributions by workers pay the pensions of the pensioners. That's how it was set up originally.

The risk here was a funding risk, but it was not like an investment risk, because they were just reserves — although the reserves were small in comparison to the liabilities. The risk was a demographic risk.

What can happen if there is a big demographic shift is that there are not enough workers to pay the pensions for the number of retirees, and that is what happened.

The Chief Actuary calculated that the contribution rate would have to climb to 14 per cent. At the time, that was seen as way too much, so a compromise was reached. The contribution rate is now 9.9 per cent. Since 2000, it is higher than the pay-as-you-go rate. So a sizable reserve was accumulated, and now the investment income on that reserve will serve to pay part of the benefit, not all of it. Most of the benefit will still be paid by current workers' contributions. It is still mainly a social security program in that sense, but it's partly funded, so at least the intergenerational inequities are not as bad as they could have been. So that's CPP.

CPP2 promises something different. It promises to be fully funded by contributions and investment income. This is different. You contribute for 40 years, so you have made your contributions and you have earned investment income on those contributions — as a group, obviously, not as an individual — and then the group collects the benefits from those contributions and investment income. It's fully funded in that sense.

Now, in order for this to be secure, the investment would need to match the liabilities. So here, if we're saying we really wanted fully secure, we could invest all of this in government, real return bonds, 40 years, and then we would know what we get at the end and it's fully secure. However, no one is really advocating for that. That would be really expensive.

There are other ways. New Brunswick just reformed their public pension plan regime. They opted for something that is more of a compromise. They are running stochastic simulations with their portfolio. They come up with a thousand scenarios, and it has to be right 97.5 per cent of the time. So 25 scenarios could be worse than the threshold that they decided should be the security threshold of the benefits. I think it's the base benefit, not including price inflation. They say this needs to be secure 97.5 per cent of the time, and so they have to adjust their investment strategy as a consequence so that the amount of risk that they take will allow them to reach that. If you do it this way, at least you don't have to invest everything in real return bonds, which would be really expensive.

There are probably other ways, too. If we start thinking about it, I'm sure we could find other ways to bring more security, or to at least not pretend that this is fully funded and that the assets will be there, that it's secure for sure, when really we don't know.

The Chair: Essentially what you're saying, Mr. Laurin, if I've understood you, is that there are two principal ways that the issue of funding in the long term can be adjusted: one is through increased contributions, and the other is through a change in investment strategy calculated to yield higher than the current strategy; is that correct?

Mr. Laurin: If you change your investment strategy, you would go more conservative, and so you would need higher contributions.

The Chair: So the point is that really, in the end —

Mr. Laurin: But it would be more secure. If what we're promising Canadians is a secure benefit, then let's design the plan to be more secure. It would be okay if we did not promise Canadians that this is not a secure plan and we said there are significant risks, and if these risks materialize, the rules need to be clear.

Senator Marshall: I would like to carry on talking about the investment strategy. I had thought the investment strategy for the current plan was in the policy of the investment board and that it's not in legislation or regulations.

When the minister was here yesterday, I asked a question about the investment strategy of the board and whether the government would be interfering in that. Looking on the website of the investment board, my recollection is that their rate of return is, I don't know, 6 or 7 per cent, so I was thinking as long as they continue on with their current strategy, everything looks fairly good at this point in time.

But you were saying there is no provision in the regulations. Is there a provision in the existing legislation or regulations governing the existing Canada Pension Plan that is missing in this legislation? I was thinking it's just a strategy of the board. Is there something in the legislation or regulations that you're aware of that we should have for the expanded Canada Pension Plan?

Mr. Laurin: Well, yes, for the expanded plan it would have been nice, for sure, to have had some rules regarding what happens, because right now we don't know. Yes, the CPPIB is yielding — I don't know what the return was last year. There is a lot of volatility. When you look at the prospectus for any stock you are always told, as a disclaimer, not to look at historical returns as a guide for what your future return will be. There are risks. It's the same thing for the CPPIB. We all understand it.

Maybe, if I look at the last 10 years, I'll have an average return of 4 per cent. I don't know what it is; I can choose 12 or 20 years, and maybe it will be different. You can always pick and choose and get the average return that you want. Yes, there are risks and we realize there will be good and bad years. When we are looking 40 years in the future, they don't know, and we don't know; no one knows what the return will be.

Senator Marshall: What precisely do you think we should have in this legislation or in the regulations? What do you think we should be looking for?

Mr. Laurin: As I understand, it's up to the regulations, the way the bill was drafted, and this also needs to be negotiated with the provinces. Like I said, we are late in the game but what would have been nice is if we could have negotiated in advance these mechanisms for funding the level of risks and what happens in the future if returns are higher or lower than projected. That way, we would know what we're embarking on; that would have been the best.

If this is the way we go, I would have favoured a system similar to New Brunswick's, where base benefits are very secure in a stochastic scenario simulation model. If you can adapt a portfolio that will lead to intended results 97 per cent, 90 per cent of the time, you can get your base benefit protection. It's secure in that way. Then, you know, the last 20 per cent of your benefits may vary, and everyone understands this part is more flexible.

If you structure it this way, the risk of intergenerational transfers is reduced a lot. That's what we don't want, intergenerational transfers. That's what I don't want.

The Chair: I will go to the second round now. Senator Dean, followed by Senator Stewart Olsen.

Senator Dean: Thank you, chair. What a terrific discussion about risk. It's very, very important, so thank you for the comments so far.

I would like to explore risk a little bit more. We have a fairly detailed report the Chief Actuary conducted, as required, when there are CPP changes, which tells us that there is an expectation that contributions proposed together with investment returns will be sufficient in the long term to deliver on the future benefit.

We have investments being handled through the Canada Pension Plan Investment Board, which is a globally respected investment organization. It is not a small player.

There will always be risk: There is risk in RRSPs. There are massive risks associated with defined contribution plans, especially when somebody happens to retire when the market is down.

My question to both of you is: What is the risk of doing nothing? If we are concerned about intergenerational transfer, we know that we have 1.1 million families at risk already, and growing; we know that workplace based pension plans are in decline; we know that the 25 per cent replacement rate in CPP has been unchanged since the 1960s, and that the fill-in pieces that were anticipated as part of that have not materialized. In fact, they have evaporated.

Are we not putting a lot of risk on future generations of covering all of those shortfalls and taking on the responsibility that I think we are, perhaps, looking to avoid today?

What is the risk of doing nothing and not preparing, over the next 30 to 40 years, for a viable, responsive CPP?

Mr. John: I would definitely like to respond to that. I don't think it's a risk we should assess; it's a result we should assess. I think it's clear from the direction that things are going that the risks will definitely have certain outcomes, which will not be positive.

It's nice to look at the risk. I think it's incredible. As you said, the Canada Pension Plan is world-renowned for its sustainability. I don't know any other pension plan that has been evaluated as 75 years, which is the limit to which you can go.

Doing nothing will definitely have negative results for the intergenerational obligation; that will grow, and we don't need that today. There is already a little bit of that discussion going on with millennials being somehow convinced they are covering the burden of the cost of seniors when, in actual fact, seniors have provided for their own retirements, including OAS, which comes out of the general fund, but it's funded by per capita federal tax from everybody who pays income tax. So I think the risk of doing nothing is way too high.

I don't think considering the investment risk is something that should be avoided. It is absolutely a discussion that needs to happen, but it should not be a discussion that ends up in not doing this, and even not doing more. Looking at the funding mechanisms and the assurance and, maybe, using an amortization of debt in the bad times of investment returns would be a good way to minimize the impact when the market is not performing well.

Mr. Laurin: First, about the Chief Actuary's report, I think he did his job very well. According to his mandate, he needs to calculate the minimum rate of return that needs to be achieved in order to be able to pay those benefits as set out in legislation. He did that, and the real rate net of the investment management piece needs to be at 3.4 per cent. That is the real rate, nominally, 5.4 per cent, net, of investment management fees. We know that, and we are asking the CPPIB to generate pretty sizable returns.

Then you said there is a crisis or what is going to happen if we do nothing? I don't think there was a consensus in the studies as to whether there was a crisis and we actually needed to go to a mandatory solution. Our mandatory solution — you said it yourself — is a middle ground, so will it really be enough if there were a crisis? Probably not.

Then you talked about low-income people. True, low-income people will probably get a WITB that is better than they currently have. Will this be enough to fully compensate? We don't know yet because we don't know what the changes to WITB will be. WITB has a different objective. It's for the welfare wall. It's to encourage people to work even though they face a lot of benefit clawbacks when they work. They have a high effective tax rate. WITB is for that.

If the effective tax rates change in 10 years, we will adjust the WITB and this function of CCP compensation will quickly be forgotten. We don't know exactly who the low-income people are, but when they retire they will face high clawbacks if they don't change, and right now it is 75 per cent for a single person. It's very high, and that's why they needed to do something. They will find that they have to pay this high clawback rate, so they won't see a lot of benefit from the expanded CPP, and they too will quickly forget that they were compensated through the WITB for their CPP contribution.

It raises problems there, too, so it is not an ideal solution — if it's a solution at all. We've published papers looking at the extent of the problem. Yes, there were some problems, obviously. No one is perfect. Not all families have saved enough. But there is still time to save, in many instances. In the latest study I published, I looked at the patterns, and families do save in many different ways, not only RSPs. They may save in their houses, in their small businesses and in many different ways that some of the studies have not considered.

So it's a big question. I will leave it at that. If we want to do something, there are alternatives. In Quebec they did something different, the VRSP, which is voluntary, but employers have to offer. It's not the CPP. There are advantages and disadvantages. I accept that there were negotiations and we came up with an expanded CPP. I don't want to be here saying we shouldn't do the CPP. This was negotiated. It's done. If we are doing it, I'm saying let's do it the right way.

Senator Stewart Olsen: Just a quick comment on something that was said. I think that discussing risk is very important; that's our job as legislators. It was mentioned that there is risk in RSPs and all kinds of things like that. Yes, there is, but it is transparent risk. Canadians don't have a complete understanding that CPP is risky as well. That's what we're trying to do as we examine this legislation, is to see how we can make it better.

Mr. John, I'm wondering if you would agree with me that there is a long wait period for this to kick in, and so a whole generation is lost in this. I would like to see right now things done for seniors and for the poor. I think we can do some things now, and I wonder if you would have suggestions in terms of what we can do now to provide for the interim.

Mr. John: The first thing — and it's really outside a CPP discussion — but the basic foundation of all of this is employment. We've seen hundreds of thousands of good manufacturing jobs leave this country in the last 10 years, and that has caused lots of problems — problems with investments, with interest rates and with income security, whether you're working in precarious work or whether you have a good job. I believe the first thing that needs to happen in Canada is to develop a manufacturing policy and have people going to work.

I remember that when I was very young, it was a very simple equation. You take a raw material, you add labour and you have a product to sell. We don't do that today. We've gotten away from the basics of what sustains communities. So that's one thing that needs to be done.

A lot of Canadians don't understand CPP at all. Most people between 20 and 40 that I talk to are surprised to hear that the Canada Pension Plan is viable for 75 years. Most of them think they are not going to get anything when they retire. So there needs to be some education about the real issues — about what pensions are and how you save.

When people are going to save and invest money, they have to do that with disposable income — and disposable income, for the bottom 40 per cent of Canadians, has been deteriorating since 1960. So how we expect people to save is a real challenge. We can save in different ways, but if you don't have a decent job and you can't buy a house, and you can't invest that way, and you don't have money left over after you pay all your bills, you can't buy RSPs or put money in a TFSA, how are people supposed to prepare for retirement when they are struggling to make ends meet every day because employment is not what it used to be and what it could be?

There are real challenges. CPP is the end of all these other discussions, and all those other discussions need to be addressed in order to make retirement a pleasant thing to perceive in the future.

Senator Raine: Thank you very much. We have been hearing about the new infrastructure investment bank and the possibility of CPP's pension board investing in that. Is this the kind of investment that our pensions should be going into? Is this a secure investment? You say we need 5.4 per cent — I don't understand the difference between nominal and real rate of return. Anyway, we need a significant return, guaranteed. Could I have your comments on the infrastructure bank?

Mr. Laurin: Infrastructure is definitely a good investment for pension plans. I'm thinking about infrastructure financed through user charges. It could be public transit, airports or ports. There are a lot of them, when we start thinking about it. Some countries have privatized infrastructure, too, so we have examples.

These infrastructures are great for pension funds because they are long term. Their returns are indexed to inflation; they go up with inflation. That's important for a pension plan. It used to be, at least when they started to be sold in other countries — I'm not privy to the CPPIB and other pension plans — apparently they got good prices for it, so they will have good returns. They are pretty safe. If it's public transit, it's pretty safe. You can expect the user charge you will get if it is a port or airport, as long as you maintain it and do your proper due diligence.

So infrastructure is a good pension plan investment. I think we can all agree on this, and there has been lots of writing on this, too.

Senator Raine: For instance, an infrastructure bank would have the ability to borrow on the capital market at a certain rate and then charge out to whoever is borrowing from them at an increased rate and make money that way, the way other banks do?

Mr. Laurin: I don't think we have the whole model for the proposed investment bank yet, but I don't think the model is to go out and borrow. I think the government would borrow its own share, but the rest of the equity would come from pension plans, et cetera, which is not borrowed money.

Right now, if the government share in infrastructure had to come from borrowings, since obviously it's a lot of money and the current income is not there, it's okay. It is also an asset. It's a balance sheet transaction. You are buying an asset with borrowed money, so really you have an asset on one side and a liability on the other and your current expense is only the depreciation of that asset. So it's okay to do that, especially if we need the infrastructure.

We'll see a different model, though, because that's a user charge finance model for infrastructure, which is different. Taxpayers end up paying for infrastructure anyway. We all end up paying for it. It's just how you pay for it; that's the difference.

Mr. John: National Pensioners also supports CPP investments in infrastructure because it's a very good investment. It's long term and it has a good return. The difference that will be coming up in the discussion is how that's done.

It sounds like what is being proposed now is a form of privatization of public assets, and the ownership of public assets helps to reduce the inequality of the distribution of wealth in a national economy. That's an important thing to consider coming up. The other alternative is just to borrow money at a 0 per cent interest rate from the Bank of Canada instead of bringing private banks into the equation, where they will charge some amount of interest for that loan.

The Chair: Okay. Thank you very much. Again, even with that last comment, it sounds to me like one possibility with the somewhat openness of the CPP2 is the possibility that the government could lend the money in CCP2 to its new infrastructure bank at a rate that would guarantee its success and then in the end the taxpayer is on the hook again for covering the issue. One way or the other we will get it. That was just an aside.

Mr. Laurin, I found one thing interesting in your presentation. It was the paragraph where you say:

. . . investment income are sufficient to fully pay the projected expenditures of the additional Canada Pension Plan over the foreseeable future.

It is the term "foreseeable future'' that I'm interested in. I've been part of a process dealing with medical assistance in dying, which has led to a major bill through Parliament in which the term "reasonably foreseeable'' was interpreted by the minister wherein the reasonably foreseeable future means a period of up to six to eight months. That was with regard to reasonably foreseeable death. I'm assuming your term "foreseeable future'' has a much longer term on it than six to eight months.

Mr. Laurin: That is taken from Bill C-26. That is the language in the legislation.

The Chair: We have different foreseeable futures depending upon the circumstance, and that's understandable.

I want to thank you both very much for being here. Once again, I thank my colleagues for their questions.

We are now about to start clause-by-clause consideration of Bill C-26. Before we get into it, I want to remind us all that we have a considerable number of officials in the audience. I won't go through all those who are here, but I will indicate to you that they come from the various divisions that are relevant to issues in this particular bill. I want to thank them for being here in case we require your advice on the interpretation of certain aspects as we go through clause by clause. Thank you.

I also want to go over a few points with my colleagues with regard to our process. I want to remind you that if at any time you have any confusion as to where we are in the process, simply signal for clarification and we will attempt to clarify all issues as we go through.

Because of the length of this bill, I want to put a proposal to you. There are I think some 76 clauses here. I would propose that we consider the clauses in groups of 10, but if there are any clauses within a grouping, as we will call it going forward, for which a member has an amendment or any other issue to raise, you will immediately signal and we will go to that clause and deal with the issue that is raised.

Perhaps at the outset I could get a sense from the committee that if there are specific clauses that people wish to raise questions about specifically and so on, we'll let it go through in terms of the actual clauses.

With that, I'm going to move to clause-by-clause consideration of Bill C-26, An Act to amend the Canada Pension Plan, the Canada Pension Plan Investment Board Act and the Income Tax Act. I will proceed to ask you questions in order to go through the clause-by-clause consideration.

Is it in fact agreed that the committee proceed to clause-by-clause consideration of Bill C-26?

Hon. Senators: Agreed.

The Chair: That's agreed. Thank you.

Shall the title stand postponed?

Hon. Senators: Agreed.

The Chair: Thank you.

I will now ask you officially: Is it agreed with leave, that the remaining clauses be considered in groups of 10?

Hon. Senators: Agreed.

The Chair: That's agreed. Thank you very much.

Shall clauses 1 to 10 carry?

Some Hon. Senators: Agreed.