Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 20 - Evidence - April 18, 2007
OTTAWA, Wednesday, April 18, 2007
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-26, to amend the Criminal Code (criminal interest rate), met this day at 4:35 p.m. to give clause-by-clause consideration to the bill; and to which was referred Bill C-36, to amend the Canada Pension Plan and the Old Age Security Act, met this day at 5 p.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Honourable senators, we will begin with consideration of Bill C-26, to amend the Criminal Code in respect of criminal interest rate, without amendment but with certain observations. Is it agreed, honourable senators, that the committee move to clause-by-clause consideration of Bill C-26?
Hon. Senators: Agreed.
The Chairman: Shall the title stand?
Hon. Senators: Agreed.
The Chairman: Shall clause 1 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 2 carry?
Hon. Senators: Agreed.
The Chairman: Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Is it agreed that Bill C-26 be adopted without amendment but with observations?
Hon. Senators: Agreed.
The Chairman: It is unanimously agreed. Before proceeding, I ask the researcher from the Library of Parliament, Ms. Dewetering, to read the observations to which senators have agreed.
June Dewetering, Researcher, Library of Parliament: The Standing Senate Committee on Banking, Trade and Commerce has decided to report Bill C-26, to amend the Criminal Code in respect of criminal interest rates, without amendment, even though we have reservations about the bill as drafted because of the following factors.
First, the committee unanimously supports measures designed to protect consumers of payday loan services and does not wish to delay access to legislated protection for this special group of borrowers, some of whom we believe to be vulnerable. We have some familiarity with the section of the Criminal Code that would be amended by the bill as well as with issues related to payday lending. In particular, last year, we examined a bill proposed by our former colleague, Senator Plamondon, which also sought to amend section 347 of the Criminal Code and, in the context of our study of consumer protection in the financial services sector, we heard from witnesses on the subject of alternative financial service providers, particularly payday lenders.
We continue to be somewhat puzzled by the reasons underlying the rapid growth of the payday lending sector. Such growth suggests that the services provided by such lenders are needed by consumers. Important considerations for us are the reasons for the emergence and growth of this sector as well as what appears to us to be a lack of involvement by chartered banks in this kind of short-term, low-value lending.
During its recent presentation to us on Bill C-37, the Canadian Bankers Association indicated that it, too, is perplexed. It also indicated that the chartered banks provide a range of credit options on a short-term basis. Nevertheless, the Committee believes that the payday lending sector's growth may be related, in part, to a relative unwillingness by Canada's chartered banks to lend to certain borrowers, who then become customers of payday lenders. Consequently, we urge Canada's chartered banks — which are federally regulated, belong to an independent complaint resolution mechanism and are involved in some aspects of financial education — to begin making short- term, low-value loans.
Moreover, we believe that implementation of the proposed legislation could result in the federal government granting exemptions to designated provinces with insufficient assurances that provincial actions would provide the level and nature of consumer protection in this sector that the committee seeks. There is no assurance that all provinces will enact protection measures following enactment of this proposed legislation. Moreover, we are concerned that a patchwork of non-uniformed protection measures could develop across the country.
Thus, we urge provinces, in adopting consumer protection measures pursuant to this bill regarding the payday lending sector, to include minimum requirements in at least the following areas: limitations on rollovers and back-to- back loans; mandatory participation by payday lenders in an independent complaint resolution mechanism; mechanisms ensuring full and accurate disclosure of contract terms; acceptable debt collection practices; and a right for the borrower to rescind the loan and obtain full reimbursement no later than the end of the day following the making of the loan. Efforts made by payday lenders in the area of consumer financial education would also be welcome.
Consistent with the committee's mandate, we will continue to monitor developments in the payday lending sector, and hope that the enactment of Bill C-26 will allow effective protection to consumers. In our view, if the provinces fail to meet minimum standards in the areas indicated above, the federal government should take appropriate legislative actions.
The Chairman: Thank you, Ms. Dewetering. Honourable senators, is it agreed that I report Bill C-26 with those observations at the next sitting of the Senate?
Hon. Senators: Agreed.
The Chairman: This tiny piece of proposed legislation has been difficult but we have devised an effective way of prodding the banks to become involved. We have undertaken to keep this issue under surveillance and we will follow the actions of the provinces. We hope they will follow our advice. Failing that, these recommendations leave us open to remove the exemption and exercise full federal authority in this area, which is possible through additional proposed legislation.
I thank senators and staff for their hard work on Bill C-26.
Honourable senators, we will proceed to consideration of Bill C-36, to amend the Canada Pension Plan and Old Age Security Act. We are delighted today to have before the committee the Honourable Monte Solberg, P.C., M.P., Minister of Human Resources and Social Development Canada, to speak to this important proposed legislation. Minister, you will understand that the Senate has given this bill special and significant treatment. The Senate is sitting at this moment, dealing with important emergency legislation, but has allowed us an extraordinary exemption to continue with our hearings, notwithstanding that the Senate is in session. A number of our colleagues are not here because they must be in the house, but we have Senator Angus, who is our deputy chair, Senator Massicotte, Senator Moore and Senator Tkachuk. We are well represented.
Thank you, Minister, for coming on such short notice. We would like to proceed with this bill quickly. We are interested in what you and your colleagues have to say. Perhaps you might introduce your colleagues, and then we will turn it over to you to conduct your presentation.
Hon. Monte Solberg, P.C., M.P., Minister of Human Resources and Social Development: Thank you very much. It is a pleasure to be here, and I am happy to introduce my colleagues. From the department, Susan Scotti, Assistant Deputy Minister for Social Development Sectors Branch, and Marla Israel and Nancy Lawand who work closely with Ms. Scotti. It is a pleasure to be here today and talk about this important legislation.
The Chairman: Minister, perhaps I should briefly introduce the bill. We are being televised from coast to coast to coast and around the world on the web. I think it is important for people to understand what we are dealing with.
Under this bill, the Canada Pension Plan and Old Age Security Act would be amended, amongst other things, to include a generous eligibility requirement for the CPP disability benefits, provide greater flexibility for credit splitting between former common-law partners and clarify rate setting to ensure the benefit costs are fully funded.
The bill would amend the Old Age Security Act, amongst other things, to simplify access to the Guaranteed Income Supplement and Allowance benefits once the initial application is made. It will make changes regarding income-tested benefits for certain immigrants and eliminate the entitlement of estates to OAS income benefits. The bill would make the changes regarding the charging of interest in relation to the CPP and OAS overpayments and the imposition of penalties for persons who knowingly accept benefits to which they are not entitled.
I am pleased to welcome the Minister of Human Resources and Social Development. The minister served with me on the executive of the Canada-U.S. Inter-Parliamentary Group, and while the group has lost a staunch, strong and articulate supporter, the nation has gained an intelligent, thoughtful minister.
With that I welcome you once again.
Mr. Solberg: Thank you for those generous words. It is a pleasure to be here. Good afternoon to all honourable senators.
I am delighted to be here today to talk about Bill C-36, to amend the Canada Pension Plan and the Old Age Security Act. First, I want to offer my thanks to Senator Angus for sponsoring the bill through the Senate, and to members of the Senate banking committee who have graciously invited me to be here today.
This bill introduces a number of important amendments to the Old Age Security and the Canada Pension Plan. I have come here with a great sense of pride to discuss two programs that have had a great deal of influence on the daily lives of Canadians and are integral to the social fabric of Canada. Given their proud history, we have a responsibility to ensure that any changes to the Canada Pension Plan and Old Age Security Act are thoughtfully considered and make sense for Canadians now and in the future.
[Translation]
Together, the Canada Pension Plan and Old Age Security Program are the cornerstones of our retirement income system.
Bill C-36 will ensure that Canadians continue to have confidence in the Canada Pension Plan and Old Age Security Program, and know they will be there for them when they retire.
[English]
Yet, as dependable as these programs are, they must evolve and adapt to the changing needs of Canadians, and especially Canadian seniors. Bill C-36 is about making changes now to address the current and future needs of those who are, or will become, entitled to receive CPP and OAS benefits.
This bill provides an opportunity to improve the delivery of pension benefits for seniors and to enhance eligibility for Canada Pension Plan Disability Benefits for long-term contributors to the plan. My greatest sense of pride as a parliamentarian is participating in a democratic process whose end result makes a meaningful difference in the lives of Canadians. The changes we propose go a long way in doing just that.
Old Age Security and the Canada Pension Plan represent the largest single expenditure in the Government of Canada. Over $54 billion in benefit payments are provided annually to Canadian seniors, and over 4 million seniors receive public pension benefits on an annual basis. Over the next 15 years, this number will double. As a result, we need to look for administrative improvements continually and streamline the application process wherever possible. Traditional application methods need to evolve to continue to serve Canadians to the highest standard.
In great part, these proposed changes to the CPP and OAS reflect the recommendations put forth by the federal, provincial and territorial ministers of finance in their last triennial review of the CPP, which concluded in June 2006. The bill also reflects changes that thousands of Canadians have told us were needed, through their letters and discussions with parliamentarians. One key change is improving access to the Guaranteed Income Supplement, GIS. Bill C-36 improves access by providing seniors with a lifetime application process for OAS and GIS.
For example, take the case of Arlene, a single, low-income senior approaching age 65. After Arlene's initial application, her income tax information will be provided through the Canada Revenue Agency. This information will determine her access to GIS benefits now and into the future. She will never need to reapply for the benefit, regardless of fluctuations in her income, as long as she files her tax return.
Of course, it is still important to work closely in partnership with communities and non-governmental organizations, as well as with groups of people who face language barriers or who may be intimidated by the application process. That is why we will continue our extensive efforts to reach out to those who are most in need, to inform them of the benefits available to them. Officials in my department, including Service Canada, have made great strides over the past decade to reach out to vulnerable communities to spread the word, and to mail applications proactively so that no senior or person with a disability will be left behind.
Our immigrant communities have asked us to help them by broadening the definition of trusted representatives who can assist seniors with questions regarding their benefits. Again, this bill accomplishes that by lifting previous restrictions that made it difficult for family members and other trusted friends and loved ones to provide all the assistance needed in accessing information on CPP or OAS benefits.
This bill also goes a long way toward helping persons who have worked hard all their lives and who have made steady contributions to CPP but, because of present rules, may have been prevented from gaining access to CPP disability benefits. This bill will help thousands of long-term contributors to the CPP by relaxing the present eligibility rules to provide access to CPP Disability Benefits with contributions made in three out of the last six years. These changes are real and meaningful, and will have a positive effect on the lives of those who mean the most to us.
As this bill moved through the House of Commons, it received strong support from all parties. To me, this demonstrates the good faith of all members to work together to do the right thing for Canadian seniors and for persons with disabilities. I know that this spirit of cooperation will continue through deliberations in the Senate.
These changes were proposed with Canadians in mind. They are actuarially sound. They reflect the recommendations made by federal, provincial, and territorial ministers of finance. They reflect the observations of the Auditor General, and they reflect the opinions of many Canadians.
The success of Canada's retirement income system would not be possible without the cooperation of our provincial and territorial partners. As joint stewards of the Canada Pension Plan, the provinces and territories and the federal government ensure that the CPP remains a vital part of Canadian public pensions.
I want to make one important point: Through this bill, we improve a pension system that is already recognized around the world for its excellence. We are one of the few G8 countries to reform our public pension system to make it sustainable.
Senators, the Old Age Security program and the Canada Pension Plan are cornerstones for income security for seniors. We want to improve their administration and make it easier for Canadians to apply and receive these benefits. We also want to strengthen accountability and fairness and streamline the delivery of benefits. Bill C-36 will accomplish these goals.
[Translation]
There is one important point I want to make: Through this bill, we are improving a pension system that is already recognized around the world for its excellence. We are one of the few G8 countries to have reformed our public pension system to make it sustainable.
[English]
Senator Angus: Minister, am I correct that this bill deals more with housekeeping and streamlining aspects than with substantial changes?
Mr. Solberg: I would describe a number of the changes as housekeeping, things that bring the act into alignment with recommendations from people such as the Auditor General, for instance. However, some changes are substantive in the sense that they will affect a number of people in a positive way: for instance, the changes regarding the eligibility for Canada Pension Plan disability, which will affect a large number of people, about 3,700, as I recall. The changes regarding GIS are technical in a sense, but they will have an important positive impact on a large group of people.
Senator Angus: Are any new policy or initiatives of the government reflected in this bill, or any changes in direction in our pension structure and scheme?
Mr. Solberg: The answer is no, but these changes enhance what already exists and builds on it to a large degree. In the case of Old Age Security, it enhances the system to the point that makes it much better than the system has been in the past. We will now capture the great majority of people who are eligible for Old Age Security and GIS in this case, and allow them to continue to receive it without having to reapply in the future as their income goes up and down because, typically, they will file their tax return.
It is an important technical change that will make the system much stronger. It will ensure that we catch all those people who today we do not always catch, and ensure they receive their GIS benefits.
Senator Angus: That is interesting. In my role as government sponsor of this bill at the Senate level, I had the occasion to meet with your capable people from the department, two of whom are here — Ms. Israel and Ms. Lawand. One thing that I found interesting and unusual in my briefing sessions with these people was that in the past one needed to apply and reapply. You referred to it again: This bill would waive the requirement that recipients of the Guaranteed Income Supplement, for example, must reapply. It seemed anomalous to me to make them do that. Can you develop that point for me, please?
Mr. Solberg: It is odd. It is hard for me to speak to the process that took us to the point where people were forced to reapply as their circumstances changed. The result was that, of course, some people did not necessarily reapply, and therefore were not able to receive the Guaranteed Income Supplement even though clearly they were eligible for it. People were left out of the system. There are good reasons why those things happen. As people become older, they may find it intimidating to approach the government with respect to some of these things. They may not know how to go about it. In the case of immigrants, they may face a language barrier. There are a number of reasons why people did not go through that process. People did not know about it and did not understand it.
These changes will make a large and positive contribution to ensuring that we capture as many people as we can so that in the future we will not have the situation where large numbers of people are inadvertently left off the roll and will not receive their Guaranteed Income Supplement.
Senator Angus: To be clear, they apply once and do not need to reapply, providing they continue to file their income tax return annually. If their circumstances change so they are not eligible in a given year, it is adjusted through the income tax filing and refund or payment procedure. Is that right?
Mr. Solberg: Absolutely. Of course, people's situations change. Their income may change.
Senator Angus: They are defeated at the next election.
Mr. Solberg: They are defeated. Different things can occur and that change will be caught, of course, by their tax return. That will be reflected in providing them with the Guaranteed Income Supplement if they continue to qualify; or it could be a situation in reverse, of course, where their income goes up dramatically and they no longer qualify. That change will allow us to make sure that we do not pay GIS to someone who does not qualify.
Senator Angus: In that regard, knowing the amazing amount of information those officials with you have at their fingertips, you made a statement in your opening remarks that one measure in this bill is designed to penalize people who receive and accept social welfare benefits to which they are not entitled. In this committee, our mandate is the financial services sector generally. We tend to find out all about banks and how money flows in and out of Canada. We have learned many things that have shocked us, for example, in payday loans, on which we passed a bill here today, and also in our study of measures designed to prevent tax fraud, money laundering and the like.
We found out that an enormous amount of illicit funds is out there. Those things interest us. Now we hear that perhaps many Canadians accept benefits from the government to which they are not entitled. What order of magnitude would that be?
Mr. Solberg: I am not sure I could answer that question off the top of my head. Let me address what I think you are getting at. One thing this bill does is to change some authority with respect to Old Age Security, allowing us to set new rules. Currently, Old Age Security is governed by the Financial Administration Act. There are rules regarding the collection of interest on overpayments and this kind of thing.
Senator Angus: Yes.
Mr. Solberg: Under the new bill, the authority for those regulations will change, and the government will determine these new regulations, the policy for collecting on overpayments and this sort of thing.
Currently, under the Financial Administration Act, we must charge interest on overpayments. However, if I can say it this plainly, we do not enforce that in the sense that we do not collect overpayments from seniors because, typically, we are talking about people in difficult financial situations.
Where someone commits fraud, of course that is a different story. I leave that to Ms. Scotti or someone else to comment on the particulars. Obviously, we have enforcement measures in place and people who devote themselves exclusively to uncovering fraud, but I should let Ms. Scotti say more.
Senator Angus: Ms. Scotti, I would appreciate your addressing the subject. The minister has addressed part of my question, but I wanted to know if there is a problem. Are many people out there in the rolls taking these cheques every month that should not receive it?
Susan Scotti, Assistant Deputy Minister, Social Development Sectors Branch, Human Resources and Social Development Canada: I cannot quantify the number for you. I do not have that information. We can probably obtain it for you.
My sense is that the incidence of fraud is low in the OAS and CPP as well.
When there are instances of fraud, we investigate. We can suspend payments and request repayment with interest to the government.
The Chairman: I have an important supplemental. Ms. Scotti, you noted that many old-age pensioners live from cheque to cheque. In some instances, as known from anecdotal information that I have received, they might receive an overpayment, although not as a result of their efforts. Rather, it is usually a glitch in the system that causes such an overpayment. Three or four months later, a notice pops out of the system requesting repayment of the overpayment, but they no longer have the money.
I hope that the regulations, at least in their execution, would differentiate between the innocent who have already used the money through no malfeasance on their part, and those who try to rig, misrepresent or defraud the system. There is a vast difference between the two kinds of recipients of overpayments.
I assume that this difference will be considered in the new regulations because the bill gives you the power to do so. How will you exercise your discretion between those two kinds of recipients? I would have great concern if this bill gave the department more power to proceed willy-nilly against those who are innocent and suffer from a delayed piece of information that arrives after they have spent the overpayment.
Mr. Solberg: In general, the practice of the department has been to recognize the difficult financial situation that some people are in. Although the Financial Administration Act states that we should charge interest on overpayments, we do not charge interest precisely because we want to be as sensitive as possible to the difficult financial situation in which many seniors live.
Our intention is to bring the regulations in that respect into alignment with the practice under this bill, which is not the case now. To state it baldly, currently it is fair to say that we are, to some degree, in breach of the Financial Administration Act because we show that kind of generosity, which we think is in alignment with Canadian values. As well, we want to ensure that under the new rules, we write this value into the regulations.
Senator Tkachuk: How would an overpayment occur?
Mr. Solberg: I will ask my officials to speak to that.
Ms. Scotti: A variety of circumstances can occur. The income situation might change because the person worked temporarily and did not report the earnings until the person filed an income tax return. Marital status might change. Sometimes we pay dead people because we did not know they had died, although we do not recover amounts from those who died.
A change in the income or family status of the individual is the key reason that overpayments occur because different rates are paid for single and married people.
Senator Tkachuk: It is difficult to collect from someone who has died.
Ms. Scotti: We do not collect from estates.
Senator Tkachuk: There is no overpayment unless the cheque is cashed by someone else in the family. Then, it becomes a question of fraud.
Ms. Scotti: That is right.
The Chairman: Senators, we are joined by Senator Ringuette, as well as Senator Cordy, the critic on this bill. Welcome. They have come from the Senate that is still sitting so they are performing double duty today.
[Translation]
Senator Massicotte: Minister, thank you for coming here today to discuss a very important bill that affects so many Canadians.
My concern is about the potential cost of changing the system for the government and for Canadians. You say that we are being more generous with compensation, particularly in the case of accidents. Do we know the additional cost of the proposed amendments to the three pension funds?
[English]
Mr. Solberg: The most important point to make regarding the cost of these benefits is that, along with the provinces and territories, we have referred all these proposed changes to the chief actuary. The chief actuary makes these judgments independently, based on assessment of the direction of the country's demographics, while ensuring that we do not put the pension plans or premium rates in any jeopardy. Taking that fact into account, the chief actuary has signed off on this plan allowing us to remain within that 9.9 per cent rate. The chief actuary assures us that the fund will continue to be viable for the next 50 years, as I recall.
I ask Ms. Lawand to speak to the costs.
Nancy Lawand, Director General, Canada Pension Plan Disability Directorate, Human Resources and Social Development Canada: The cost for the relaxation of the disability contributory rules is .02 per cent in relation to the contribution rate, which, as the minister explained, has been looked at. This cost is projected and will be reported on for the next 50 years. The calculations have been made.
It has been deemed to be found within the full funding parameters that are the subject of the other amendment that comes from the triennial review.
[Translation]
Senator Massicotte: What is the annual amount?
Ms. Lawand: I do not have those calculations with me.
Normally, our calculations are based on the rate of contribution. The amount is certainly over a million dollars. That is based on an estimate of the number of people who might be eligible in the future. Perhaps my colleague from the Department of Finance has the figures.
Ms. Kalinowski: In his report, the Chief Actuary estimated that the change would cost 2 cents for each $100 of pay.
Senator Massicotte: What exactly does that mean?
Ms. Kalinowski: The total cost depends on the number of people brought into the program.
Senator Massicotte: What if we were to take the year 2008, say?
Ms. Kalinowski: We estimate that, in 2007, costs will increase by 5 million. As a percentage, that represents a total cost of approximately $27.4 billion.
Senator Massicotte: Minister, you are convinced that there is no threat to the sustainability of the pension funds, and you have an actuary who says that, in spite of the improvements, if we maintain the 9 per cent rate, the fund will remain solvent.
[English]
Mr. Solberg: Yes.
The Chairman: Senators, the minister must leave at 5:30 for a vote in the House. We hope that officials will stay on. Minister, if you have a brief response for Senator Massicotte or Senator Tkachuk, please proceed.
Mr. Solberg: I am confident and it gives me extra confidence knowing that the provinces and territories are comfortable with this as well. We have taken all the steps necessary to make these assurances.
[Translation]
Senator Massicotte: I have a question about fixed benefits. The amounts have increased a great deal over the past few years, so that the pension funds could remain solvent. But it has had the result that young employees who join the government now will receive less in benefits than they put into the fund if we count their contributions and the interest.
That seems to be unjust — people who have been contributing for a long time receive benefits that are fair, while new members of the public service will not. Some believe that, in 10 or 15 years — given the demographic problems — there will be pressure on the pension funds because of inequities and unfairness.
We must ensure that pension funds are fair to all public service employees, be they new employees or not. What is your view on the future of the Canada Pension Plan?
[English]
Mr. Solberg: There are two issues here. Part of the translation went missing for a moment. One issue has to do with Old Age Security and one has to do with Canada Pension Plan.
There is a substantial change with regard to Old Age Security and making sure that we bring into alignment the Old Age Security with the Charter, frankly, and also with some of our international agreements, so that being a citizen is not a requirement to receive this benefit. Inadvertently, when the legislation was rewritten in 1996, it caused that kind of a discrepancy, which was never the plan. When OAS was brought into being in 1952 the only requirements were that recipients were a certain age and they were in residence for 10 years. Inadvertently, we changed that in 1996 and now we are trying to rectify that in this legislation.
The other issue, as I understand it, is the sustainability of Canada Pension Plan, but contributory requirements must be met to receive Canada Pension Plan, meaning that I am comfortable, and if I can speak for the provinces and territories, we are comfortable that any growth in the population because of immigration will not jeopardize the sustainability of the plan because people still must meet those contributory requirements.
The Chairman: I have a problem with this meeting. We were given to understand that you would be available to us for a full hour. Some of our senators have serious questions.
Mr. Solberg: I am happy to come back if I can.
The Chairman: Perhaps you can stay for as long as you can, maybe another three or four minutes. I know you need to be at the House. If you can come back tomorrow morning from 11 a.m. to 1 p.m., we can give all the senators an adequate opportunity to ask questions, because if we have serious reservations that might lead to suggested changes it is important for the minister to be here and respond to those questions.
Mr. Solberg: I will do whatever I can to accommodate that, without knowing my schedule off the top.
The Chairman: I take it your bell is ringing now. Minister, if you must be on your way, we will continue with the officials, on the understanding that you will try to come back tomorrow. We are trying to deal with this bill expeditiously but, having said that, senators have serious reservations about it. I have not heard those yet, but we want to hear from the senators directly, and your responses. If you can come back tomorrow, hopefully before 12:30, that will give us time to deal with the bill. We will try to cover it off with your officials, but if we are not satisfied, we would appreciate your coming back.
Senator Ringuette, you had a serious problem. Do you want to raise it now?
Senator Ringuette: No, I will wait for the minister tomorrow.
Senator Tkachuk: I have a supplementary question. I have questions for the minister on policy but to prepare for it, I thought I would ask for further information. The minister was trying to determine the cost.
I think it was you, Ms. Lawand, who said it was two cents per hundred dollars earned by the contributor.
Suzan Kalinowski, Chief of Income Security, Department of Finance: Contributions are paid up to around $42,100.
Senator Tkachuk: Let us say $35,000, because there is a deduction on that. Would it turn out to be seven dollars a person?
Ms. Kalinowski: It depends on their earnings.
Senator Tkachuk: The contributor pays on $35,000 worth of contributory earnings. The deductions have been subtracted and there is $35,000 left. What would that contributor pay? Would it be $70?
Ms. Kalinowski: Yes, annually.
Senator Tkachuk: That is all I wanted to know.
Senator Massicotte: I was not finished. Can I ask a supplementary question?
[Translation]
That is my concern. I worry that contributions by new government employees to the pension fund will largely exceed the benefits that they will get from the fund in later years.
Ms. Lawand: That is not true. New employees will receive less return than I do. I am 59. But they will get a real return. That was part of the study conducted by the Chief Actuary, who has the figures. We can provide you with those figures.
Senator Massicotte: If he contributes for 35 years, he pays about 9 per cent. Is that right?
Ms. Lawand: Up to the annual income.
Senator Massicotte: I thought that actuaries used a 4 per cent rate.
Ms. Lawand: That is to increase the contribution to the funds.
Senator Massicotte: You say that, if they contribute for 35 years, they will get 4 per cent. On that basis, you believe that the value of future benefits will exceed their financial contribution?
Ms. Lawand: Yes. We expect that the person will receive retirement benefits for a number of years.
Senator Massicotte: If that is the case, then I fail to understand. You do have to recognize that employees already contributing to the pension fund receive benefits that exceed their contribution, including interest. If they receive benefits exceeding their contribution, someone is losing money somewhere. When actuaries do their calculations, it all balances out to zero. For a plan to be sustainable, or solvent, assets have to exceed future liabilities. I therefore fail to understand how benefits can exceed contributions.
Ms. Lawand: The Canada Pension Plan is a partly funded plan. It is not 100 per cent stand-alone. That is why the Chief Actuary has based his projections on the current population. Today, we know that a certain number of people will survive to a certain age, and we know that with a combination of a partially funded and pay-as-you go systems, even contributors who start contributing at age 18 now will receive a real return upon retirement.
Senator Massicotte: What is the actuary's hypothesis? Will those people be contributing for 35 years?
Ms. Lawand: The contribution period runs from age 18 to age 65.
Senator Massicotte: What is the average, in number of years?
Ms. Kalinowski: Forty years.
Senator Massicotte: The maximum is equal to the benefits they will receive later?
Ms. Kalinowski: The benefit is approximately up to 25 per cent of the average salary.
Senator Massicotte: Twenty-five per cent, you say?
Ms. Kalinowski: Yes.
Senator Massicotte: I have difficulty understanding how someone who pays in 10 per cent each year for an average of 40 years, and receives 25 per cent of his average salary can be a winner. In fact, I would see him as a big loser. He pays in 10 per cent a year plus interest, for 40 years, and eventually gets 25 per cent of his salary back.
Ms. Lawand: The individual does not pay in 10 per cent, except if he is a self-employed worker.
Senator Massicotte: I am talking about the employer/employee contribution.
Ms. Lawand: The employee actually pays about 4 per cent.
Senator Massicotte: The employer pays the difference, as with all other pension funds?
Ms. Lawand: Yes.
Senator Massicotte: But I have seen calculations showing the opposite, calculations indicating that the employee is a big loser. That is typical of a number of current pension funds, with fixed benefits. They are to the advantage of employees with a great deal of seniority. That is how the balance is maintained.
Ms. Lawand: I might perhaps suggest you invite the Chief Actuary, who can explain the process to you. He is the expert in making long-term calculations for the pension plan.
[English]
Senator Moore: Senator Tkachuk, do you want to clarify that point for the record?
Senator Tkachuk: For the record, I do not think it is $70. It is $7.
Senator Moore: I think the minister said in his remarks that the Canada Pension Plan distributes $54 billion-plus per year. Is that correct?
Ms. Scotti: That includes OAS and CPP, and it includes GIS.
Senator Moore: What is the breakdown?
Ms. Scotti: According to our current projections, OAS is $24.142 billion; GIS is $6.85 billion; and CPP is $26.132 billion. You then have to factor in the costs to the Quebec Pension Plan, QPP, which are $8.354 billion.
Senator Moore: Billion?
Ms. Scotti: Yes: Then we have something called an allowance which is 517. We can circulate these cards, which are helpful.
Senator Moore: Does it indicate the number of recipients for each of those plans?
Ms. Scotti: It does, yes.
The Chairman: You have no problem with this as part of our record?
Ms. Scotti: No.
Senator Moore: Did I understand the minister to say that 4 million Canadian seniors receive one of these public pensions, per year? Is that right? Then he said the number will double over how many years? I did not hear the number of years. Do you have his speaking notes?
Ms. Scotti: I have his speaking points here so I can quote verbatim what he said.
Over 54 billion in benefit payments are provided annually to Canada's seniors and over 4 million seniors receive public pension benefits on an annual basis. Over the next 15 years, this number will double.
The Chairman: You recall that we conducted a study on exactly this issue, and we say there is a huge economic time bomb here. Unless the government addresses this problem, it will be impossible for there to be sufficient funding in the federal government to provide for anything other than these pensions.
Senator Moore: This question comes out of Senator Massicotte's questions.
Will we have sufficient funds in 15 years, and leading up to it and beyond? What do the actuarials say?
Ms. Scotti: I will let my colleague in the finance department answer this question because it relates to the reforms that were made in the 1990s to the Canada Pension Plan, in particular the creative —
Senator Moore: I remember that legislation came before the Standing Senate Committee on Legal and Constitutional Affairs.
Ms. Scotti: The CPP investment board was created with a view to forestalling any of these grave consequences you allude to.
Senator Moore: The question is: are we looking at the situation accurately?
Ms. Kalinowski, you are with the Department of Finance? What do you do there? Are you an actuary?
Ms. Kalinowski: No, I am an economist.
Senator Moore: What is your title?
Ms. Kalinowski: Chief of income security. We prepare the input to the CPP, triennial reviews by federal-provincial finance ministers. I guess the actuary does actuarial reports on a three-year cycle for the Canada Pension Plan and for the Old Age Security plan. Those actuarial projections take into account the aging of the population.
In the case of the CPP actuarial reports, that particular report is reviewed by an independent panel of three actuaries that look at the assumptions the chief actuary makes to determine whether they are reasonable assumptions, too pessimistic or too optimistic.
The most recent report the chief actuary produced was reviewed by the panel, and they found the assumptions he made on demographics and economics, et cetera, were broadly within the reasonable range and his methodologies were appropriate, given actuarial standards of the day.
He also provides in those actuarial reports some shock experiments where he alters the assumptions and sees what implications they could have on the contribution, like a better or worse case scenario.
Senator Moore: He was doing his review, and with the assumptions and the fact that we will have an estimated 8 million seniors per year receiving public pensions within 15 years, are his numbers consistent? Do they take into consideration those increased recipients? Where will that leave us in the national treasury? Will we be okay?
Ms. Kalinowski: The funds that are used to pay CPP benefits do not come from the treasury. They are not financed from general revenues. They come from contributions and earnings on the plan assets. There he projects that the 9.9 contribution rate is sufficient to sustain the plan for at least 75 years. They have a model going beyond 75 years, but he reports results over a 75 year period. If you look at the report, a contribution slightly lower than 9.9 could sustain the plan.
Senator Moore: What does 9.9 mean?
Ms. Kalinowski: Per cent of contributory earnings.
Senator Moore: Per contributor.
Ms. Kalinowski: An actuarial report is produced on the OAS. It includes projections on demographics, the change in the population pyramid and the fact that we have fewer younger people and more people over 65. He does not include sustainability. He projects the increase in costs of the plan as a percentage of GDP. I do not have that report in front of me but I believe that when we hit the peak aging of the population, which I think is at 2020, OAS and GIS costs will rise by about one percentage point of GDP.
Senator Moore: Perhaps the chairman can have that report for our information.
The Chairman: It would be useful if you could supply it to us before tomorrow morning.
Senator Massicotte: I have a supplementary question. I know it is one percentage point of GDP, but what does that percentage represent annually in contributions?
Ms. Kalinowski: OAS is financed from general revenues.
Senator Massicotte: What is the dollar amount, for tomorrow morning?
You make reference to the actuary giving a solvency report, which is normal. The actuary always makes an important assumption called expected return on investments. I would appreciate receiving that information.
Ms. Kalinowski: I think it is about 4.5 per cent real, but I will provide it.
Senator Moore: I was interested in the item that Bill C-36 will eliminate entitlement of estates of a deceased person to Old Age Security income. How is an estate entitled to receive a benefit and for how long?
Marla Israel, Acting Senior Director, Seniors and Pensions Policy Secretariat, Human Resources and Social Development Canada: The estate can apply for Old Age Security in Canada within a year of a person's passing. There are circumstances where it might not have been applied for and the person would still be entitled.
On the question of the Guaranteed Income Supplement, that benefit is proposed to be discontinued because the benefit itself will be geared to the personal income circumstances of a low-income individual. Because eligibility is reassessed every year as opposed to Old Age Security where once they receive the pension they receive it for the rest of their life, some Canadians wrote in around that issue and the assessment was made in terms of reasonableness. In light of what the policy intent is, in other words, to assist people in the here and now, it seemed unreasonable to allow that benefit to continue.
Senator Moore: How much is spent annually on OAS in benefits to estates? Is it a big number? What are we eliminating here?
Ms. Israel: I would have to look at that number. I do not know.
Senator Moore: There must be some rationale for eliminating this benefit. Is it large or is it a nominal housekeeping sum? I would like to know the amount.
Ms. Israel: I would have to speak to my operational experience. I do not believe it is a large number. Not many estates apply retroactively for GIS benefits, but before I proclaim on that, I would rather see the findings.
Senator Moore: Does removing those costs mean there will be higher benefit payments for OAS and GIS recipients? Do those funds go into the pool to enhance benefits? What happens? If a billion dollars is saved by eliminating this benefit, what happens to those funds?
Ms. Israel: It is retained in general tax revenues. In other words, the line item that is projected with respect to the cost of the Old Age Security program would diminish, but because the program is a statutory one we pay it as we go along.
Senator Moore: Is this money not part of the CPP fund?
Ms. Israel: No, it is not.
Senator Moore: This is out of the treasury, so I was partially right.
Ms. Israel: Yes.
Senator Moore: Will you let us know what the amount is? There must be a rationale for that change.
Ms. Israel: My colleague says it is a few dozen per year in terms of estates.
Senator Moore: Therefore, it is not a large sum of money.
Ms. Israel: An estimate of the ``savings'' would be around $200,000, on average.
The Chairman: Before I turn to Senator Ringuette, what percentage of the annual revenue that is expended for the plans that we are talking about is contributed, and what percentage comes out of general revenues? I believe Senator Moore asked the question but I did not hear the answer. What is the drain on the federal treasury? We are trying to understand what the upward pressure would be.
Ms. Scotti: All of OAS, GIS and the Allowance are funded out of general revenues, the Consolidated Revenue Fund. All CPP is funded through contributions.
The Chairman: Break down the numbers for us again. What comes out of general revenues?
Ms. Scotti: For the OAS it is $24,142,000,000. For GIS it is $6,850,000,000.
The Chairman: Roughly $31 billion comes out of general revenues.
Ms. Scotti: That is right. The rest is about $26 billion for CPP and $8 billion for QPP.
Senator Ringuette: I need a lot of information because I absolutely do not agree with many issues in this bill. One of the first issues is the new requirement to have been a contributor to CPP for 25 years to be able to apply for disability benefits. That is the way it is proposed.
Ms. Lawand: Perhaps I could explain. There is a contributory rule in the current legislation. There always has been a contributory rule for CPP Disability Benefits, from the inception of the CPP.
The policy objective is to tie eligibility to recent labour force attachment. The current rule is that first they must meet a test of having contributions in four of the last six years before they become eligible to demonstrate that they have a disability. That is for everyone.
The proposal now is to ease that rule for long-term contributors, for people who have been in the workforce and paid into CPP for a long period of time, 25 years. If this bill passes and it receives the provincial Order-in-Council and comes into effect, a CPP contributor with 25 years will need only three out of four years; so the contributory rule will be eased for those individuals who can then demonstrate that they have a disability that prevents them from working regularly. In a sense, the contributory rule is eased. It is not more difficult. The proposal makes it easier.
Senator Ringuette: Where did you get the number of 25 years?
Ms. Lawand: We did some analytical work, worked with the Chief Actuary, and looked at a number of possible options. Cost implications for easing the contributory rules needed to be taken into account. There was a certain unfairness. A number of individuals who had tried to apply for disability benefits, who were demonstrably disabled and who had worked for many years could not meet the test of four out of the last six years. The number was a combination of what might be fair to those people who had a long attachment to work and being fiscally responsible in terms of not putting the sustainability of the CPP for the future at risk. It was a combination of a number of possible options. This option, for the Finance Department and the provinces, seemed to be the best and most reasonable option.
Senator Ringuette: Is it possible for the actuary to table that comparison data? If you table actuarial information, it should be included.
Ms. Lawand: We would have to discuss this matter with the provinces in terms of releasing that information but perhaps we could look into it and respond to the committee later.
Senator Ringuette: You will discuss it with the provinces?
Ms. Lawand: Yes: The federal, provincial and territorial governments form the governance structure for the Canada Pension Plan. Any changes to the CPP must be approved in principle initially by the provinces and territories and then ratified by a certain proportion of provinces and territories representing a certain proportion of the population. That is how the CPP works.
Senator Ringuette: I understand. The 25-year figure is subjective because one could work for 20 years and average 70 to 90 hours per week, thereby making major contributions to the plan but be unable to benefit from this reduction. I have difficulty with that. I agree with reducing the norm but I do not know if the 25-year standard is fair to Canadian workers who have paid into the system.
My other question concerns the four-year limit on application for credit splitting for couples who separate. My experience indicates that most of the time when people separate they reach the age of 60 to 65 and think that they are entitled to half the ex-spouse's pension. The four-year time frame is gone because of the current age of the population and the fact that many women were not in the workforce while their spouses were working.
The four-year time limit to apply for CPP splitting is discriminatory against women, but perhaps I do not understand. If that is the case, please clarify.
Ms. Scotti: I do not think you are reading it correctly, senator, with all due respect. The current provision provides for a four-year time limit during which former common-law partners can apply for a credit split. We are waiving that requirement if both parties agree to waive it. It is fair and is neither regressive nor discriminatory. It helps partners who come to an agreement to waive this requirement. It is not a new requirement.
Senator Ringuette: In reality, we are looking at the same amount of money from the program. The payout would be split between two persons instead of going to one person only, thereby not costing the program extra. Why do we have the four-year limit? The reality is that sometimes separations of married couples and common-law partners are not friendly. Therefore, I do not understand the requirement that both partners must agree to waive. Honestly, this limit is discriminatory against women. I do not see why we would have a four-year limit. It does not cost the government anything extra but creates financial uneasiness for one former partner. The four-year limit should be removed from the bill. It does not cost the government anything so it is not a question of cost. Rather, it is a question of fairness and equity.
Ms. Scotti: It is an administrative requirement.
The Chairman: Senator Ringuette raises an important point. This committee has always been concerned about notice and equity. In studying consumer issues, we always ensure that people know and understand their rights. Senator Ringuette raised an important point of notice and understanding. A couple who has been income splitting may separate and continue income splitting for one to three years. Do they receive a notice each year to say that they have another two or three years to go so that people who suddenly have a dramatic change in their splitting processes are treated fairly with adequate notice? This question is about equity and Senator Ringuette has put her finger on an important issue.
Ms. Scotti: This provision is not income splitting, senator. It is credit splitting between former common-law partners.
The Chairman: Yes, I meant to say credit splitting. Senator Ringuette raises a fundamental question. We assume that people look at their notices, yet we know that today, we cannot even fill out our income tax returns without an expert. Few people are prepared to do their income tax returns without an outside expert. There are many notices. How can we be satisfied that a former common-law partner has adequate notice that their status will change, which might affect them dramatically? Senator Ringuette, I do not want to put words in your mouth but I assume that is the issue you have raised. Is that correct or is there more?
Senator Ringuette: Yes, and there is more to my point. This program is in place to assist people financially when they retire or become disabled. My view is that the four-year limit on application for credit splitting is discriminatory, and more so against females. Ms. Scotti, you indicated that it is an administrative policy.
Ms. Scotti: That is right.
Senator Ringuette: It is not now the law?
Ms. Scotti: It is the law now. The current regime provides for a four-year notification period. We are not changing that. We are saying that in the cases where two partners come to a mutual agreement, the four-year period is waived. I have difficulty understanding the concern about discrimination, senator. I do not know the history of the current provision was stated at four years but we could obtain that information for the committee.
Senator Ringuette: Could you provide the rationale for this provision?
Ms. Lawand: The issue is the differentiation between married people whose marriages end. Do not forget that the CPP has been through an evolution. Changes have been made to some of the rules over time. There was never credit splitting before 1987, I believe. Credit splitting was introduced as a measure to allow couples in relationships to share the fruits of their contributions.
This was a huge amelioration for women. The fact that there is credit splitting in the CPP is hugely beneficial, especially for women.
Perhaps in the evolution of how these legislative provisions have been brought in there has been a differentiation between common-law relationships. You have to understand, it is difficult to document a common-law relationship from beginning to end. In a marriage, certain legal documents are available, et cetera.
I think the sense was that it was fair, on the dissolution of a common-law relationship, to have a time period in which a credit split would have to be exercised. There is no limit for married couples.
Ms. Israel: That was before the rules changed in 1987.
Ms. Lawand: Yes, it was before the rules changed in 1987, but now, since 1987, there is no limit on marriage dissolution. This amendment tries to bring in flexibility for common-law couples where they can agree that the time bar would not be at play. The issue of eliminating the time bar would be something that would need to go back for discussion with the provinces, because that elimination would be a major change to the existing legislation. With respect, I do not think we could propose to remove the four-year time bar for common-law couples altogether without having a discussion with the provinces.
Senator Ringuette: The bottom line is that we are not looking at additional payments. This issue is revenue-neutral. There might be a slight administrative cost, but it would be low.
The Chairman: I notice some witnesses are shaking their heads.
Ms. Scotti: We do not know because we have not done an analysis of what the costs would be of waiving this requirement. I think the point that Ms. Lawand makes is that any change to these provisions would need to be discussed with the provinces and considered in the context of a triennial review process. The federal government cannot amend the CPP unilaterally, and we would need an actuarial assessment of the cost of making that change and then, have the provinces agree with us to make it.
The Chairman: Senators, we are way over our time limit. We must attend to other business in the Senate. I have good news for all senators. The minister has agreed that he will reappear tomorrow at 11 a.m. Therefore, we will have him for half an hour, which will give him more than the full time that he originally allotted. We will allow Senator Cordy and Senator Ringuette to commence the questioning at that time, because they have some serious questions.
Ms. Scotti, Ms. Israel, and the other colleagues, thank you very much. We hope to see you bright and early tomorrow morning at 11 a.m. You can see that the committee here is interested in the subtext of this legislation, and we thank you for your assistance. You have given us a lot to ponder overnight.
The committee adjourned.