14.4: Government-to-individual transfers

Many Canadians take pride in Canada's extensive 'social safety net' that aims to protect individuals from misfortune and the reduction of income in old age. Others believe it is too generous. While it is more supportive than the safety net in the US, the Canadian safety net is no more protective than the nets of the developed economies of the European Union. The extent of such support depends in large measure upon the degree to which governments are willing to impose, and individuals are willing to pay, higher or lower tax rates. The major elements of this umbrella of programs are the following.

The Canada and Quebec Pension Plans (C/QPP) are funded from the contributions of workers and their employers. Contributions form 9.9% of an individual's earnings up to the maximum pensionable earnings (MPE) figure of $57,400 in 2019. The contributions are shared equally by employer and employee. The Canada and Quebec components of the plan operate similarly, but are managed separately. The contribution rate to the QPP stands at 10.65%. Contributions to the plans from workers and their employers are largely transferred immediately to retired workers. Part of the contributions is invested in a fund. The objective of the plans is to ensure that some income is saved for retirement. Many individuals are not very good at planning – they constantly postpone the decision to save, so the state steps in and requires them to save. An individual contributing throughout a full-time working lifecycle can expect an annual pension of about $14,000 in 2019. The Plans provide a maximum payout of 25% of maximum insurable earnings. The objective is to provide a minimum level of retirement income, not an income that will see individuals live in great comfort.

The C/QPP plans have contributed greatly to the reduction of poverty among the elderly since their introduction in the mid-sixties. The aging of the baby-boom generation – that very large cohort born in the late forties through to the early sixties – means that the percentage of the population in the post-65 age group has begun to increase. To meet this changing demographic, the federal and provincial governments reshaped the plans in the late nineties in order to put them on a sound financial footing – primarily by increasing contributions, that in turn will enable the build-up of a CPP 'fund' that will support the aged in the following decades.

A number of recent studies in Canada on the retirement savings practices of Canadians have proposed that households on average are not saving a sufficient amount for their retirement; many households may thus see a notable decline in their incomes upon retirement. In response to this finding, the federal government agreed with the provinces in June 2016, to add a supplement to the CPP. The new federal provisions, which will be phased in over the period 2019-2025, envisage an increase in contributions that will ultimately lead to a maximum replacement rate of 33% of MPE as opposed to the current goal of 25%. However, full benefits will be experienced only by individuals contributing for their complete lifecycle, meaning that full implementation will take about four decades.

Details of the CPP and the 2016 enhancements are to be found at http://www.fin.gc.ca/n16/data/16-113_3-eng.asp.

Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and the Spousal Allowance (SPA) together form the second support leg for the retired. OAS is a payment made automatically to individuals once they attain the age of 65. The GIS is an additional payment made only to those on very low incomes – for example, individuals who have little income from their C/QPP or private pension plans. The SPA, which is payable to the spouse or survivor of an OAS recipient, accounts for a small part of the sums disbursed. As of 2019 the maximum annual OAS payment stood at $7,360. The federal government in 2016 reversed a plan that would have seen the eligible age for receipt of OAS move to 67.

The payments for these plans come from the general tax revenues of the federal government. Unlike the C/QPP, the benefits received are not related to the contributions that an individual makes over the working lifecycle. This program has also had a substantial impact on poverty reduction among the elderly.

Employment Insurance (EI) and Social Assistance (SA) are designed to support, respectively, the unemployed and those with no other source of income. Welfare is the common term used to describe SA. Expenditures on EI and SA are strongly cyclical. At the trough of an economic cycle the real value of expenditures on these programs greatly exceeds expenditures at the peak of the cycle. Unemployment in Canada rose above 8% in 2009, and payments to the unemployed and those on welfare reflected this dire state. The strongly cyclical pattern of the cost of these programs reflects the importance of a healthy job market: Macroeconomic conditions have a major impact on social program expenditures.

EI is funded by contributions from employees and their employers. For each dollar contributed by the employee, the employer contributes $1.4. Premiums are paid on earned income up to a maximum insurable earnings (MIE) of $53,100 in 2019. The contribution rate for employees stood at 1.62% of MIE in 2017. EI contributions and pay-outs form part of the federal government's general revenues and expenditures. There is no separate 'fund' for this program. However it is expected to operate on a break-even basis over the longer term. To reflect this, the contribution rate fluctuates with a view to maintaining a balance between payouts and revenues over a seven-year planning period.

EI is called an insurance program, but in reality it is much more than that. Certain groups systematically use the program more than others – those in seasonal jobs, those in rural areas and those in the Atlantic Provinces, for example. Accordingly, using the terminology of Chapter 7, it is not everywhere an actuarially 'fair' insurance program. Benefits payable to unemployed individuals may also depend on their family size, in addition to their work history. While most payments go in the form of 'regular' benefits to unemployed individuals, the EI program also sponsors employee retraining, family benefits that cover maternity and paternity leave, and some other specific target programs for the unemployed.

Social Assistance is provided to individuals who are in serious need of financial support – having no income and few assets. Provincial governments administer SA, although the cost of the program is partly covered by federal transfers through the Canada Social Transfer. The nineteen nineties witnessed a substantial tightening of regulations virtually across the whole of Canada. Access to SA benefits is now more difficult, and benefits have fallen in real terms since the late nineteen eighties.

Welfare dependence peaked in Canada in 1994, when 3.1 million individuals were dependent upon support. As of 2019, the total is approximately half of this, on account of more stringent access conditions, reduced benefit levels and an improved job market. Some groups in Canada believe that benefits should be higher, others believe that making welfare too generous provides young individuals with the wrong incentives in life, and may lead them to neglect schooling and skill development.

Workers Compensation supports workers injured on the job. Worker/employer contributions and general tax revenue form the sources of program revenue, and the mix varies from province-to-province. In contrast to the macro-economy-induced swings in expenditures that characterize SA and EI since the early nineties, expenditures on Worker's Compensation have remained relatively constant.

Canada Child Benefit: The major remaining pillar in Canada's social safety net is the group of payments and tax credits aimed at supporting children: The Canada Child Tax Benefit (CCTB), the Universal Child Care Benefit and the National Child Benefit Supplement were repackaged in 2016 under the title Canada Child Benefit. Child support has evolved and been enriched over the last two decades, partly with the objective of reducing poverty among households with children, and partly with a view to helping parents receiving social assistance to transition back to the labour market. As of 2016, the federal government provides an annual payment to families with children. For each child under the age of 6 the payment is $6,639 and for each child aged 6-17 the payment is $5,602. Since these payment are primarily intended for households with low and middle incomes, the amounts are progressively clawed back once the household income reaches a threshold of $30,000.

Application Box 14.2 Government debts and deficits

Canada's expenditure and tax policies in the nineteen seventies and eighties led to the accumulation of large government debts, as a result of running fiscal deficits. By the mid-nineties the combined federal and provincial debt reached 100% of GDP, with the federal debt accounting for the larger share. This ratio was perilously high: Interest payments absorbed a large fraction of annual government revenues, which in turn limited the ability of the government to embark on new programs or enrich existing ones. Canada's debt rating on international financial markets declined.

In 1995, Finance Minister Paul Martin addressed this problem, and over the following years program spending was pared back. Ultimately, the economy expanded and by the end of the decade the annual deficits at the federal level were eliminated.

As of 2007 the ratio of combined federal and provincial debts stood at just over 60% of GDP. However, the Great Recession of 2008 and following years saw all levels of government experience deficits, with the result that this ratio of combined debt to GDP rose again. Growth in recent years has seen that ratio fall. As of 2018-19, federal interest payments on its debt account for about 7% of its revenues (this figure stood at 28% in the early nineties). At the time of writing, interest rates are low in developed economies and so the interest costs of government debt are low. Low borrowing costs are a reason why some people favor large government spending in the form of infrastructure projects. Those who are fiscally more conservative fear rising rates in the future. The recessionary impacts of the coronavirus pandemic of 2020 will add greatly to accumulated debt, particularly at the federal level.

Debts can be measured in more than a single manner. One measure of debt is the value of all federal government bonds and financial liabilities outstanding. As of 2019-20 this value was approximately $700b. In addition to this, the federal government has outstanding liabilities to the pensions of its retired employees, and not all of these liabilities have been covered by the contributions of those employees into their pension plans. The federal government also owns assets, both financial and physical - such as office buildings. Hence these assets offset the financial liabilities. To assess the total debt picture of the Canadian economy we need to add provincial and local government debts to the federal debts, and then consider the annual interest costs of this total. It turns out that the interest costs are just above 2% of GDP.

Source: Government of Canada, Fiscal Reference Tables: https://www.fin.gc.ca/frt-trf/2019/frt-trf-19-eng.asp