by Paul Martin
Sheila Copps decided she had no choice but to keep her election promise by stepping down and fighting a by-election (which she subsequently easily won). Jean Chrétien disagreed with her decision, as he had done with mine, and tried to dissuade her, but to her credit she was determined and stuck to her guns. I do not remember him ever talking directly to me about the GST apology, but he communicated his displeasure publicly in many ways. In the House, he never associated himself with the apology. He was quoted in the media as saying that I had “created a problem” for the government, and he was said to believe that I had gone “too far” in making the apology. Terrie was stunned because she believed that despite a tactical difference of opinion between the prime minister and me, the decision to apologize had been worked out with the PMO in minute detail. Jean Chrétien continued to refuse to make any apology himself for many months, even when an angry voter in a CBC Town Hall confronted him just before Christmas. His response inflamed the issue once again, and he was forced into a series of increasingly more straightforward expressions of regret. He thought I made a mistake apologizing. I thought he missed an opportunity to staunch the bleeding once and for all.
As we began to prepare for the 1996 budget, it became clear that the issue of the government’s ability to fund its Old Age Security requirements when the baby boomers begin to retire in 2011 was no longer the concern it had been for me a year earlier. Actually I realized this when reflecting much later on something Scott Clark had said just before putting the 1995 budget to bed: “You haven’t just hit your targets here, you’ve eliminated the deficit.” He did not mean, of course, that we would do it in one budget, but that it would be accomplished within a few years. That brought home to me the reality of what we had done. This meant that by 2011 the OAS would no longer be in jeopardy, and the drastic reforms I had envisaged were no longer required, proving once again the healing powers of a virtuous circle.
This did not mean, however, that Canada’s pension problems were behind us. Far from it. We were facing the complex task of reforming the Canada Pension Plan (CPP).
When we took office in 1993, we actually had two financial time bombs dropped in our laps: the deficit and the CPP. The big difference between them was not their scale — the unfunded liability of the pension plan was comparable to the national debt. The difference lay in the fact there was virtually no public pressure to face up to the problems of the CPP. Remarkably, many young people had begun to assume that they never would get a government pension, but there were no headlines about a “pension crisis,” and even the markets seemed to take little notice. This always amazed me. In a sense, it worked to our advantage. The CPP is jointly run by Ottawa and the provinces. Because I was able to work on the problem with the provincial ministers outside of the full glare of public attention, we were able to focus, to a remarkable degree, on fixing the plan for future generations instead of worrying about how it would all look at the next election.
In 1995, the actuary’s report revealed that to maintain the soundness of the CPP, contributions would have to rise from the rate at the time of 5.8 per cent to reach more than 14 per cent of employee income. Even though that amount would have been split between the employee and employer, it was nonetheless staggering. What had happened is that the flaw in the architecture of the CPP, which had been there from the beginning, was finally being fully revealed. When the plan began in the 1960s, there were eight workers for every one of pensionable age. But then, as Canada’s baby boomers grew older and the demographic bulge moved upward, that ratio began to change — to five to one when we took office and barrelling toward three to one in the early decades of the twenty-first century. The CPP was never a savings plan; there was never some big pool of money out there to pay the pensions, as you would have with most company pension plans. The CPP was based on the idea that today’s pensioners would have their stipends paid out of the contributions of today’s workers. The problem was, as the ratio of pensioners to workers shifted, the ability of the workers to sustain the burden was increasingly compromised. This also raised an issue of fairness between generations. Workers paying big CPP premiums in the late twentieth and early twenty-first centuries might find that by the time they were ready to retire, the system was collapsing and there was little or no pension for them.
That was looking at it from the point of view of the ordinary citizen. But from the point of view of the federal government, the looming crisis in the CPP posed an additional challenge. At some point, the markets would clue into the fact that this was a fiscal disaster in the making. Canada’s baby boomers were going to begin retiring in 2011, which was not that far off. If we reached 2011 with large numbers of Canadians potentially falling into financial distress because the CPP had failed them, I knew that the federal government would be on the hook through Old Age Security and the Guaranteed Income Supplement, which are funded by Ottawa alone. Where would the money come from? The possibility that the demand for pensions would go straight to the general revenues of the federal government was real. Even the perception that they might was going to make Canada seem even more suspect financially than it already was, with all that entailed. In that sense, getting the CPP back on track was not just about pensions, it was about maintaining the solvency of the country.
The reform of the CPP was unusually complex because the CPP is jointly administered with the provinces, as I mentioned earlier. Changes to the way it is managed need the approval not only of the federal government but also of two-thirds of the provinces containing two-thirds of the Canadian population. That includes Quebec, even though Quebec has its own pension plan, in part because it generally follows the same principles in running its plan. Of course, all the provinces saw the problem with sustaining the pension system in the long term, but they also came at it from very different ideological viewpoints. Resolving the problem would need either an increase in payments or a decrease in benefits, or a combination of the two. While Mike Harris’s Ontario Tories could be counted on to resist increases in premiums — which look from some perspectives, but are not, like taxes — the NDP governments out West could be expected to argue just as strongly for maintaining benefits.
Despite their ideological differences, the provincial finance ministers showed their determination to solve the system’s problems. The constructive spirit shown by Ontario’s Ernie Eves, Alberta’s Jim Dinning, Manitoba’s Eric Stefanson, New Brunswick’s Edmond Blanchard, Newfoundland’s Paul Dicks and Saskatchewan’s Janice MacKinnon was typical. Dinning’s leadership was crucial, because Alberta had been concerned about the CPP for years and even toyed with the idea of creating its own separate pension fund along the lines of Quebec’s. Even Quebec’s finance minister, Bernard Landry, was prepared to play along. He was the most determined separatist in the Bouchard government and it would not have astonished us had he been pushing another agenda. However, Landry saw that the Quebec Pension Plan (QPP) itself needed reform to be saved, and our process gave his government cover for making some difficult decisions.
By this time, Barry Campbell, a highly respected international lawyer and businessman, had become my parliamentary secretary. Thus I asked David Walker to lead a process of consultation that took him across the country, into small communities as well as large cities. He spoke to pensioners, and actuaries and investment advisers. An important element in the process was that wherever he went, a representative of the province he was in would accompany him. He included the local MPs as well. And of course, senior officials from the Department of Finance were also there every step of the way.
In the end, we reached a consensus that the increase in premiums should be held to 9.9 per cent, and we were able to protect most of the CPP’s benefits. At Finance, our approach to pension reform, which required in-depth coordination with provincial officals, was skilfully developed and led by Susan Peterson, the assistant deputy minister responsible for relations with the provinces, and Bob Hamilton. Munir Sheikh devised the mechanism to ramp up CPP pre
miums relatively quickly to create a surplus in the fund. The thesis was that the surplus would be invested over time and would generate a second stream of revenue for paying pensions and thus eliminate the need for ever-rising premiums. We believed that working people would accept an increase in premiums if it was coupled with a fundamental reform that would guarantee their future pensions and not just patch up a cranky, leaky old system for a few years. Of course, sound as this idea is in principle, the creation of a cash fund also raised a whole other set of questions, such as how large it should become, how its assets should be invested, and who would manage them. It would defeat the whole enterprise if we just ended up with a large pool of cash that politicians invested according to their inclinations and ambitions (something that was alleged to have happened with Jacques Parizeau and the QPP).
We needed the fund to be managed exclusively in the interests of the pensioners. To that end, part of our plan was to set up the Canada Pension Plan Investment Board, responsible for managing the money in the CPP fund, completely independently from government influence. We gave the board a clear mandate — to maximize the fund’s return on investment without taking an undue risk of loss. There were to be no other goals or objectives, no political interference of any kind. The mandate could not have been simpler: do the best job for CPP members.
Years later, the wisdom of this approach has become even more apparent as many other countries have set up “sovereign wealth funds” with their national assets, which all too often are accused of making investments with political motivations that will cost them financially in the long term.
A word about sovereign wealth funds. They have become a huge issue in the last decade, which has seen many new state-owned or state-controlled funds roaming the world searching out investment opportunities. Already we are seeing strong reactions to these entities and talk of legislation to control their activities.
I believe that governments around the world — when they act — should establish a very clear line of demarcation between funds that are primarily agents of government policy and funds that are pure return seekers. I expect that governments will begin to put restrictions on those that fall into the first category, but I hope they will largely exempt funds in the second group. It will be essential for the Canada Pension Plan to be seen as independent of government control. And the best way to be seen as independent is to be genuinely independent.
There is, however, one area linked to CPP reform where I feel we should have been able to do more. Disability costs had increased sharply in the late 1980s and early 1990s, though we had begun to bring them under control by the time CPP reform was on the table. Some of the provinces felt that disability benefits should be withdrawn completely from the CPP, as one way of reducing the costs of the pension plan. My position was that we were coming at this from the wrong angle. It is wrong, I argued, for a country as rich as Canada not to have a comprehensive system of support for the disabled.
I grew up in the era when polio’s ravages were a part of everyday life. For my generation of children there were reminders of the toll the disease had taken: boys and girls in class in leg braces or with withered arms. Later, I had some experience of the difficulties the families of the disabled face; Sheila’s nephew Douglas is confined to a wheelchair. Then, when I was finance minister, Terrie would often bring her brother Stephen, who is handicapped, with her to work when he was visiting town, and he became an important part of everybody’s life.
We needed back then — and need now — a joint federal-provincial program that ensures as much as possible a level playing field across the country for the disabled, providing enhanced benefits and improved services to everyone who needs them. Only if that were implemented could I have supported re-examining the relationship between disability benefits and the CPP, and I felt that the national disability program had to be in place first. Unfortunately time did not allow for this to happen, and it is one of the greatest regrets of my life that we were not able to make more progress toward a truly national disability program built by both orders of government. It’s time to revive that idea and do the job properly.
In retrospect, it may seem strange that at a time when the federal government was cutting transfers to the provinces and federal-provincial relations, as a result, were severely strained, we were able to work together so constructively on the CPP. We were able to do so for two reasons. First, because the CPP is a joint federal-provincial program, and neither the provinces nor Ottawa were in a position to blame the other if the system were to fail. It was, perhaps, to paraphrase Benjamin Franklin, a case of finance ministers hanging together or hanging separately.
That being said, I believe there was an even deeper reason, one that the cynics may find difficult to accept. Quite simply, the finance ministers of that era, all wrestling with inherited deficits of one kind or another, were not prepared to transmit the consequences of the broken retirement system on to subsequent generations. In short, we were determined to do the right thing, and we did.
As I write, the last actuarial report on the CPP says it is now on a sound footing looking forward seventy-five years — the furthest out that actuaries are able to project. We had succeeded in saving the pension system, and we are one of just two G7 countries to have done so.
CHAPTER THIRTEEN
Tipping the Balance
Mitchell Sharp, a man with generations of political experience, once remarked to me that I had become the most powerful finance minister ever. Too powerful in his view. Perhaps, but if so, this was a result of the desperate fiscal situation in which we found ourselves. In any event, this picture of my influence overlooked the fact that in one crucial area of government policy in which I was deeply interested, my role in the government’s decision making was relatively limited. That was the province of Quebec.
First of all, there was the matter of party politics. In the rest of the country, the era where a single individual can dominate the organization had long since passed. As a result, with a few notable exceptions, the party outside Quebec settled into a more normal phase after the 1990 leadership race, and my supporters continued to play significant roles as riding or provincial executives, candidates, and organizers. In Quebec, it was different. There, all power flows from the Quebec lieutenant, who is named by the prime minister; and in Quebec, the bitterness over the leadership race never ended. Thus I had no involvement with the party organization in Quebec whatsoever, nor did those who had supported me. While I got along well with André Ouellet and Marcel Massé, many of the party’s leading organizers in Quebec didn’t much like me and I didn’t much like them. My friends in the party were on the outs and frankly had no interest in working their way in.
When I first became minister of finance, I was also assigned responsibility for Quebec’s regional development agency. My task there was fairly specific, however. With the help of my Quebec assistant, Benoit Labonté, who later went on to become mayor of Montreal’s Ville-Marie, I set about cleaning up the mishmash of programs that previously existed, refocusing them on small and medium-sized businesses. I also added a component of “social economy,” supporting the Regroupement économique et social du Sud-Ouest (RESO). This is a wonderful organization founded by Nancy Neamtan in Montreal, which helps lift people out of poverty through sound entrepreneurship and the development of business skills. I was very enthusiastic about this element of my job as regional development minister. However, being in charge of a spending department was clearly a conflict of interest as I set about attacking the deficit, and the prime minister eventually decided to relieve me of those responsibilities.
Party politics aside, it was not altogether surprising that I was kept at a distance from the Quebec file. Jean Chrétien was the senior minister from Quebec in every respect and had devoted a considerable portion of his career to the management of Canada’s relationship with his home province. Moreover, he and I had differed deeply in our approach to Meech Lake and to Quebec more generally.
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br /> In my view, as someone who has lived in Quebec for forty years, a commitment to Quebec and a commitment to Canada are not contradictory; indeed, they reinforce each other. Most of the French-speaking Quebecers I know are both Quebec nationalists and Canadian nationalists, and no one should be offended by that. I have always believed that the more confident the rest of Canada feels about itself and the more confident Quebec feels about itself, the more confident each will feel about their relationship.
On the one hand, I believe that if Canadians are going to compete in the world, they will need world-class post-secondary education and national social programs in health care and child care. The federal spending power that is essential to building these programs, which are under provincial jurisdiction, was confirmed in 1999 when our government signed an agreement on the social union with the provinces. On the other hand, I believe our federation is “asymmetrical” in the sense that the provinces have their distinct needs and aspirations that should be recognized. This is especially true of Quebec, with its unique challenge as a province with a majority French-speaking population in the midst of English-speaking North America.
The idea of recognizing the particular needs of individual provinces is nothing new. Pierre Trudeau himself acknowledged this when he agreed to the so-called “Cullen-Couture agreement” giving Quebec a role in selecting immigrants to the province. But asymmetry has also been recognized in other ways for other parts of the country. The Auto Pact, for example, which my father and Lester B. Pearson signed, was very much an agreement aimed at sustaining automobile manufacturing, which existed primarily in Ontario. Similarly, when I was minister of finance, at the suggestion of then National Resources Minister Anne McLellan, we enacted specific tax changes to kick-start development of the oil sands, which existed only in Alberta and now in Saskatchewan.