Economist David Colander wrote of his field of study: "When an artist looks at the world, he sees colour. When a musician looks at the world, she hears music. When an economist looks at the world, she sees a symphony of costs and benefits." It's a romantic and compelling description, though most of us probably favour humourist P.J. O'Rourke's response: "Somebody change the CD."
To the uninitiated, economics is overly complicated. An economic study, representing the pinnacle of economic research, is equally unappealing. For the most part, economic studies are dry, technical and hopelessly irrelevant.
Given such standards, the latest study by the C.D. Howe Institute is two-for-three. Dry and technical, The CPP Payroll Tax Hike: Macroeconomic Transition Costs and Alternatives is anything but a page-turner. But, alas, it may be worth some attention. After all, any study that looks at employment, pensions, and economic growth -- read, your job, your retirement and your prosperity -- is relevant.
The study analyzes the Canada Pension Plan. Established at a time when Canada's population was young and growing, the pension program was originally designed to be financed on a pay-as-you-go basis. In other words, the bill for one generation's pensions would be footed by their children. But today, Canada's population is aging. With relatively fewer taxpayers and relatively more pensioners in the coming years, the grand inter-generational scheme was headed for bankruptcy. The federal government came up with a simple solution: raise CPP premiums so today's employees and employers would shoulder a larger share of their own retirement, as well as their parents'.
The C.D. Howe study is a scathing attack on this approach. The study doesn't dispute that an unreformed CPP was headed for bankruptcy nor that a change to the financing was needed. University of Toronto economist Peter Dungan, the study's author, argues the CPP premium hike hits employers with the equivalent of a payroll tax and has all the problems associated with a tax on jobs: a drag on economic growth and job creation.
This isn't just intellectual economic pie-in-the-sky. Dungan projects with the federal government's reforms, many jobs will be lost, culminating at more than 200,000 in 2003. The nation's GDP will also be hit, to the tune of $13 billion.
The study goes one step further. Borrowing a page from Chile and Singapore, it proposes a way of saving the CPP without a payroll tax, by encouraging individual saving. Since savings are beneficial to economic performance, the plan would generate new jobs, peaking in 2003, at 181,000. Economic output would also increase. In 2003, $13 billion would be added to the GDP, a $26-billion improvement over the federal government's approach, roughly equal to the entire annual economic output of New Brunswick and Newfoundland combined.
It's a bold and timely plan. Whether you agree with the Howe Institute, we can all agree an aging population has profound implications on every aspect of our society, sustaining pensions being one example.
But what about health care? Our medicare system suffers from the same problem as the unreformed CPP. When the baby boomer generation starts thinking less about tennis and more about lawn bowling, they won't just draw pensions, they will require more health services. The average elderly Canadian runs up a health-care bill that is more than 2 1/2 times that of a thirtysomething. If resources are stretched now, what will they be like when a quarter of our population will choose Metamucil as their drink?
In Canada, public policy discussion has focused largely on the short term.
That groups like the C.D. Howe Institute have begun considering the pension question indicates a change in this mindset. But almost no thought has been given to our health-care system.
When medicare is discussed, two different opinions are expressed. The magicians believe that with just the right combination of government control and regulations, medicare will magically work. The spendthrifts argue with more government spending, every problem, from the attitude of the grumpiest hospital orderly to the lengthiest waiting list for radiation therapy, will be solved.
The magicians and the spendthrifts are persuasive and well-spoken but the ideas they champion are about as useful as rearranging deck chairs on the Titanic. To save the medicare system for the future, Canada must act now. As illustrated by the pension debate, Canada could either choose to encourage individual savings or raise taxes. Canadians, however, have spent precious little time entertaining either option.
It doesn't take a PhD in economics to see this isn't good.