Six Pillars of Social Policy: The State of Pensions and Health Care in Canada

William B.P. Robson, a co-author with David Slater of a series of papers on pension issues, has written an ambitious survey of the state of Canadian economic policy in the areas of pensions and health care. He argues that it is appropriate to tackle both issues in the same paper because they are both major spending programs strongly related to the life cycle of Canadians, and face challenges arising from the aging of the population. Robson notes that the pension debate uses the metaphor of three pillars to describe a comprehensive pension system: a safety net to guard against destitution in old age; a mandatory employment-related system to provide basic replacement income; and a voluntary system supported by provisions that reduce the double-taxation of saving. The main elements of public policy related to pensions in Canada cover these pillars. He recognizes that all three of the pillars cannot be directly applied to health care, but he argues that the three-pillar metaphor is still a fruitful perspective because it facilitates constructive responses to the pressures confronting Canada’s health system and illuminates interactions between the pension and health systems. Hence his title “six pillars of social policy”. Based on his examination of Canada’s pension and health-care systems, Robson makes a number of recommendations. First, he advocates more prefunding in both the pension and health areas to cover the future cost of the aging baby-boom cohort. Second, he recommends a gradual increase in the normal age of eligibility for pension benefits. Third, he recommends the creation of a second pillar, a mandatory contribution scheme in the health area as a way to avoid the development of a means-tested system that would exacerbate the disincentives to work and save. Fourth, he puts forward the idea of a new type of saving vehicle that provides tax-relief on distributions rather than on contributions so that Canadians can avoid the high marginal effective tax rates associated with means-tested programs.Health, Health Care, Health-care, Healthcare, Canada, Pensions, CPP, Retirement, Mandatory Contribution, Aging, Ageing

Tax Policy and Tax Research in Canada

In a survey of tax reform in recent years, Richard Bird and Michael Smart explore the relationship between tax policy and tax research. They conclude that there have been important examples of apparent influences of research on policy. For instance, they are encouraged that the downward pressure on personal and corporate taxes has certainly been supported, if not initiated, by the increasing evidence of distortions caused by high marginal tax rates. In their view, the adoption of the GST can be explained by the acceptance of the federal government of the economic argument that Canada had to switch to a value-added tax to reduce economic distortions. On the other hand, they are disappointed that the equally convincing economic studies of the damage done by poorly-designed excise, property and payroll taxes do not seem to have had any effect. Consequently, they believe that political economy factors were probably the more dominant explanation of the tax reforms than the simple acceptance of advice from economists. Their conclusion is that if economists want to have a greater influence on policy, they need to pay more attention to the issues that motivate policymakers, including, most notably, distributional issues, and they need to write in a way, and in a forum, that will most likely come to the notice of the policy-makers.Canada, Taxation, Income Tax, Value-Added Tax, Value Added Tax, VAT

Has Quebec’s Standard of Living Been Catching Up?

Quebec’s relative growth performance with Ontario has always been an issue of concern for economic historians. In his paper Pierre Fortin discusses trends in Quebec’s real domestic income relative to that in Ontario over the last half-century. He finds that per capita real domestic income in Quebec, as a percentage of that in Ontario, fell from 78 per cent in 1926 to 74 per cent at the end of the 1950s, with a particularly steep decline during World War II. After WWII, it then started an upward climb, reaching 86 per cent in 1999, and exhibited a particularly strong performance in the 1975–85 period. Fortin sees the WWII slump related to the proportionally smaller number of men in Quebec enrolled in the armed forces, which reduced the share of overall military pay going to Quebec. He attributes what he calls the big bubble of the 1975–85 period to the strong cyclical expansion associated with a large number of major projects accompanied by a wage explosion. The key development Fortin seeks to explain is the 12 percentage point increase in Quebec’s per capita real domestic income from 74 per cent of that in Ontario in 1960 to 86 per cent in 1999. He decomposes this change into three sources: productivity, employment and the demographic structure, and finds that faster growth in output per worker in Quebec was the most important factor, accounting for 55 per cent of the decline in the gap. In 1999, output per worker in Quebec was 93 per cent of that in Ontario, up from 83 per cent in 1954. Faster growth in the working age population accounted for 35 per cent of the decline in the income gap, and more rapid rate of increase in the employment rate for 10 per cent. Fortin points out that the massive investment Quebec has made in education has greatly reduced that gap in average years of schooling between persons in Quebec and Ontario. Indeed, in 1991 the average 25-year-old man had received more years of schooling in Quebec than in Ontario. This development bodes well for future income growth. Equally, Quebec has also done well in investment in infrastructure and equipment and in research and development. Fortin explains the continued income gap with Ontario by the long gestation period required before the education revolution filters up to all age groups.Canada, Quebec, Ontario, Living Standards, Income, Real Income, Growth, Income Growth, Relative Income, Productivity, World War 2, World War II, WWII, Demographic Structure, Demography, Employment Rate

Taxes, Efficiency and Economic Growth

In the third paper on taxation, Jack M. Mintz and Thomas A. Wilson consider the best way to allocate the “fiscal dividend”. This is the amount available to the government that can be used for tax cuts or expenditure increases within the framework of a balanced budget. In their view, although the current growth recession will reduce the potential surplus somewhat, the medium-term outlook is still for increasing surpluses. Concerned about lagging economic growth and emphasizing the importance of efficiency and productivity growth, they argue that priority should be given to debt reduction and tax cuts designed to stimulate investment and potential growth. Mintz and Wilson make the case that a large part of the remaining fiscal dividend should be allocated towards reducing the relatively large personal income tax burden faced by many Canadian families and individuals. But they also stress that it is important to steadily reduce payroll and business taxes as well. This case is supported by extensive international comparisons of taxes in Canada with other countries that show that the burden of taxation is higher in Canada than in many other industrialized countries. It is also bolstered by the results of simulations, using the FOCUS macroeconometric model, of a fiscal package containing significant debt reduction, modest spending increases and cuts in personal, business and payroll taxes. These simulations show such a fiscal package should have favourable supply-side effects on output, employment and productivity over the medium term. In addition, since their analysis reveals that there are still important issues of tax structure that need to be addressed, they recommend that the government establish a task force to review personal income taxes and to consider the need for additional tax cuts. Finally, Mintz and Wilson also remind us that while planned debt reduction is an important component of a growth-oriented fiscal policy, in the short run the size of the surplus should be allowed to vary with the level of economic activity. Otherwise fiscal policy will exacerbate the slowdown that is currently underway.FOCUS, Taxation, Simulation, Forecast, Efficiency, Growth, Debt Reduction

Poverty Among Senior Citizens: A Canadian Success Story

Lars Osberg makes the case in his paper that the major success story of Canadian social policy in the twentieth century has in fact been the reduction of poverty among senior citizens. According to Osberg, the poverty rate, defined with the poverty line measured as one-half median equivalent income after taxes and transfers, for households headed by a person 65 or over fell from 28.4 per cent in 1973 to 5.4 per cent in 1997, while the poverty gap or income shortfall below the poverty line fell from 26.2 per cent to 15.8 per cent over the same period. In contrast, the elderly poverty rate and gap before tax and transfer income are much higher and show no downward trend. Osberg attributes the difference between the before and after transfers and taxes poverty rate and gap to the introduction of the Old Age Security in 1952 and Guaranteed Income Supplement in 1968 and the reduction in poverty after 1973 to the maturing of the Canada/Quebec Pension Plan regimes established in 1966. Osberg notes that income trends capture only part of the improvement in well-being enjoyed by seniors over the past several decades. Many of the current elderly population received significant capital gains from a large run up in housing prices in the 1970s and 1980s. In addition, the elderly have not been hit by the labour market insecurity that has affected the non-elderly, particularly youth, in the 1980s and 1990s. They have also greatly benefited from the introduction of universal medicare. Osberg also finds that relative to the United States, Sweden and the United Kingdom, Canada has done the best job in boosting the income levels of seniors above the poverty line. In his view, Canada has done a remarkable job in ensuring that senior citizens receive an income sufficient to prevent poverty.Poverty, Elderly Poverty, Canada, Retirement, Income, Low Income, Low-income, Wealth, Capital Gains

Where Are They Now? Migration Patterns for Graduates of the University of British Columbia

In an empirical analysis of the migration patterns of University of British Columbia (UBC) graduates, John F. and David F. Helliwell show in their paper how much the situation has changed between the 1960s and the 1990s. Canadian research and graduate education have expanded dramatically, leading many more undergraduates to stay in Canada for their graduate work. According to the Helliwells, this is perhaps the single most important reason why the south-bound flows of bachelor’s graduates has fallen so much from the early 1960s to the 1990s. Consequently, they argue that the resurgence of discussion of a brain drain in the 1990s has much less basis in the data, and probably represents factors specific to certain sectors, such as health spending, research and university financing, where funding support has risen much less rapidly than in the United States. It has also been fuelled to some extent by sharp increases in the numbers in temporary NAFTA visas to Canadians working in the United States, and in part to increasing gaps in salaries and tax rates in the 1990s that favoured high-income earners in the United States, relative to their Canadian counterparts. The UBC graduate data show that over the past five decades there have been continuing reductions in the shares of UBC graduates living in the United States. For all of the large-scale bachelor’s programs the proportion of graduates living in the United States has continued to fall during the 1990s. For the graduate programs, the proportion living outside Canada is and has always been high, reflecting a very international mix of both the student intake and the available career positions. For all degrees, the proportion of 1990s UBC graduates living in the rest of the world is higher than that in the United States. For graduate degrees, the proportion of the graduates subsequently living and working in Canada, and especially in British Columbia, is much higher than the share of Canadian citizens among the incoming students. With respect to the international distribution of those with the highest level of educational aptitude and attainments, as represented by the master’s and PhD graduates of UBC, Canada and British Columbia stand in the middle ground between the United States and the rest of the world. Comparing the citizenship of UBC’s graduate intake with the country of residence of the graduates, the United States is the largest proportionate net recipient (7 per cent U.S. citizen intake, 14 per cent U.S.-resident 1990s PhDs), Canada is the largest recipient in terms of numbers of PhDs (46 per cent Canadian citizen intake, 70 per cent Canadian-resident 1990s PhDs), with students from 100 other countries providing a net flow into Canada and the United States.Canada, United States, Migration, Brain Drain, Brain-drain, Braindrain, Graduates, Temporary Visa, Visas

Education and Skills: An Assessment of Recent Canadian Experience

The skills issue is currently at or near the top of the federal government’s policy agenda, given its importance for harnessing the benefits of technological advances. Policy initiatives in the area should be premised on an accurate assessment of Canada’s recent experience in education and skill formation. In his paper, W. Craig Riddell attempts such an assessment. He provides a careful examination of trends in education expenditures and outcomes in Canada compared to other countries, looks at trends in the incidence of education, and analyzes the link between education and labour market success. Riddell’s overall assessment of Canada’s record in education and skills is quite positive. He finds that relative to other OECD countries, Canada ranks near the top in terms of expenditure per student and share of GDP devoted to elementary, secondary and post-secondary education; that Canada’s population is well educated by international standards, with the highest proportion of the population with non-university, post-secondary education in the OECD; and that the country’s literacy skills, particularly for the young and well educated, are above average among the G7 countries that participated in the International Adult Literacy Survey. One possible weakness he identifies is the relatively low student achievement in mathematics among the G7 countries that participated in the standardized tests. This suggests Canada may not be obtaining good “value for money” from its relatively high expenditure on education. Riddell notes that the conventional estimates of the return to education appear downward biased so that the causal effect of education on earnings may be higher than previously believed. Evidence suggests that the marginal return to incremental investment in education exceeds the average from previous investments and that there is no evidence that investments in schooling are running into diminishing returns. Riddell concludes that investments in human capital remain an important potential source of economic growth and equality of opportunity.Education, Human Capital, Skills, Literacy, Numeracy, Canada, Post-secondary, Postsecondary, Post Secondary, Earnings, Return To Education

North American Economic Integration and Globalization

Morley Gunderson presents an overview of issues related to North American economic integration and globalization. He provides a particularly balanced perspective, a rarity in this area of highly charged, ideology-driven and emotional debate. He first notes that economic integration has both a deepening and widening dimension and enumerates the various aspects of these two dimensions in the context of North American integration, noting that in practice the different dimensions complement one another in a self-reinforcing fashion. He also points out that deeper and wider economic integration can foster internal consolidation since this integration is generally regarded as a precondition for external competitiveness. Gunderson pays particular attention to the issue of policy integration. He argues that the emerging competitive pressures on the North from low-cost, less regulated jurisdictions in the South is the most important consequence of trade liberalization and globalization, although there is still insufficient evidence of harmonization leading to the lowest common denominator. The policy-making process is now subject to the forces of competition that apply to business and labour. He argues that the laws and regulations that will be under the most pressure will be those that are the most inefficient, that is those that protect interest group rents and impose costs without commensurate benefits. Gunderson notes that integration represents a threat to distributional or equity-oriented policies that do not have positive feedback effects on efficiency even when the population considers such policies highly desirable. Raising taxes to finance these policies may not be the solution if mobile factors of production consequently flee to lower-tax jurisdictions. He documents the wide range of policy responses to the potential policy vacuum created by globalization and integration, including the NAFTA labour side agreement, the inclusion of social clauses in trade agreements, corporate codes of conduct, social labelling, and consumer boycotts, transnational efforts amongst unions, social groups and NGOs and union-to-union cooperation. But he finds that effectiveness of these responses to date is moot. Gunderson raises the issue of whether the more circumscribed role of governments and greater role of market forces will in fact benefit the most disadvantaged. He notes that so far this has not been the case, although whether this negative trend will continue is an open question. He concludes by cautioning that the long-run sustainability of integration depends on the equitable sharing of the efficiency gains arising from this process.Canada, North America, NAFTA, Integration, Border Effects, Policy Integration, Competitiveness

Cyclical Changes in Short-Run Earnings Mobility in Canada, 1982-1996

The paper by Charles M. Beach and Ross Finnie represents the first attempt to quantify short-term or cyclical changes in earnings mobility in Canada. Mobility analysis can be seen as a complement to the analysis of income distribution. For a given degree of earnings inequality, more earnings mobility corresponds to securing greater labour market opportunity. Using longitudinal income-tax-based data, the authors divide the employed population into eight age/sex groups: entry workers (20–24), younger workers (25–34), prime-age workers (35–54), and older workers (55–64) for both sexes; and divide the earnings distribution into lower, middle and upper regions or earnings intervals based on median earnings levels for the distribution as a whole, and calculate the proportion of workers in each group for all years over the 1982–96 period. They also develop transition matrices that show the probability of moving from one earnings interval to another over a one-year period. They find that there have been major cyclical changes in earnings polarization and that these changes have been concentrated in recessions, notably in the 1990–92 downturn. They also find that men in particular experienced a marked decrease in their net probability of upward mobility in the earnings distribution during recessions, as the probability of moving up fell sharply as did the probability of moving down. The results of the paper are particularly relevant for an understanding of how earnings mobility may be affected by the current economic slowdown.Earnings Mobility, Income Mobility, Mobility, Income, Earnings, Distribution, Income Distribution, Earnings Distribution, Earnings Inequality, Recession, Cyclical