Canada’s public pension system and the changes to it over the years make a fascinating case through which to explore the impact of federalism on public policy.

When the Pearson government proposed the Canada Pension Plan (CPP) in the mid-1960s, Quebec opted out and set up a nearly identical pension scheme, the Quebec Pension Plan (QPP). Successive Quebec governments used pension surpluses to feed the newly created Caisse de dépÎt et placement du Québec, an institutional asset manager that served as a key tool for provincial economic development in pursuit of the statist project of the Quiet Revolution. Since then, CPP and QPP have mostly developed in parallel, but signs of policy divergence have emerged in recent decades. The unique dynamics of federalism have shaped the evolution of the two programs as they have been adapted to deal with accelerated population aging and a decline in the proportion of Canadians covered by pension plans sponsored by employers, known as registered pension plans (RPPs).

Population aging has created sustainability challenges for CPP and QPP. Reforms enacted in the mid-1990s led to changes in both programs, notably a gradual rise in payroll contributions from 5.85 to 9.9 percent of covered wages. As Bruce Little suggested in his book Fixing the Future, the 1997 CPP reform is an example of collaboration between Ottawa and the provinces, which have veto power in this domain because the consent of seven provinces accounting for two-thirds of the population is needed for the federal government to reform the program. The Quebec government has sole constitutional jurisdiction over its pension plan but, as the mid-1990s reform suggests, preserving parallelism between QPP and CPP has been a priority for Quebec and Ottawa since the start.

In the past decade, however, differences between Quebec’s demographics and the rest of Canada’s have made a fork in the road necessary. Quebec’s population is aging more rapidly, and therefore the decline in its ratio of contributors to beneficiaries is steeper. In 2011 the province had to announce a gradual increase in QPP contribution rates of 0.9 percent, split equally between workers and employers. For the first time since the creation of CPP and QPP, the two programs have different contribution rates. In effect, Quebec workers and employers have to pay higher contributions than their counterparts in the nine other provinces because of a decision made in the mid-1960s to create QPP in the name of provincial economic development.

Simultaneously, the decline of RPP coverage and the shift from defined-benefit to defined-contribution schemes, which do not set in advance how much retirees might receive from them, have led to calls to expand CPP and QPP benefits; these calls became louder and louder in the aftermath of the 2008 financial crisis. The Harper Conservative minority government contemplated the idea of minor CPP benefit increases in mid-2010, but it decided to reject increases later that year, despite pressure from labour unions and the New Democratic Party. As it became clear that the Harper Conservative majority government (2011-15) would not bring in reforms either, the Ontario Liberal government of Kathleen Wynne proposed its own response to the call to strengthen the retirement income system: the Ontario Retirement Pension Plan (ORPP), which would have extended supplemental pension benefits for workers who lacked pension coverage through their employers. After the Trudeau Liberal government took power in November 2015, the Ontario proposal — which would have dramatically increased asymmetry within the Canadian public pension system — created additional pressure for Ottawa and the provinces to reach a deal on CPP expansion, an idea Trudeau’s Liberals had already embraced during the 2015 federal campaign. In June 2016, Ottawa reached an agreement on CPP expansion with most of the provinces, with the exception of Quebec and Manitoba (Manitoba signed the agreement a few weeks later). This agreement will gradually raise the CPP replacement rate from 25 to 33.3 percent, slowly raise the maximum earnings limit and increase the combined payroll contribution rate from 9.9 to 11.9 percent from 2019 to 2023.

Just as the ORPP initiative put pressure on Ottawa to expand CPP and convince a majority of provinces to go along, CPP expansion created strong pressure on the government of Quebec Premier Philippe Couillard to adopt a similar reform for QPP. At first Quebec Finance Minister Carlos LeitĂŁo criticized the idea of adopting such reform because it would further increase the payroll contributions of workers and employers in a province where these contributions are already higher than in the rest of Canada. So in its discussion document on QPP reform published in late 2016, ahead of public hearings on QPP reform, the Couillard government discussed three policy options: the status quo, an expansion of benefits modelled on the recently announced CPP reform and a more modest expansion, which the government preferred.

This last proposal has been criticized by powerful actors such as the provincial labour unions, who say that it would not be acceptable for retirees in Quebec to receive lower earnings-related pensions than their counterparts in the nine other provinces. In a province that prides itself on having an especially generous welfare state, a failure to maintain the parallelism in pension benefits between CPP and QPP seems problematic at best, and the Couillard government is reported to have reluctantly accepted the idea that QPP expansion not only will take place but will also mirror the recent CPP changes.

Regardless of what is officially announced later this year, the CPP expansion created strong pressures on Couillard’s right-of-centre Liberal government to do something similar regarding QPP. This reality should not hide the fact that, even if the replacement rates of CPP and QPP were to remain identical, this would not be the case for payroll contributions, as workers and employers in Quebec would still have to pay more for the same benefits because of the demographics of la belle province. Parallelism between CPP and QPP has changed forever in the context of a federal system in which diverging demographic trends have lasting policy consequences.

Photo: Federal Finance Minister Bill Morneau is flanked by his provincial and territorial counterparts during a news conference after reaching a deal to expand the Canada Pension Plan, in Vancouver, on June 20, 2016. THE CANADIAN PRESS/Darryl Dyck.

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R. Kent Weaver
R. Kent Weaver is professor of public policy and government at Georgetown University and a senior fellow in governance studies at the Brookings Institution.
Daniel BĂ©land
Daniel Béland is director of the McGill Institute for the Study of Canada and James McGill professor of political science at McGill University. Twitter @danielbeland and LinkedIn.

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