Once again, tongues are wagging about defined benefit pension plans, particularly the impact of the upcoming budget on public sector retirement packages. An aging workforce and longer life expectancy have made it more expensive to provide them. What to do? Some recommend scaling back the entitlement while others advocate increasing the employer contribution.
Yet an obvious part of the solution is the one that everyone forgets: lower business taxes. Virtually every defined benefit plan in the country owns shares in the country's largest and most profitable enterprises. If these businesses make good after-tax money, they can pay better dividends to the pension funds that own their shares.
Take the Canada Post Pension Plan (CPC Pension). During the recent debate over the Canada Post strike, members of the New Democratic Party simultaneously demanded that the existing pension fund for mail workers be preserved and that corporate taxes should rise to pay for more government spending.
These concurrent demands are painfully ironic. The top five holdings in the CPC Pension are Toronto Dominion Bank, Royal Bank of Canada, Bank of Nova Scotia, Suncor, and Canadian Natural Resources. Banks and oil companies -- the twin villains in every left-wing storyline -- pay dividends to the pension fund of these unionized workers. These dividends come from after-tax profit. If the business tax rate rises, the after-tax profit remaining for the pension funds drops.
At the time of the strike, the Canada Post Fund had $202 million invested in Toronto Dominion Bank. When TD profits, it can reinvest the money in growth or pay dividends to the shareholders (either way, the pension fund gets a better return on its investment).
However, TD can only pay out these benefits on after-tax earnings. If taxes go up, dividends and capital gains necessarily go down and shareholders (including the postal workers) lose out. It is really that simple.
Anyone in Canada with a pension plan has a good reason to celebrate the New Year. On January 1, 2012, the final installment phase of the Harper government's business tax cuts took effect, dropping the rate to 15 per cent from 22 per cent only a few years ago.
By contrast the 2011 NDP election platform proposes to increase the corporate rate from 15 per cent to 19.5 per cent (a one-third hike) to raise $9 billion for new federal spending. The Liberals proposed similar business tax increases. That would drastically reduce after-tax earnings left to pension funds who own shares in these very same companies. In that sense, a corporate tax hike is a tax increase on pensions.
By contrast, when Prime Minister Harper reduced business tax rates by one-third, people saving for retirement benefited. These beneficiaries also included Canadians without company pension plans. Almost seven million Canadians have opened Tax Free Savings Accounts (TSFA) and many more have Registered Retirement Savings Plans (RRSP).
These investment tools are often used for mutual funds or stocks. On top of that, 17 million Canadians are invested in the Canada Pension Plan (CPP), which owns over $18 billion in domestic equities. These people are directly or indirectly shareholders, as well. All of these retirement investments enjoy dividends and capital gains from after-tax profits. Tax these profits and you are ultimately taxing the retirement funds of ordinary middle class people.
We should celebrate the fact that workers are invested in capital markets. It is good for everyone involved. People grow their retirement savings while their money provides investment capital to companies that create jobs and build wealth.
But the benefit is not just economic. It is also societal. Politicians often like to divide people by socio-economic class: workers versus capitalists. The two are increasingly one and the same, due to direct or indirect share ownership by workers.
The old utopian socialist dream was for workers to become owners of the "means of production" through the process of forced collectivisation. In an ironic twist of fate, it was the capitalistic stock market -- and not the state -- that transformed workers into business owners.
For them to retire in peace and comfort, we need a strong profitable business sector with low taxes.