The CPP Payroll Tax Hike: Macroeconomic Transition Costs and Alternatives

The FOCUS macroeconomic model is used to estimate the impact of the CPP premium increases introduced in 1997. It is found that these will have relatively severe macroeconomic consequences in the short to medium term, although they will put the plan on a sound fiscal footing. Additional simulations explore how the macroeconomic damage of the CPP rate hikes could be mitigated. One method would be to "privatize" the CPP such that employers would no longer be taxed. A second alternative is to cap the CPP premium at the planned 1999 rate of 7 percent in 2000 and beyond, and collect the funds required to finance the unfunded CPP liabilities through the income tax. A final simulation indicates that if the current plan for CPP rate hikes is not amended it will be imperative that Employment Insurance rates be massively reduced over the next few years.