Elections
Interview with Mr. Michael Mendelson
News Release
March 9, 2006
On January 23, 2006, the Canadian public took to the polls and voted for a change in government. This year’s national elections ousted Paul Martin’s Liberal Party from leadership and produced a Conservative led government for the first time in 13 years.
What issues were on the minds of the Canadian public as they cast their votes during this winter election? What are the main health care, labor and aging issues that the new government will be forced to confront?
The AARP Global Aging Program spoke with Michael Mendelson of the Caledon Institute of Social Policy about the recent elections and the pressing social and economic policy issues facing Canadians. The Caledon Institute is a nonprofit, independent organization, considered the most influential think tank in Canada on social policy issues. Mr. Mendelson is a recognized authority on Canadian fiscal and social policy. He has held numerous senior public service positions and has been an advisor to governments at both the federal and provincial levels.
Pensions | Older Workers
GAP: Last month, the Canadians elected their first Conservative government in 13 years. How did the priority issues for older voters play-out in the campaign?
MM: Issues affecting elderly persons were not prominent in the campaign. The Conservative platform on pensions was essentially a promise not to change the existing arrangements. The Conservative’s platform also promised a modest increase in tax credits for seniors, but that seems to have been forgotten post-election so we will see if it resurfaces in their first Budget, which is not expected until late April or May.
The most relevant aspect of the campaign for seniors was with respect to the health system. The issue of waiting lists is obviously important to older Canadians, in particular for elective surgeries, such as hip replacements. The Conservatives have promised to bring in a hard-edged waiting list guarantee wherein governments will be required to provide services within specific time limits and, if not, allow people the option of receiving services in other provinces or even in the U.S., covered under our universal Medicare plan, without any payment by the patient at point of service.
The catch is that health care and waiting lists are a provincial area of responsibility and the provinces are not likely to take on new promises without additional federal financing, which the Conservatives say will not be forthcoming in respect of the waiting list issue. As well, many of the provinces do not agree with a waiting time guarantee and have already made substantial progress in reducing waiting lists over the last few years, just through innovation and by better organizing services. So all this promises to be another one of Canada’s perennial dust-ups between levels of government.
GAP: What policy change in direction do you foresee from a Conservative government on aging policy issues?
MM: I don’t really expect any policy changes from the Conservative’s until there is another election. The Conservatives don’t have a majority in the House of Commons, and it is very unlikely that they will serve a full term. Most likely their government will last about 18 months to two years. The Conservatives will focus only a narrow set of priorities that they believe will pass in the House of Commons with support from at least one of the other parties, and attempt to run a highly disciplined government. None of those narrow priorities, with the exception of waiting lists, are directed towards or especially relevant to older persons.
Remember that in a British Parliamentary system such as in Canada, if a government is defeated in the House on a major issue there has to be an election, and the Conservatives will not want an election for at least a year and a half. Moreover, they will want to demonstrate to Canadians that they are not wild-eyed radicals, so they will be careful not to go beyond the issues they have already staked out.
In Canada we had a significant reform of our contributory pension plan, the Canada Pension Plan, several years ago. The consensus among opinion leaders, including the financiers on Bay Street (Canada’s equivalent of Wall Street) is that this reform has been successful and that our contributory pension plan is now stable. This is unlike the U.S. As a consequence, the contributory pension plans - the Canada Pension Plan and Quebec Pension Plan - have not been a topic of public debate. I don’t expect that they will come up as a significant political topic in the near future.
GAP: Former Health Minister Ujjal Dosanjh has twice introduced legislation designed to curtail the importation of prescription drugs to the United States, once in June 2005 and again just days before the start of the national elections. What are your predictions for how the new government will respond to this issue?
MM: I think that the Conservatives will not touch this issue. If they do think about it, they will probably be empathetic to allowing continued exports because of their free-market orientation. They will see it as an example of markets working as they should. It has been hard to document any real threat to Canadian prescription drug supply, which was the ostensible reason for curtailing exports. In reality, many of us suspect that the pharmaceutical industry lobbied hard on this issue and that had a major impact on the Liberals. I am sure the industry will continue to lobby under the Conservatives, but likely they will take some time to form relationships.
If there is action on this issue it is more likely to be at the provincial level, where pharmacists are regulated. Pharmacy associations are generally antagonistic to their members’ roles in the export of drugs over the Internet, as are the medical associations. There was a complaint that would disallow physicians from signing a prescription without an adequate investigation of the patient, which would make it impossible for Internet companies to function. The companies themselves would probably just move to another country. I’m not sure what that would mean in terms of access and quality. Right now, some of the Internet based companies in Canada are high quality and reliable. There are competing international sites but they have a lot of trouble in establishing as much credibility as Canadian sites. I do not really expect anything much will happen and fortunes will continue to be made by exporting drugs from Canada.
The whole thing is kind of a farce. The cost advantages in Canada are obtained because our government plans bargain with the pharmaceutical companies. If the U.S. allowed bargaining, they could get the same savings and wouldn’t have to look toward imports. My understanding is that the new U.S. Medicare drug plan disallows the government from bargaining over prices with pharmaceutical providers. If this is true, it is not exactly surprising that U.S. prescription drug costs are high.
GAP: What is the sentiment of the Canadian public on allowing Americans to access cheaper drugs from Canada?
MM: I think most of the public is indifferent; the only worry is that they have priority access if there is a shortage. There have been a few rumors of a shortage of particular drugs here and there; however, there is really no evidence to support these rumors. It is not a number one topic in Canadian households. I suspect that most Canadians have not heard about this issue and have no idea that our prescription drug prices are lower than those in the U.S.
GAP: The U.S. looks to Canada as an example for successful cost control policies on pharmaceuticals. Are there other countries that Canada looks to as models in this area?
MM: Quite honestly, our debate isn’t about the cost of drugs: rather it is about who pays. The debate here is about public coverage of pharmaceuticals. Pharmaceuticals are not covered in our Medicare system, people pay for drugs themselves or they are covered under an employer’s insurance plan. Prescriptions given in a hospital are covered but outside of hospitals they are not covered. The big debate here is on whether and how drugs should be covered under public health insurance. Currently three provinces have some form of universal prescription drug coverage – Quebec, British Columbia, and Manitoba – but various studies have called for the introduction of a national pharmacare program, including a report of a special commission in the 1990s called the The National Health Forum.
GAP: The Supreme Court last June struck down a Quebec law, which banned private health insurance. The ruling has seemed to open discussions in other provinces to expand the provision of private heath care. What does this decision mean for the Canadian health care system? What changes do you foresee?
MM: This is the number-one hot topic. It is going to be tricky to deal with politically. To be clear for non-Canadian readers, the policy approach of the Conservative Party has been to uphold the concept of a single payer system. In the single payer system, all ‘medically necessary’ health services are paid for by the public system – a single payer – rather than multiple insurance companies, private patients, co-payments and so on. This is more or less the system we have now for ‘medically necessary’ services covered under our universal Medicare plan. ‘Medically necessary’ services are defined mainly as health care provided by physicians or in hospitals. The Quebec decision was that ‘medically necessary’ health services must be provided by the public system within a reasonable length of time, and if they are not, than the government cannot deny people the right to buy them privately, including through a private insurance plan.
Quebec has come up with a measured response to the decision, in which the province would allow private insurance for only a few elective medical procedures, while at the same time undertaking to provide wait time guarantees for those medical procedures. Quebec also disallowed physicians from practicing in both the public and private systems. This means that physicians will have to make a commitment to get all their income from privately financed services, and, since the demand is likely to be very small, the result will probably be that only two or three physicians will opt for the private sector. In short, there will likely be no measurable impact on the health system due to the changes in Quebec.
Quebec has opened a very small door. In British Columbia and Alberta the governments seem to be more aggressive about challenging the single payer system, but all we have so far are general policy statements and no one really knows what these provinces are actually going to do.
In British Columbia and Alberta, there are two aspects of the debate that tend to be confused with one another. As in Quebec, we have a debate about whether there will be a so-called private tier where care is paid for through private means. There is a second debate in the West about whether services should be provided by for-profit corporations. In Canada at the present time, all hospitals are nonprofit agencies with independent boards of directors. Doctors are paid mainly through fee-for-service, although that is changing as doctors are increasingly encouraged to enter into group practices and opt for per capita payments.
At present, all surgical procedures requiring an overnight stay are in the nonprofit or public sector. Will there be a for-profit surgical center? The question here is not who pays, but who offers the service. The Conservatives and the New Democratic Party (the most left wing of the parties) have both said that for-profit care providers are not an infringement of the basic principles of our Medicare system, so long as there remains a single payer. This might be the only thing upon which the Conservatives and the NDP have agreed. Nevertheless, for-profit care remains a hot-button topic in Canada and it tends to get confused with the issue of ‘who pays.’
I should add for the U.S. audience the somewhat ironical observation, that the wait list problem in Canada is exclusive to elective interventions. Provisions for urgent care are in place and work well. If there is an urgent care need it is always met immediately, except perhaps in a few specialized areas where there are real shortages of inputs. For example, there is a shortage of radiological technicians so this means that some equipment is not used as fully as it should. However, this shortage should be resolved in a few years. For the most part, the wait list problem only arises in elective services, where there may be pain and suffering but no medical emergency. So the issue is not quite as bad as you might think from our obsession with it.
GAP: What is the sentiment of the Canadian public on public/private health care issues?
MM: The public Medicare system as we have it today has huge support in Canada; surveys consistently show support at 90 percent levels. Despite the noise and issues we have around the health care system there is overwhelming backing for it and there is a great deal of fear about losing it. Interestingly, I think that much of the support for public universal Medicare in Canada comes as a result of Canadian familiarity with the U.S. system. Most Canadians travel to the U.S. and have friends and relatives in the U.S. We are not strangers and we know the U.S. well. The U.S. system is Canada’s health care boogeyman. The fear of ending up with a U.S. system is one of the main reasons there is so much support for a rigid single payer system. With all our problems, there are almost no Canadians who would trade our health care system for the U.S. system, especially the middle-class who have seen friends and relatives south of the border struggling with the cost of health care. No one wants this in Canada. I should also note that for the most part, the experience in Canada in hospitals and with doctors is pretty good. Surveys show over 80 per cent of recent hospital patients were happy with their care.
GAP: Through reforms, including benefit cuts, increases in contributions, and allowing diversification of investments, the sustainability and confidence of Canada’s pension system has been restored. What impact has the investment diversification strategy had in securing the pension system?
MM: There were three measures initiated to secure the contributory pension system. The key is a contribution rate which remains stable over the foreseeable future (50-100 years) forecast; a so-called steady-state contribution rate. A ‘steady-state contribution rate’ means that a rate is set such that the rate can stay just at that level more or less forever. The government said that if workers today can pay 9.8 percent towards pension plans, then workers in 2045, ’55, and ‘65 should also be able to pay 9.8 percent. Let’s design a system that will have a long term stable contribution rate. This will mean that the system is sustainable.
The Canadian governments (federal and provincial) decided to set a steady state contribution rate at below 10 percent. Then it became a matter of addressing the rate of return on investments and the benefit structure to ensure that the steady state would in fact be sustainable. So to keep to a 9.8. per cent rate required reductions in benefits (most of which were invisible to the average person); an increase in long-term contributions through reducing the base exemption level; and the creation of an investment fund that will increase the rate of return. So the reform had three legs, so to speak.
The third leg of reform was to establish an independent investment board (CPP Investment Board) to manage the funds. This has only been operating in the market for three or four years so it is too early to judge the long term impact. However, the reforms had as much to do with perception as reality. Giving people the perception that there are hard assets owned by the CPP and that the money will be there when they retire has been important. The creation of the investment fund in the context of a steady-state contribution rate has taken the issue off of the political radar.
GAP: In the U.S., there would be deep concern about insulating investment decisions from politics. In Canada, are investment decisions made purely on the basis of optimizing returns? Are there pressures to avoid controversial investments, such as companies influenced by certain governments, ideologies, controversial products?
Investment decisions do seem to be successfully insulated in Canada. Actually, it is not all that difficult to do if there is a sincere wish to insulate investment decisions. The steps are simple. First, legislation sets up an independent board for the fund and also sets out the responsibilities of the directors. The legislation says that the board of directors must seek to optimize returns. The directors do not have the power to vary this mandate. They would be in breach of their fiduciary responsibilities should they do so. The directors are nominated by the provincial Ministers of Finance, not the federal Minister, so the nominations process is arm’s length. The directors have set terms in office. Most of the directors are the same types of people you would find in an investment board in a large private investment fund. This does not seem to be such a big conundrum and the steps are not a mystery.
GAP: In the U.S. there could be considerable backlash if people’s Social Security contributions were being used to invest in things they didn’t agree with…
MM: In Canada, there are no ethical limitations beyond those normally found in a large investment fund. Remember, however, that the Canadian investment fund is only large enough to pay benefits for five years if contributions ceased at any time. So it is a large fund but not overwhelming. The U.S. seems to have gotten into an insane preoccupation with full funding. From my perspective this is completely unrealistic and unnecessary. Funding a significant proportion of the economy through returns on capital is not possible. The U.S. debate needs to start by setting out what it means to fund a plan: in Canada the fund is only large enough to smooth out down times in the demography and economy so we can keep a steady contribution rate and that is all that is needed.
In any case, the U.S. has plenty of intermediary solutions that would increase confidence in the system. For example, the U.S. could set up a fund that only bought municipal and state bonds, which would not interfere with investments in the private sector.
GAP: Like in the U.S., Canadian companies are increasingly shifting from offering defined benefit to defined contribution pension plans. What are the reasons for this shift in Canada? Do you see this as a major risk to the retirement security of Canadians?
MM: Yes, it is happening in Canada a lot. Almost every private plan, and even some in the public sector, is now a defined contribution scheme. The main defined benefit schemes left are in the public sector and sectors where there are strong unions, such as the automotive industry. The reasons for the change are the same as in the U.S. -- unforeseen liabilities that result when investment returns aren’t the same as forecasts.
In the U.S., health liabilities are larger than pension liabilities. In Canada, we have much smaller employer health liabilities (only for services not covered by the public system), but companies are still concerned about their pension liabilities, especially if these are unforeseen and must be financed when markets are poorest. There is also a significant regulatory burden in running defined benefit schemes, much of which can be avoided in a defined contribution scheme.
What does this mean? I should note first that an important difference between Canada and the U.S. is Canada’s strong redistributive base in old age security. Every Canadian over 65 gets a base pension, which is not huge but enough to live on. It is a non-contributory pension plan. This is very different than in the U.S. where your Social Security is more generous than the Canadian Pension Plan, but the poor in the U.S. do not do as well.
So, returning to the topic of the structure of private pension plans, in a defined benefit contribution plan, risks are shifted from the company to the individual. Consequently, people don’t know how much to save because they don’t know how long they will live. You have to over-save in order to ensure that you will not be impoverished if you live longer than you expected. I think this situation will be increasingly problematic, especially if baby boomers find themselves having to convert retirement savings to annuities in a period of low interest rates.
I read one case of a man with a defined contribution plan that showed that if he retired in 2000, he would have had 130 percent of his pre-retirement income; however, if he retired in 2002 he would have had 67 percent of pre-retirement income -- a rather significant difference. But the other side of it is the competitive pressure on firms. If there are other countries where people aren’t providing defined benefit pensions, it is harder to compete. Defined benefit schemes aren’t necessarily more costly, but they carry the problem of unforeseen liabilities.
GAP: How are Canadian business practices and government policies addressing the issues of older workers? What more needs to be done to ensure that older workers who wish to work longer are permitted to do so?
MM: We had a mixture of policies from province to province on the issue of mandatory retirement. Two provinces had a law against it (couldn’t force people to retire at age 65); now Ontario has also disallowed mandatory retirement as of a few months ago. It used to be that seniors’ associations and the labor movement were strongly in favor of mandatory retirement laws. However, the experience in Quebec and Manitoba, neither of which have had mandatory retirement for decades, shows that the absence of mandatory laws didn’t really matter that much -- people still retired at more or less the same age in those provinces. About the only place where it is an issue is in the universities where there is tenure and professors could seemingly carry-on collecting a pay check forever.
Mandatory retirement was a human rights issue in Canada. The other issue is extending the normal retirement age to 67/66. This is being raised in policy circles although it has not been a serious political topic. No party is suggesting increasing the minimum age for retirement benefits. Like the U.S., Canada has a very large immigrant population and that makes our age distribution younger than Europe’s. I think there will eventually be a public debate; however, it is on the backburner right now.
The views expressed in this article do not necessarily represent the views or policies of AARP.
Biography
Michael Mendelson is Senior Scholar at the Caledon Institute of Social Policy. He has held many senior public service positions prior to his appointment to the Caledon Institute. He was the Deputy Secretary (Deputy Minister) of Cabinet Office in Ontario. In Manitoba, he was Secretary to Treasury Board and Deputy Minister of Social Services. He has served as Assistant Deputy Minister in Ontario’s Ministries of Finance, Community Services and Health. He served a year as Visiting Fellow, Strategic Policy with Human Resources Development Canada.
Mr. Mendelson has been an active participant in many of Canada’s major developments in federal-provincial relations, finance and social policy in the last decades. He co-chaired Ontario’s delegation on ‘division of powers’ in the Charlottetown Constitutional negotiations. In the 1980s in the Federal Privy Council's Ministry of State for Social Development, he played a critical role in the development of the Canada Health Act. He was a consultant for the Parliamentary Task Force on Federal-Provincial Fiscal Relations and for the more recent National Forum on Health.
Mr. Mendelson has published many articles on social and fiscal policy, as well as books on the issue of universality and the administrative cost of income security programs. He has been a Visiting Professor at the University of Toronto School of Social Work and Visiting Fellow at Queen’s University School of Policy Studies.
Mr. Mendelson was also co-Principal Investigator of the ‘Speaking Out’ project: a multi-year qualitative research project looking at the effects of budget and tax cuts on Ontario households, through in depth interviews with 40 households over three years.