Fraser Forum

Ontario pension plan is unnecessary—and will result in lower wages

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This week, Ontario Premier Kathleen Wynne (pictured above) reiterated her government’s commitment to push ahead with its provincial pension plan—the ORPP—despite evidence that it’s unnecessary and counter-productive. But there will be other adverse consequences from the ORPP that have received little attention—namely, lower wages for working Ontarians.

Before we explain how that will happen, it’s important to understand how the ORPP will work. The details, while sparse, suggest that individual workers and their employers will both be required to contribute 1.9 per cent of the employee’s eligible earnings into the plan up to a maximum of $90,000 in annual earnings. If the basic exemption mirrors that used for the Canada Pension Plan ($3,500), this could mean annual contributions of up to $1,644 from each entity.

Of course, a working Ontarian’s disposable income will unambiguously fall by up to the $1,644 that they themselves will have to pay into the plan directly. But the costs to workers will not end there. Workers will also ultimately pay the portion nominally paid for by their employers (an additional 1.9 per cent of the employee’s eligible earnings).

There is a widely-held misperception that employers will simply pay their share without any consequence on workers. In reality, employers will not absorb an increase in the total cost of labour as a result of higher payroll taxes without changing behaviour. Instead, the increased payroll taxes will ultimately result in a reduction in worker compensation (either wages or fringe benefits, or a combination of both) or even reduced employment levels.

A new Fraser Institute study sheds important light on who ultimately bears the cost of business taxation. The study analyzed individual-level data from Statistics Canada over the period between 1998 and 2013 to examine the impact of higher business payroll taxes on the wages of workers (it did not measure the complete effect on all forms of compensation due to data availability or the effect on employment so the results understate the overall effect).

The study found that, after controlling for other factors (such as a worker’s age, education, union status, firm size, occupation, industry, and a host of economic variables), a one per cent increase in the employer portion of the payroll tax rate reduces the average hourly wage rate of Canadian workers by between 0.03 and 0.14 per cent in the following year. This can work out to hundreds of dollars in lower wages annually.

For illustrative purposes, if Ontario’s 2012 federal-provincial payroll tax rate (11.9 per cent) was increased by 1.9 percentage points (the employer amount required by the ORPP), we estimate that based on the results above, the average provincial hourly wage rate would decrease between $0.12 and $0.54. This translates into a reduction of $234 to $1,053 in a worker’s annual wage—not a trivial amount.

The Ontario government should reconsider the ORPP. It is not only a solution in search of a problem but will inadvertently reduce the wages of working Ontarians.