Pointing the index finger

Marc Clark June 24 1985

Pointing the index finger

Marc Clark June 24 1985

Pointing the index finger


Marc Clark

For Finance Minister Michael Wilson, the 500 U.S. and Canadian businessmen who gathered last week in the gilded ballroom of the Waldorf Astoria Hotel in midtown Manhattan formed the friendliest audience he had seen in weeks. Wilson, who worked briefly in New York as an investment banker early in his career, said playfully:

“I’m delighted to see so many of my friends from the investment banking business. I’m sure it has nothing to do with the fact that we might want to release a bond issue down here.” But even in New York the shadow of the May 23 budget hung over the embattled finance minister. Just two days before Wilson’s short trip to sell Canada’s new economic strategy to top-level U.S. bankers and analysts, an article by a conservative economist in the influential Wall Street Journal criticized the Wilson budget as a disastrous document and a blueprint for economic ruin.

In Canada the clamor over the budget, particularly the schedule for cutting back on inflation-related increases in old-age pensions, continued to grow throughout the week. Wilson only added to the controversy when he told a group of investors in Quebec City that the government was considering linking some of its bond issues to inflation in order to cut the cost of government borrowing. That proposal prompted New Democratic Party Leader Ed Broadbent to claim that the finance minister was “talking about protecting investors from the ravages of inflation but taking away such protection from Canada’s pensioners.” Then, on the day of Wilson’s New York speech, the Toronto Globe and Mail revealed that finance department officials had warned the

minister before the budget’s release that the tax changes it contained would batter lowand middle-income Canadians while barely touching the wealthy.

But the rudest shock came when the constituency that the Tories sought to

please the most with the deficit-cutting budget—Canadian business—joined the ranks of those attacking the deindexation of pensions. Several leading business groups—including the Canadian Chamber of Commerce, the Business Council on National Issues and the Canadian Organization of Small Business —announced their support for senior citizens’ groups in the fight to maintain the elderly poor’s protection against inflation. Even the three premiers of the Maritime provinces—all Tories, meeting in Prince Edward Island—joined the

governments of Quebec and Manitoba in disapproving of the pension deindexing plan. Said Mulroney of the businessmen’s stance: “These are the same people who were pressing for much larger cuts in the budget, particularly on the social side.”

Still, the government prepared the way for a possible retreat on the issue. At an Ottawa news conference Mulroney stated, “I am not blind to the realities nor am I insensitive to them.” In New York, Wilson conceded that the government might consider making changes “at an appropriate time.” Like Mulroney in the House of Commons earlier, Wilson defied budget convention when he described his pension measures as “proposals.” And he could not say, when reporters asked, if he still enjoyed the Prime Minister’s backing on the pension matter.

Opposition MPs and senior citizens’ groups quickly hailed Mulroney’s statements as evidence that the Tories’ resolve was flagging under pressure from thousands of telephone calls, letters and petitions. “Why don’t they get off their fannies and admit they made a mistake?” said 73-year-old Charles McDonald, president of the National Pensioners and Senior Citizens Organization, an umbrella group representing 450 senior citizens’ groups with more than 400,000 members nationwide.

Further ammunition for the pension revolt came in a study released by the Ottawa-based Canadian Council on Social Development, a nonprofit research group funded largely by government. According to the council, the deindexing of pensions would cost each senior citizen about $100 in 1986 and $500 by 1990. In addition, other tax increases in the Wilson budget would cost each pensioner an additional $200 by 1990. The report estimated that altogether by 1990 the

changes would add another 100,000 senior citizens to the approximately 650,000 now struggling below the poverty line.

Few political observers predicted that the government would back away fully from deindexing. Most expected the government to make a more politically palatable move and give extra money to the poorest pensioners by raising the Guaranteed Income Supplement (GIS), a payment of as much as $328.66 a month to pensioners whose main source of income is the monthly old-age security payment

of $276.54. Half of Canada’s 2.6 million pensioners receive some or all of the GIS. (Pensioners lose $1 of the supplement for each $2 of income they take in over their pension.) But for Joan Woodsworth, president of the Ontario division of Canadian Pensioners Concerned, and other pensioners, increasing the supplement is unacceptable because it goes only to those who apply and prove need.

“It’s the kind of demoralizing social handout we’ve been trying to get away from,” she said.

The business leaders’ defence of the pensioners clearly angered the government. Geoffrey Hale, vice-president of the Toronto-based 6,000-member Canadian Organization of Small Business, told Maclean's that he received a number of calls from leading government figures and their reaction “wasn’t shock —it was rage.”

Thomas d’ Aquino, president of the Business Council on National Issues, said that he too had heard from angry officials.

The business groups were quick to stress that they continued to support Wilson. Said d’Aquino: “The fact is, we do not oppose partial deindexing. We think it is fine so long as the GIS is increased so that support for the elderly poor is not eroded.” Added Anthony Amery, chief economist of Dupont Canada Inc. of Toronto: “The media has given the impression that the business

community has somehow changed its mind, turned on the finance minister and rejected the budget. In fact, that simply is not true.”

There was greater business support for Wilson’s proposal to index some government bond issues to inflation—and criticism of the NDP for linking the issue with the deindexing of pensions. “The people who are attacking this are preying on the fears of pensioners,” said Earl Bederman, chief economist for The Permanent. Other defenders of the policy noted that the British government has been issuing various types of indexed bonds since the 1970s. The appeal is that the government can borrow money at lower interest rates while buyers get protection against inflation. Unlike conventional bonds, which offer only a fixed interest rate, indexed bonds in Canada

would offer interest equal to the inflation rate, plus a fixed percentage of three or four per cent. At present, government savings bonds offer 11-percent interest; with inflation currently around four per cent the government would pay only seven or eight per cent on indexed bonds. According to Wilson, the government would save $30 million to $40 million on every billion dollars borrowed through bonds.

According to some business leaders, the muddling of the indexed bond proposal with the deindexing of pensions

only distracted from the real issue —thorough pension reform. At present in Canada, there are roughly four workers supporting each pensioner; as older people increasingly begin to dominate the nation’s population, that figure is expected to drop to two workers for each pensioner within 20 years. Said Hale: “There’s no question that we will not be able to afford the present pension system. Unless we act soon, the problem will make the present discussion over deindexing look like a schoolyard shoving match.” The only way to maintain an “affordable, compassionate pension system,” he said, is to give government pensions only to those who need them.

But for the government, that would mean scrapping Mulroney’s often repeated commitment to the “sacred trust” of universality. Many economists speculated that it was his adherence to that promise that forced Wilson to propose deindexing as an alternative to help cut the deficit. Said Dupont Canada’s Amery: “Clearly, the commitment to universality boxed them in.” For Wilson, at least, the deindexing position has turned out to be an uncomfortable one.