Evaluation of the Canada Pension Plan (Disability Component) - Final Report - September 1996

2.0 Rationale for CPPD

This section summarizes the rationale for the CPP Disability Program and the need for a Federal role in the provision of disability insurance to Canadians. Some specific evaluation questions posed in this section are: Are the CPPD program component benefits still relevant? Should the Federal government through CPP be involved in providing disability benefits?

2.1 Rationale for Public Disability Insurance (PDI)

Rationale as Seen in the Literature: The rationale for PDI programs (such as CPPD/QPPD in Canada) is clearly outlined in a wide range of writings on public welfare and social insurance. Most importantly, economists and others have pointed to the need for society to control the spillover costs to society in situations where members, who can no longer work because of disability, might not be able to provide for themselves without public support.

Further, there are values encompassed within PDI, namely in collective compassion - society knowing that its members with disabilities are taken care of - and in redistributive equity - knowing that societal income resources will be redirected to persons with disabilities, persons who are among those in society who are least able to provide for their own income needs without assistance.⁴⁴

Aarts and de Jong (1992) identify three factors which determine the need for PDI:

Risk-dependence: private insurance depends on a heterogeneous distribution of risk levels throughout the insured population, but a national population may be broadly subject to certain risk considerations in common, such as an epidemic or a high unemployment rate or disability rate; Adverse selection: low-risk people would tend not to buy insurance, driving premiums up to levels at which few can afford them, causing participation to dwindle; and Moral hazard: the extent to which risk may be influenced by "individual decisions based on work-leisure preferences".⁴⁵

The literature on social insurance indicates that publicly funded disability programs are widely supported in many developed countries, and that government intervention in the field of income security and disability benefits is generally seen as an appropriate way to provide such programs. In countries with comprehensive social security systems (including national social assistance programs and universal health care), compulsory and contributory disability benefits, based on insurance principles, are used as a way to redistribute the cost burden of this form of income security more directly to workers and employers, in lieu of having them financed from general revenues of government.

Also, it is generally recognized that income security schemes based on insurance principles are better administered by central governments, providing a larger base of contributors to spread the insured risk. (This is somewhat analogous to the collective risk rationale which led employers in North America to form workers' compensation systems, over the past 100 years.) Economies of scale (cost-savings) in administration also argue in favour of programs administered by central governments.

International experience indicates that disability benefits are widely implemented in almost all countries with comprehensive social security programs, and that the need for disability benefits is not significantly challenged. A wide range of program designs exists, however, with all of Canada's major international trading partners operating either a PDI program or a public non-contributory disability benefits program providing universal coverage and means-tested payments.

It should be noted, however, that PDI programs, as such, are not implemented in all industrialized countries. Some countries, such as Australia and New Zealand, operate programs based on welfare principles, rather than maintaining a separate PDI. These programs usually provide universal coverage, but payments are means-tested and benefit levels are relatively low. As a general rule, benefit levels in these countries are similar to those of PSA programs in Canada.

PDI programs, where they exist, are generally funded by employers and workers, rather than the general revenues of the government. They usually provide higher earnings-replacement than welfare-type programs. They do not replace means-tested social assistance programs for individuals with disabilities, but they operate in parallel, providing additional earnings protection to those who are the most able to bear the costs of insurance protection, i.e. the working population. Thus, a large segment of the working population provides for its own earnings-protection through compulsory insurance coverage and presents a lower burden for society in the event of disability and a loss of earning capacity.

The co-existence of PDI programs such as CPPD, and means-tested disability benefits programs raises important issues of individual equity. Indeed, when the base guaranteed income of means-tested programs is higher than benefit rates of PDI programs (such as is the case for PSAs in several provinces in Canada), some contributors may feel that they derive no additional income from years of contributions to an insurance program, since their PDI payments will be entirely offset via reductions in social assistance benefits (if they are entitled to receive any).

In reality, however, most beneficiaries of PDI will derive a net benefit from their contributions to the program, either by preserving significant assets accumulated over the years or by benefiting from the additional income of a spouse that would have disqualified them from social assistance payments. Nonetheless, data from the 1995 CPPD Survey of Beneficiaries indicates that up to 13%⁴⁶ of CPPD beneficiaries who responded to the survey are in receipt of social assistance and, therefore, may have contributed to CPP for a number of years without deriving any additional income once they became eligible for benefits from both programs.⁴⁷

The perceived importance of PDI programs can be demonstrated by the fact that, while other countries have faced significant pressure to reduce costs and enrolment for disability benefits, all of the jurisdictions studied for this evaluation have favoured the implementation of reforms to existing programs rather than government withdrawal from PDI programs.

2.2 Federal Role

The Canada Pension Plan is one of the many national social support programs that combine to provide Canadians with a social safety net. Many feel that this safety net is part of what defines the uniqueness of Canada.

The role of the Federal government in any such program is critical, for example, in the eyes of key stakeholders (see below), as it is only the Federal government that has a mandate (with Provincial consent) to require and provide social programs such as CPPD that are universally available to all Canadians. By providing a level of income security for workers who are unable to continue their employment because of a disability, CPPD is a key part of this income security system.

Stakeholders interviewed for the evaluation, from Provincial governments, WCBs, non-governmental organizations (NGOs), employers and labour groups were supportive of this Federal involvement in the provision of disability benefits under the CPP. LTDI providers also viewed this role as significant, as LTDI premiums pay only for additional earnings replacement coverage, over and above the CPPD benefit; and CPPD provides almost universal coverage for all workers.

2.3 Conclusion Regarding CPPD Rationale

Economic research, international practice, and stakeholders all suggest that PDI is desirable for a country such as Canada, and that providing a national PDI program is a reasonable role for the Federal government with an input role for provincial and territorial governments . However, there are various views surrounding the details of the design and administration of such a program, and the degree to which change is required so that the program meets Canadians' needs in a balanced manner. Many of these views are influenced by the extent of program success and difficulties, as detailed in Section 3 below.

⁴⁴ Redistributive equity is sometimes contrasted with individual equity (sometimes called "actuarial fairness" in this context), against which redistributive goals must be weighed in considering how much of a program's cost people can be legitimately asked to bear, either through taxation or through payroll deductions, to achieve social security ends. For a discussion of this issue, see Meyer and Wolff (1993). Also see: A Literature Review on Public Disability Insurance Programs, a working paper for the CPPD Evaluation, SPR Associates Inc., January 1996.

⁴⁵ Aarts and de Jong (1992), p.5. Aarts and de Jong provide an extensive overview of the various economic arguments in favour of PDI; the discussion in Burkhauser and Haveman (1982) is also pertinent.

⁴⁶ See: An Examination of the 1995 Statistics Canada Survey of Beneficiaries, SPR Associates, March 1996, and Exhibit 9, p. 34.

⁴⁷ See Section 3.2.3 of this report. See also: An Examination of the 1995 Statistics Canada Survey of Beneficiaries, SPR Associates, January 1996.

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