Speech Article from
Address by Minister Duclos on The squeezed middle class in the OECD and emerging countries
December 1, 2016 - Paris, France
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Ms. Ramos, delegates, distinguished guests.
I would like to thank the World Bank and the OECD for welcoming me here today.
It’s a privilege for me to help make Canada’s voice heard in this international challenge to fight inequality, whether it be economic, social or political.
Inequality is a global challenge that we must address now more than ever.
While the world economy has never created so much wealth, it remains very unequally distributed.
Forty-two percent of the world’s income goes to the richest 10%, while only 1% goes to the poorest 10%.
Average income in the rich countries is roughly 30 times greater than in the poor countries.
Even life expectancy is dramatically different: In rich countries, people can expect to live 22 years longer on average than in poor countries.
The infant mortality rate is 13 times higher in poor countries than it is in rich countries.
We live in a world where extreme wealth rubs shoulders with extreme poverty, not only globally but also in many countries.
In between, the working poor and the middle class are struggling and increasingly wondering what role and place they have and can expect in their society.
Furthermore, socio-economic exclusion and inequality, however real or perceived, can lead to real feelings of frustration and anger.
And these feelings are generating increasingly troubling political challenges.
As Prime Minister Justin Trudeau stated:
“Concerns about losing out are not unique to Canada. We see it, in widespread calls for nationalism over globalization, and in those who promise to build walls instead of tearing them down. When prosperity isn’t shared, people increasingly feel left behind, and they start to look to deceptively easy solutions.”
The situation in Canada
Over the next few minutes, I’d like to speak to you specifically about economy and social inequality in Canada, as well as about the steps that were recently taken by the Government of Canada to foster greater economic and social inclusion of all our citizens.
I will return later to how this is linked to political inclusion and to inclusive decision-making processes.
To start, many of you might not be aware of the current situation in Canada.
In 2014, Canada ranked 20th in terms of having the lowest Gini coefficient of income inequalities among the 34 members of the OECD (ranked from highest to lowest).
Income inequality (again based on the Gini coefficient) increased significantly in Canada between 1989 and 2014, rising to 0.311 in 2014 from 0.281 in 1989.
In his recent paper on income inequality, Michael Veall, an economics professor at McMaster University in Canada, notes that the share of income belonging to the top 1% rose from 8% to 12% between 1980 and 2010—a considerable increase.
In a paper written with my last master’s student, Mathieu Pellerin, we found that the coefficient of variation of hourly wages among full-time workers doubled between 1980 and 2010, and that increase could largely be explained by the growth of the top 0.1% of full-time hourly wages.
The impact of demographic changes, or of between-group inequality changes, was small; most of the variation in wage inequality could be attributed to within-group changes in inequality, again explained by changes in top wages.
In October 2015, Canada had a general election.
A new government was elected on a platform of doing different things and doing them differently.
In particular, it promised a more open and transparent government.
Throughout the campaign, we centered our messaging on helping the middle class and all those who would like to be part of it.
We also promised to work for greater social inclusion of certain groups, such as Indigenous people, Canadians living in the far North, Canadians living with disabilities, women, children and the LGBTQ2 community.
Reducing taxes and supporting middle class families
One of the first actions our government took was to reduce taxes for the middle class and increase them for the wealthiest 1% of Canadians. This supports 9 million middle-class Canadians with a tax cut of up to $1,300 per family.
Last July, we also introduced a new Canada Child Benefit (CCB), the most significant social policy innovation in a generation.
The CCB is non-taxable, more simple, more transparent and more equitable than the earlier complex system of boutique tax credits and support for higher income families. It will result in a reduction of about 40% in child poverty, leading to the lowest level of child poverty ever seen in Canada.
Canada’s child poverty rate is expected to fall from 11.2% to 6.7%; the families of nearly 300,000 children will be lifted out of poverty in the short term.
For a middle-class family of four with total family income of $90,000, the Canada Child Benefit will provide an annual amount of about $5,700, a non-taxable increase of about $1,800 on top of the previous regime of child benefits.
For a single parent with two children and family income of $30,000, the Canada Child Benefit will provide an annual amount of $11,800, an increase of almost $250 non-taxable per month.
9 out of 10 Canadian families will receive greater support under the Canada Child Benefit than before.
Seniors of today and tomorrow
Increasing longevity, decreasing accessibility to defined-benefit pension plans, an aging population and changing labour market conditions are undermining income security for an increasing number of Canadian seniors.
Looking at current numbers, one in four families approaching retirement is not saving enough.
The proportion is even higher for middle-class families.
This situation should be improved so that more Canadians have access to a dignified and secure retirement.
That’s why we are currently working towards enhancing the Canada Pension Plan so that Canadians can retire in conditions of greater income security.
The enhancement will increase the share of pensionable earnings that workers receive from the Plan’s retirement pension from one quarter to a third of their pre-retirement after-tax family income once they retire.
The limit on pensionable earnings will also be increased by 14%.
This will result in the number of families at risk of income insecurity in retirement being reduced from 24% to 18%.
While some families would still be at risk of not saving enough for retirement after the enhancement, the degree of under-saving would be materially reduced.
Among families at risk, the median after-tax retirement income gap—the difference between current retirement income and that required to replace 60% of pre-retirement income—is estimated to be reduced by more than half: from $8,300 to $3,700.
Because the CPP enhancement comes with an increase in the working income tax benefit (WITB) that exceeds the additional CPP contributions that lower-wage workers will be making, they end up with additional incentives to work and to save for their retirement.
This means lower-income workers will benefit in the short term because they will have more disposable income, and in the long term because they will have a better retirement. A total of 6,000 low-income workers will be lifted out of poverty in the short term.
Additional great news is that our younger workers will see the largest increase in their retirement benefits.
Younger Canadians often find it difficult to save in safe, reliable and efficient ways. Many are working in jobs that do not have a company pension.
The Canada Pension Plan provides a secure, predictable, lifetime benefit, which means that enhancing it reduces Canadians’ concerns about outliving their savings or having their savings reduced by external shocks, market downturns or inflation.
All Canadian workers will benefit from this enhancement, particularly the middle class and those working hard to join it.
The enhanced CPP will lead to greater inclusion: more equal access to a safe and efficient pension plan, greater work and saving incentives and greater support for lower-income workers, greater protection against the financial and longevity risk of saving for retirement, and greater income security for hundreds of thousands of Canadian seniors.
Greater social and economic inclusion also means protecting the dignity of seniors who have not been able to accumulate enough savings to get out of severe poverty.
This is why we have restored the age of eligibility for Old Age Security benefits from 67 to 65.
The decision to increase that age to 67 had been taken by the previous government in the absence of proper scientific assessment of its social and economic impact.
That lack of policy rigour, and the lack of sensitivity to the welfare of our most vulnerable seniors that it betrayed, is one of the reasons I entered politics and that I am with you today.
When I was still a professor of economics at Université Laval, I gathered a small team of researchers and graduate students to study the impact of that change.
We estimated that, with the planned change, approximately 100,000 future Canadian seniors aged 65 and 66 would have fallen into severe poverty each year, starting from the full implementation of the policy.
This would have increased the poverty rate for those seniors from 6% to 17%.
The average middle-class man in that age group would have seen his income drop by 11%, and the average middle-class woman would have seen her income drop by 32%.
The most vulnerable 20% of seniors would have suffered 40% of the total income loss from that policy; they would have also lost 35% of their total income.
Let me return to the connections between the social, economic and political dimensions of inclusion.
I’m thinking here of how economic and social processes and outcomes can elicit feelings of exclusion among citizens, and how these feelings can undermine citizens’ confidence in the ability of governments to work for the betterment of all.
In turn, this can hinder the ability of societies to address some of their major development challenges, be they economic, social or environmental.
Apart from procedural principals such as horizontal equity or outcomes judgments such as Pareto improvements, economists generally grant less importance to the quality of process than to that of resulting “social welfare” values.
My recent experience as a politician has taught me that our citizens value processes considerably more than economists believe. The ability to have a voice in consultations leading to policy making has significant value in itself.
Citizens also know that when policy-making processes are inclusive, respectful and representative of diverse interests and opinions, it leads to better results.
Canadians also know and want to hear that better is always possible, and continuous engagement with them supports that spirit of hope.
Continuous engagement also favors people-oriented policies, reminding elected and non-elected officials for whom and for what they must work hard every day.
In conclusion, Canada still has a lot to do to “unsqueeze” its middle class.
Despite that important stance of modesty, Canada also understands and accepts its responsibility to contribute to global development in a respectful but determined manner.
That responsibility guides our national and international efforts to demonstrate that diversity can be a strength when it is combined with inclusiveness, that both inclusion of decisional process and inclusiveness of socio-economic outcomes matter and that unsqueezing the middle class is both good for the economy and good for politics.
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