Tuesday, January 27, 2009

Canada's Budget Fails to Address Pension Crisis

After months of speculation, Canada's Finance Minister Jim Flaherty tabled a federal budget that includes $40 billion in economic stimulus over the next two years in the form of infrastructure spending and income tax cuts.

Late tonight, there are signs that the budget will not receive support from the opposition parties. Canada's largest union, the Canadian Union of Public Employees (CUPE), strongly condemns the federal budget:
Faced with losing power, the Harper government is showcasing dozens of new measures to address the economic crisis. But today’s federal budget still falls short of what is needed to revive the economy, create jobs and protect struggling Canadians.

“The budget smacks of short-term political opportunism instead of long-term solutions,” said CUPE National President Paul Moist. “Many of these measures have a shelf-life of only two years. What happens to people after that? The budget must be substantially amended if the government is really concerned about providing relief to the people who need it most.”

CUPE is calling on opposition leaders to reject the budget unless amendments are made. The current budget fails to include any serious measures to provide relief for the hundreds of thousands who are expected to become jobless over the next few years. The budget also needs to address essential social needs such as health care, pensions, child care, and a comprehensive anti-poverty plan.

Ignoring the advice of the country’s top economists, the government is forging ahead with broad-based personal income tax cuts equal to $2 billion per year. “This kind of irresponsible investment of public revenues drives home Mr. Harper’s incompetence as an economic manager,” said Moist. “It doesn’t make sense to give the middle class another tax break, while 60% of Canada’s unemployed can’t collect employment insurance.”

Hidden, but still included in this budget are the cuts to transfers, controls on program spending, weakening pay equity for federal employees and the privatization plans announced in Harper’s disastrous November economic and fiscal update. This includes limiting growth of transfers under the equalization program and selling off over $10 billion in federal public assets over the next five years.

While the government has increased training opportunities for laid-off workers, the majority ofCanada’s unemployed remain shut out of the budget. “The training and support funding listed in the budget is only one part of the drastic EI reform this country needs,” said Moist. “What kind of unemployment relief overlooks more than half of Canada’s unemployed?” The budget does nothing to expand the country’s low eligibility rate, even though working Canadians have paid into an EI program that now sits at a $54 billion dollar surplus.

Relief for those depending on pensions is almost non-existent in the budget. “If we don’t expand public pensions and reduce reliance on financial markets for retirement security, the end result is fairly straightforward: thousands of Canadians will face poverty in retirement. The government needs to take action. We need an immediate increase in Old Age Security, and a commitment to increasing benefit levels under CPP/QPP.” “The budget fails at what should be the number one priority: protecting vulnerable Canadians,” said Moist.
I am not going to get into the specifics of each budget proposal. I happen to agree with CUPE on many points - especially expanding the eligibility rate for Employment Insurance (EI) for Canada's unemployed. I also add that extending EI benefit entitlements by five extra weeks - increasing the maximum benefit duration to 50 weeks from 45 weeks- is simply not enough.

Where I disagree with CUPE is on tax cuts. I think now is the time to cut taxes even though it will hurt government revenues and it might not make a difference on overall consumption because people will save tax cuts or pay down debts.

I also happen to like the idea of infrastructure spending but there are quite a few conditions attached to this proposal, including the condition that cash-strapped municipalities have to invest in these projects. Where are they going to find the money?

But this blog is about pensions and I agree with CUPE that the budget does not address the needs of those who have lost a substantial portion of their nest egg in 2008's stock market rout.

Importantly, CUPE is right, if we do not increase Old Age Security and expand benefit levels under CPP/QPP, then thousands will face poverty in retirement.

One problem. We need to fix our public pension funds at the same time that we expand coverage or increase benefit levels under CPP/QPP. If we maintain the status quo, the $85 billion in deficit over the next five years will mushroom as the federal and provincial governments are called upon to shore up public pension funds.

If you read the 2009 federal budget carefully, you'll see that on page 90, the following is mentioned on federally regulated pension plans:
In the November 2008 Economic and Fiscal Statement, the Government announced temporary solvency funding relief for federally regulated pension plans for solvency funding payments in respect of 2008 solvency deficiencies.

In addition to that funding relief, federally regulated pension plans are able, subject to rules established by the Office of the Superintendent of Financial Institutions (OSFI), to take advantage of the smoothing of asset value changes over a period of not more than five years to stabilize short-term fluctuations. One of these rules, as currently applicable, prevents the use of asset values in excess of 110 per cent of market value.

In order to assist OSFI to provide further pension funding flexibility by increasing the 110 per cent limit on asset value smoothing, the Government will take action to improve pension plan member protection by making the amount of any deferral of funding that results from the use of an asset value in excess of 110 per cent subject to a deemed trust.

OSFI will be issuing detailed guidance on this subject in the near future.

On January 9, 2009, the Government released a consultation document seeking views from Canadians on the legislative and regulatory framework for federally regulated pension plans. As part of this process, the Parliamentary Secretary to the Minister of Finance will be engaging with Canadians through public meetings across Canada to examine issues pertaining to defined benefit, defined contribution and other private pension plans to ensure that the framework pertaining to these pension plans is appropriate. Given the importance of some of the issues involved, the Government will accelerate its timeline so that consultations will be completed within 90 days.
These measures are there to buy time because a lot of pension plans got clobbered as stocks crashed last year. Moreover, many private pension plans hold illiquid assets in their portfolios like real estate and private equity whose values are falling.

But what about the problems in large public pension plans? What is being done to address these problems?

Unfortunately, not much. It's a topic that makes politicians very nervous, but this problem isn't going away and if we ignore it, it will just keep getting worse.

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