Finance Minister Jim Flaherty wants to be clear. The commitment he made in 2010 that the Conservative government wouldn’t touch federal pensions didn’t mean they would never be reviewed again.Get ready for a major showdown on public pensions. The federal government has an agenda to go after public pensions. According to government officials, it's not just MPs that have their snouts in the pension trough, everyone in the federal civil service is a pension pig.
The Public Service Alliance of Canada was banking that public servants’ paying higher contribution rates for their pensions would spare them from further changes or cuts to their pension plans. This was based on assurances PSAC President John Gordon said Flaherty gave him during a meeting with the Canadian Labour Congress’s executive council in the fall of 2010.
In that meeting, Gordon claims Flaherty confirmed the government wouldn’t be touching pensions as long as employees agreed to pay 40 per cent of the yearly contribution rates for their pensions by 2013.
The government is phasing in an increase that would boost employees’ share of contributions — which dipped to a low of 25 per cent — to 40 per by 2013. Last fall, the unions agreed to an accelerated rate increase, effective Jan.1, to ensure the 2013 target was reached.
With all the recent speculation that pension reform was on the Tories’ radar, Gordon publicly questioned how solid that commitment was. He has since written to both Flaherty and Treasury Board President Tony Clement to “clarify” if they have changed their minds and what they plan for pensions. The union has also revived its “hands-off our pensions” campaign and petition.
But Flaherty’s office said that “two-year-old conversation was taken out of context.” Flaherty’s assurance was never intended as a “commitment that it would never be reviewed again,” said Chisholm Pothier, his director of communications.
“In fact, Mr. Gordon knows our government continually reviews public service compensation and benefits to ensure they are fair to taxpayers and sustainable for employees — as we have stated publicly several times,” he said in an email.
The fall of 2010 is also when PSAC was in the throes of collective bargaining for a controversial three-year wage deal that included negotiating the surrender of severance pay for voluntary departures from the public service. Gordon said the union didn’t bring Flaherty’s pension assurances to the bargaining table, but he said public servants were aware of the commitment. He said he also met with then Treasury Board President Stockwell Day and received the same assurances.
“Now what I am hearing is that ‘that was then and this is now’,” said Gordon.
“I asked him a direct question, in front of the CLC, and took him at his word and if he’s moving in another direction, I know nothing about it and, if that’s the case, he should come clean on where he is intending to go.”
Many argue any pension review should be part of a broader examination of compensation in the public service, including wages, pensions and all other benefits. Many public servants would rather pay more for their pensions and benefits than lose them.
This week, Prime Minister Stephen Harper responded to questions about reforming public service pensions. He said no decision has been made but the issue must be examined because of a demographic shift in Canada leaving fewer people in the workforce and more older people living on pensions. He said pension plans for public servants and MPs have to be fair to taxpayers.
“We have to have a pension plan that is reasonable and attractive to get people into the public sector, but it should not be significantly more generous than what would be available in the private sector,” Harper said.
Clement, who is leading the spending review that is looking to trim $4 billion from departments’ operating budgets, is looking at “all options” to achieve those savings. Clement has criticized PSAC for failing to offer any “concrete responsible input” on how to help reduce costs.
And some in the media are all aboard. Mark Sutcliffe of the Ottawa Citizen reports, Why Canada’s public pension format is patently unfair:
Imagine if you and I each put our money in the stock market on the same day. We might choose different companies or funds, but let’s say for the moment that we both picked relatively safe investments and were looking for long-term results.
Each of us might expect a reasonable return on our investment in 10 or 20 years. But — and I probably don’t have to remind you of this, given recent events — there would also be the risk that we’d lose some money.
Now, what if the market was structured in a way that if both our investments tanked, I was still guaranteed a reasonable return on mine but you were exposed to the loss? I still get my money, you get nothing. Would you consider that fair?
How about this: What if, in the event my investments didn’t grow at the rate I expected, the money to pay my guaranteed return came from none other than you? So, on top of taking a hit on your portfolio, you’d have to cough up the cash to cover the shortfall in mine?
Impossible terms, right? No one would ever agree to them.
Well, that’s basically the way things are structured if you’re saving for your retirement on your own and I have a public-sector pension. If the market doesn’t perform well, you take a hit and I don’t. Oh, and you also have to top up my fund.
Now that Finance Minister Jim Flaherty has hinted that there might be some tweaks coming to federal public service pensions, the plans are under intense scrutiny. Some columnists and taxpayers groups have pointed to many reasons why the plans are too rich, while unions have, naturally, rushed to their defence.
(Before the government does anything about its employees’ pensions, it will have to introduce dramatic reforms to the pensions of Parliamentarians, which are exceedingly generous. But since there are only a few hundred MPs, the total cost isn’t as significant as the pensions of public servants.)
To the unions, of course, no changes are required to public-sector compensation whatsoever. All the government has to do to balance its books is increase taxes on corporations. The math on that doesn’t actually work, but that’s of no concern to union bosses.
The union also argues the security of a pension is part of what it takes to attract an employee to a government job, that it’s a trade-off in return for a lower salary. But there’s lots of evidence that public-sector workers are actually paid more than equivalents in the private sector.
Some critics of government pensions point to the fact that pensions are based on the best five years of income, regardless of how much was contributed by employees in earlier years. Others raise the fact that the government contributes 60 per cent toward pensions while the workers contribute 40 per cent. Both these formulas could be adjusted, but even a different average income and a 50-50 contribution split wouldn’t fix what’s fundamentally wrong.
The central problem is this: the guaranteed, indexed, defined-benefit format is patently unfair. In a defined-benefit pension plan, if the market doesn’t perform, the shortfall has to be made up by someone. In the case of public-sector pension plans, that someone is the taxpayer.
So the private-sector worker whose RRSPs or employee pension value takes a hit when the markets drop is then given a second hit: he has to chip in to prop up the pension of a retired government worker, who has no such liability.
Canadians without pensions or with plans that are susceptible to market conditions are effectively the insurance policy for the public-sector plan. And, thanks to the performance of the markets recently, there’s a huge shortfall right now.
The government can’t take away the risk of market performance for every Canadian. Even if it did, we fund the government, so it would have to raise our taxes with one hand and top up our investments with the other. That’s the kind of investment scheme Bernie Madoff would design. Or maybe the government of Greece.
If the government can’t provide guaranteed retirement income for all Canadians, why should it give it only to some, at the expense of the others?
Across the private sector, and even in government agencies like Export Development Canada, where defined-benefit plans existed, they are being phased out in favour of defined-contribution pensions.
That’s the fundamental switch the government needs to take. They could phase in the changes for new government employees only. But the bottom line is this: the government shouldn’t expect taxpayers without pensions or with retirement savings tied to market risk to insure the plans of others who have no risk whatsoever. It’s incredibly unfair.
I had no idea that defined-benefit plans are being phased out at the Export Development Bank Canada (note to self, call Steve Poloz to check). But this article is so flimsy on so many grounds. I'm getting tired of pension ignoramuses like Mark Sutcliffe and others who write articles on pensions making grandiose statements that are patently false.
First, as I've explained many times, defined-benefit plans are much better than defined-contribution plans. All you have is to look at the surprising strength of Canada's public pension funds, lauded as the best in the world. Are they perfect? Hell no! But I'd much rather have our pension fortunes with them than some crappy mutual fund the banks and insurance companies are peddling in defined-contribution plans.
Importantly, large public pension funds pool resources, lower fees, bring activities internally and invest in the best public and private market funds in the world. They also engage in direct investments in private markets throughout the world, something which no mutual fund can compete with.
Are there abuses in public pensions and room for pension reforms? Yes, the most flagrant abuse is with MPs' pensions, which are guaranteed by public coffers, but there clearly has to be a public discussion on PS pensions. Employees fund these pensions but unions are going to have to realize that people are living longer and the economic reality is that unless these pensions are fully funded, they will not be sustainable.
Is the solution to phase out defined-benefit plans and introduce defined-contribution plans? This is the dumbest idea ever. It will only accelerate pension poverty and increase our public debt down the road. Did you get that? Moving to DC plans will ensure pension poverty for millions and increase our public debt down the road because society will be saddled with all sorts of medical and social costs.
In fact, Matthew Brett, a graduate student in political science at Concordia University, specializing in political economy, wrote an excellent op-ed column in the Montreal Gazette, Public pensions help sustain, not erode, economic stability:
In their Jan. 7 Opinion piece under the headline, "Courage is needed to tackle fartoo-generous pensions," Bill Tufts and Lee Fairbanks attack one of the last vestiges of social security by targeting public-sector pension funds in Montreal and elsewhere.
Tufts and Fairbanks are using the ongoing economic crisis to foster a climate of insecurity. They proclaim that there is a crisis in public-sector finances, and that public sector workers must therefore tighten their belts.
They say that Montreal Mayor Gérald Tremblay must be courageous and tackle public-sector pensions, which they claim are the root of the problem. They situate themselves as the guardians of the taxpayer.
Their logic is troubling. It is the excesses of capitalism that are to blame for our current economic predicament, not the excesses of labour. In fact, public workers and public financing ensured that nations weathered the crisis by sustaining economic output. Yet, now the public, not the banks and multinational corporations, is being asked to shoulder the burden.
Public-sector work really is the last bastion of "decent" work, providing employees reasonable wages and a level of job security. As the global crisis drags on, one would hope that we have learned from granting private interests too much power.
Public-sector provisions should be strengthened rather than eroded in order to ensure greater economic and social stability.
Further eroding public pensions during an economic downturn is an invitation to prolonging economic stagnation. A more sensible approach would entail sustaining public pensions as a means of ensuring reasonable consumption habits. Extending public-sector standards to the private sector is the best means of ensuring that the current crisis is not prolonged. It is also the best means of ensuring that future crises do not emerge.
But the debate over public pensions must extend beyond strictly economic concerns. As Tufts and Fairbanks themselves state, "pensions were created for a noble reason: to provide employees a reasonable level of income in their golden years."
People have a right to decent levels of security and well-being, plain and simple.
Moreover, this noble endeavour did not fall from the skies. Social security emerged after years of popular struggle by people concerned for their future and their communities.
Preserving and extending public pensions is a struggle worth fighting for. One can only hope that working people in the public and private sectors are up to the challenge.
This article prompted the following responses from these readers:
That first comment is wrong, public pensions are not "massively subsidized" by taxpayers. Public sector workers pay for their pensions and pension funds invest their retirement savings to fund their pensions. The second comment is excellent and bang on.
Re: “Public pensions help sustain, not erode, economic stability” (Opinion, Jan. 18)
Political-economy graduate student Matthew Brett recommends extending public-sector pension standards to the private sector as the best means of ensuring that the current crisis is not prolonged. He then totally avoids the obvious question – How will this be financed? – by stating “the debate over public pensions must extend beyond strictly economic concerns.”
The problem with public-sector pensions is that they are massively subsidized by taxpayers who invariably have vastly inferior pensions, if they have a pension at all.
Although I am not a political economist, and as much as I would appreciate a massively subsidized pension, I recognize that someone somewhere would have to pay for it.
Matthew Brett writes: “People have a right to decent levels of security and well-being, plain and simple” in his defence of public-sector pensions.
All people, or just a percentage of the workforce employed by federal, provincial and municipal governments and their agencies? We can’t reform a broken system by perpetuating a double standard. I refer readers to an excellent La Presse series on public-pension structures in Scandinavian countries.
A Canadian version would ensure every working Canadian his or her personal pension, administered by professionals at arm’s length from whichever government is in power. It would reduce the fiscal burden on small and medium business owners, while encouraging people to remain with their employers, rather than hopscotching among jobs with regular landings on EI.
Structured properly to include registered retirement and tax-free savings plans, it would help clean up predatory financial-planning practices.
Rather than arguing in favour of an outmoded system that favours a minority, we need to find the political courage to pioneer a better way for everyone.
Let me end my comment with some personal reflections. Are there abuses in the Canadian public pension system? You bet there are, and there needs to be reforms, including reforms on MPs' pensions, retirement age, city and university pension plans, and even reforms on how we compensate public pension fund managers.
But I simply do not buy the argument that the cure-all to our pension woes is to phase out defined-benefit plans and replace them with "cheaper" defined-contribution plans. You get what you pay for, and in the case of defined-contribution plans, all you'll get is pension poverty.
All Canadians deserve a secure retirement. Maybe not as lavish as the one our MPs get, but they deserve the same peace of mind as public sector workers. It's not an impossible goal and if we do it right by building on our large public defined-benefit plans and creating new ones which are funded properly, managed by professionals and governed by independent investment boards, we will not only mitigate pension poverty, we will increase economic productivity and reduce our debt. Supplemental CPP is a step in the right direction, but it's not enough.
Years ago, Canada introduced a universal health care system. It's far from perfect but it allows all Canadians access to quality health care. I think it's time we introduce universal pensions with requisite pension portability so workers can rest assured that no matter where they go work, their pensions are always going to be managed by professional pension fund managers. It's time we stop demonizing the public sector and start thinking how we can improve our retirement system for all Canadians.
Below, Making Medicare: The History of Health Care in Canada, 1914--2007 is a new online exhibition produced by the Canadian Museum of Civilization. It offers a thorough, reliable and engaging account of the birth and development of Canada's publicly-funded health care system. It is an essential resource for anyone interested in Medicare's past, present and future in Canada.