True, most of the liabilities of federal public sector pension plans were incurred before the Public Sector Pension Plan Investment Board (PSP Investments) was set up in 2000. That fund was set up to manage the liabilities of pension plans of the Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force for post-2000 period.
More than 400,000 federal government workers across the country can relax. Their entitlement to rock-solid pensions, fully indexed to inflation, is intact.
Under measures introduced in Thursday's federal budget, employees will have to contribute more to their pensions before they collect them.
Assuming the new requirement passes a number of legal and practical hurdles, government employees eventually will absorb 50 per cent of the costs of providing promised pensions, compared with roughly one-third at the moment. It's not clear how quickly the employees' share will be hiked, though the process will occur over many years.
Current legislation caps the costs borne by employees at 40 per cent and puts annual limits on how much contribution rates may rise. At the moment, employees kick in 6.2 per cent of salary up to $50,100 (Canada/ Quebec Pension Plan current limit), and 8.6 per cent on earnings above that. Current rules allow the government to boost contribution rates of up to 0.4 per cent of salary each year.
Officials from Treasury Board, the government's employer, said legislation would be introduced to change both the cap and contribution rate.
They added that the government also would consult with unions and other interested parties.
Finance Minister Jim Flaherty said he also would increase the normal retirement age to 65 from 60 for anyone joining the public service starting in 2013.
These moves are designed to bring the federal government employee pension plan regime closer to those offered by provinces and parts of the private sector.
However, the reforms, if they indeed are implemented, will do little to narrow the huge gap between the value of pensions enjoyed by federal government workers and their counterparts in most of the private sector.
For one thing, the federal plans - which provide benefits for more than 330,000 retired public servants, military and RCMP workers - are based on a strict formula that guarantees certain levels of pensions: two per cent times years of service (up to 35), times the best five years of salary, all of it indexed. About 80 per cent of federal government workers can count on this kind of largesse, known as a defined-benefit pension.
However, only a small minority of private-sector workers have defined benefit plans, and many of the latter are under threat because the companies that sponsor them are weak financially and can't afford them. Most private-sector workers either have no pension, rely on their own registered retirement savings plan or belong to a defined-contribution plan - that is, they bear the risk of ensuring there's enough money to retire upon.
Just how valuable are the federal plans? Very. Consider the net present value of a $40,000 annual pension - in other words, the lump sum you would need in the private sector to generate this kind of pension. Using a basket of very safe dividends, blue-chip stocks and treasury bills, you would assume a return of roughly four per cent, implying a lump sum of $1 million.
Of course, it's much more complicated than this. For one thing, the federal government pensions are blended with the Canada/Quebec Pension Plan, which doles out small pensions to all Canadians. This would reduce the capital that would need to be set aside for the individual pensioner.
However, the fact of indexing also needs to be taken into account. Clues about the cost of this can be gleaned from government real-return bonds, which currently generate only about two per cent interest. This would imply a $2-million lump sum to create a $40,000 annual pension, absent the blended Canada/Quebec Pension Plan amounts.
Federal officials do not see it this way. A Finance Department expert points out that the Public Service Superannuation Plan assumes its assets will generate an annual return (including inflation) of 6.2 per cent, which implies net present value of $645,000 to create a $40,000 pension. Whether that's an appropriate yardstick is another question. Finance officials also note the government began moving toward a more balanced cost-sharing formula in 2005.
Indeed, the government, for more than a decade, has managed employee pensions through funds, rather than taking money out of consolidated revenue. Officials note the returns generated by these funds are in rough balance with pension obligations. Nevertheless, the net liability for the pension liability of public service, military and RCMP employees as of March 31, 2011, was $141.6 billion. Nearly all of this reflects liabilities incurred before the pension funds were set up in 2000.
With Thursday's budget, Flaherty and his fellow Conservatives are continuing a tradition of gradualism with respect to the public service. They are very aware of the resentment held in many quarters of the rest of the country toward federal pension benefits, but the Conservatives also appear keen to avoid a war over the one benefit that has kept so many employees wedded to the public service.
Prior to 2000, the pension contributions were invested in non-marketable government bonds. Since real rates were deemed too low to fulfill these pension obligations, a pension fund was created to invest contributions in public and private markets to achieve the required actuarial rate of CPI + 4.3%.
On that point, Bernard Dussault, Canada's former Chief Actuary, sent me this comment on the article above:
Your $1,000,000 value of an annual lifetime indexed pension of $40,000 corresponds to an average 25 years life span at age 60 and investment returns at the same rate as inflation, which is quite reasonable for an average non investment expert citizen. The real rate assumed by government is 4.25%, not 6.25%, but its $625K is consistent with a 4.25% real rate of return.The key point, however, is that public sector workers pay to obtain their defined-benefit pension plans and retire in peace and security. Those in the private sector aren't as lucky because they have to save a lot more and be damn good investors to achieve a retirement comparable to their public sector counterparts. In this wolf market dominated by big banks, elite hedge funds and high-frequency trading platforms, that is a tall, if not, impossible order to achieve.
Large public sector pension funds are able to shield themselves from the vagaries of these highly volatile markets by investing in the best public and private market funds. They're also able to pool assets and internalize many activities, lowering costs and delivering higher risk-adjusted returns than any defined-contribution plan.
This is why I've been calling for major reforms to pensions where all Canadians can have some peace of mind knowing their retirement assets are managed by professional pension fund managers who are able to invest across public, private and absolute return markets. Importantly, expanding coverage and getting the funding right is the only solution to stemming the inexorable tide toward pension poverty.
As far as MPs' pensions, the Canadian press reports, MP pension reform bill to be introduced in fall:
Legislation will be introduced this fall to turn the vague hints of MP pension reform made in this week's budget into concrete plans, government sources say.
Changes will be made to the age of entitlement and benefit levels, though they won't take effect until after the next election in 2015.
In the meantime, MPs will start contributing more to their own pensions next year and by 2016, will pay half.
In advance of Thursday's budget, the Conservatives hinted they would take a hard line on MP pensions, after they raised the eligibility age for Old Age Security benefits to 67 from 65.
But the budget Thursday was thin on details, sparking criticism that politicians weren't ready to take a hit while asking Canadians to take one on the chin.
"The fact that they put their own bank accounts ahead of the country at the same time as they are asking others to sacrifice, it's really disappointing," said Gregory Thomas, the federal director of the Canadian Taxpayers Federation.
MPs can start collecting their pensions at age 55, enjoying benefits worth up to 75 per cent of their salary. Unlike other Canadians, they also have a pension plan immune from any shocks to the stock market and indexed to inflation.
And while private-sector plans see employees and employers equally split the cost of contributions, the government report on the administration of MP pensions says they contribute just $1 into their plan for every $5.80 contributed by taxpayers.
Government House leader Peter Van Loan was coy about the coming changes Friday, saying there had to be consultation before anything could happen.
"I'll let that process unfold," he said.
Opposition MPs were equally uneasy about getting into the details of what changes could or should be made.
"You know, in terms of compensation for MPs, we have always said that … these decisions should be made by an independent body, and we would absolutely go along with whatever their recommendations are," said New Democrat MP Robert Chisholm.
The Liberals said it's not just MPs pensions that need to be addressed.
In 1992, Prime Minister Brian Mulroney implemented a special allowance for prime ministers who had served four years or more to be collected once they turned 65 or when they ceased being an MP.
The annual allowance is equal to two-thirds of the prime minister's salary, so for Prime Minister Stephen Harper's case, that will work out to around $104,000 a year.
"Mr. Harper proposes raising the age of retirement to 67," said Liberal MP Justin Trudeau.
"We propose he does the same thing for his special pension."
Love watching MPs with their snouts in the pension trough squirm trying to explain their generous, guaranteed, gold-plated pensions no matter what market conditions arise while they cut public sector jobs, raise OAS eligibility and do nothing to introduce meaningful pension reforms for all Canadians.
Having said this, I'm not calling for cuts to MP pensions or the Prime Minister's pension. We should raise the age they're eligible to collect these pensions, they should contribute more, but if we're going to attract good, smart people to public office, we should offer them some perks to what is a demanding job where everyone sees you with a cynical eye.
And the Prime Minister of Canada deserves a great pension. Period. If you think Harper's pension is generous, you have not seen the pension benefits accorded to the heads of Crown corporations and large public pension plans in Canada. This is on top of their short and long-term bonuses which run in the millions.
Finally, Jason Fekete of Postmedia News reports, Pension impact won't be small, OAS clawback could hit 6% of seniors:
Millions of Canadians woke up Friday with some disheartening news about their work lives and financial future: they learned that they may now need to work two years longer than initially planned.
The Conservative government's budget announcement on Thursday of a plan to gradually increase the eligibility age for Old Age Security and the Guaranteed Income Supplement to 67 from 65 will have profound impacts on the lives of Canadians across the country.
Finance Minister Jim Flaherty and the Harper government maintain the changes are necessary to ensure the financial sustainability of the OAS program for future generations, while the parliamentary budget officer and some pension experts insist the program is on sound financial footing.
Here's a bit of an explanation on OAS and GIS and what the changes mean to Canadians:
Question: Who is affected? Answer: Beginning April 1, 2023, the age of eligibility for OAS and GIS will gradually change to 67 from 65. Canadians 54 years or older as of March 31, 2012, will not be affected. People born between April 1, 1958, and Jan. 31, 1962, will become eligible to receive OAS benefits between the ages of 65 and 67, depending on their actual birth date. People born on or after Feb. 1, 1962, won't be eligible for OAS until age 67.
Q: What are the OAS and GIS benefits?
A: The average Old Age Security payout is $510.21 a month, with the maximum payment being $540.12 a month for seniors with less than $69,562 in annual net income.
The payment is gradually clawed back for those above that income threshold, until it disappears for those earning more than $112,772. The average GIS monthly payment is $492.26 while the maximum is $732.36. It is paid to seniors who make less than $16,368.
Q: How many seniors are affected by that OAS clawback?
A: The Caledon Institute of Social Policy calculated in a recent research paper that only 6% of seniors are affected by the OAS clawback and just 2.3% receive no Old Age Security. The institute argued that lowering the clawback on OAS would save more cash for the federal government, without affecting the majority of seniors who have low or average incomes.
"One can have a debate about when the clawback should start to happen and how much it ought to be. Those are judgment calls," finance minister Flaherty told reporters Friday following a speech to business leaders.
"We have a sharply progressive income tax system in Canada . . . some Canadians might think it's too sharply progressive or not sharply progressive enough, and similarly with the Old Age Security benefit."
Q: What's the incentive for working longer and deferring OAS payments?
A: People can voluntarily defer receiving their OAS benefits for up to five years, starting July 1, 2013, and will be rewarded with a higher, actuarially adjusted pension. For example, Canadians who defer the OAS pension for one year (to age 66 instead of 65) would receive about $6,948 annually (in 2012 dollars) instead of $6,481. Someone who defers the OAS benefit for the maximum five years would receive $8,814 instead of $6,481.
Q. Will the announced changes affect the Canada Pension Plan?
A. No. The CPP is a separate fund, available to Canadians who were in the workplace. It is actuarially sound and won't be touched.
As I stated before, Canadians have to stop whining on pensions. They have plenty of time to prepare for the increase in OAS eligibility. The Government needs to lower the clawback to ease the strain on low income seniors.
More importantly, the Government needs to introduce meaningful pension reforms to expand coverage for all Canadians, providing them with the same pension privileges of public sector workers and their elected officials. Everything else is like putting a Band-Aid on a pension tumor.
Below, listen once again to Ted Kennedy's famous 1978 speech passionately defending healthcare for every U.S. citizen. How long before courageous Canadian or U.S. politicians stand up to defend defined-benefit pension plans for the millions facing pension poverty? They too have a right to retire in dignity knowing their pensions are defended from the vagaries of this wolf market.