Friday, October 19, 2012

Two-Tier Workforce in the Public Service?

Kathryn May of the Ottawa Citizen reports, Changes to pensions will create two-tier workforce in the public service:
Canada’s public servants will have to pay more for their pensions and new hires will have to work longer than their older colleagues before they can retire with full pension benefits.

The changes will create the first two-tier workforce within Canada’s bureaucracy with all new hires losing the once-sacrosanct early retirement provisions that let public servants retire at 55 and they will be forced to work until age 65, rather than age 60, to retire without a pension penalty.

The government introduced the reforms as part of sweeping changes to pensions for both public servants and MPs in its second budget implementation bill. It expects the measures will generate about $2.6 billion in savings over five years. Almost all of those savings will come from changes to the plans for public servants, RCMP and the Canadian forces. About $29 million of the savings are generated from reforms to the MPs plan.

“Under changes announced today, for the first time in Canadian history, public servants and MPs will pay their fair share of their pension contributions,” said Treasury Board President Tony Clement.

“It’s the right thing to do.”

Under the changes, all MPs and public servants will have to foot the bill for half of the contributions to their pension plans by 2017. Public servants have been slowly increasing their share in recent years and now pay about 37 per cent of contributions with the government paying the remaining 63 per cent. The contribution rates for the RCMP, which are now at 35 per cent and the military, which kicks in 31 per cent, will also increase to 50 per cent.

Federal unions were ready for that change and weren’t even mounting much of a protest against the 50-50 cost sharing, but they strongly opposed creating two classes of workers. Beginning in 2013, new hires will no longer have the option to retire early at age 55 and will have to work until age 65 to collect full pension benefits.

“We are all for doing our fair share with the 50-50 (sharing) but now people have to work until age 65, which won’t do anything to entice people to the public service,” said Gary Corbett, president of the Professional Institute of the Public Service of Canada.

“It should be clear now the public service is being changed forever and there will be no going back... The pension plans are sound but they have bowed to the push-back from the government’s friends to drive pensions down. Why shouldn’t everyone have a good pension?”

Robyn Benson, president of the Public Service Alliance of Canada, argues a two-tier workforce that “penalizes” the next generation of workers is the hardest reform to swallow. She argued the government should be improving pensions, including the CPP, for all Canadians.

“A two-tier system creates inequities between older and younger workers,” said Benson. “The new hires in the public service are certainly at a disadvantage.”

Federal unions have fought campaigns for several years to stave off changes to public servants’ defined-benefit pensions, but they knew they would face an uphill battle if MPs plans were reformed.

Currently, public servants can retire with a full, unreduced pension at age 60 unless they have 30 years of service by time they turn 55 years old. If they have that combination of age and years of service, they can collect a full pension at 55, which amounts to two per cent for every year of service or 60 per cent of their best five years of salary.

Those who retire before age 60 face a five per cent a year reduction on their pension for every year under age 60. The maximum pension public servants can earn is 70 per cent of their salaries but they must work for at least 35 years.

With the reforms, public servants will now have to work longer for the same pension. With the retirement age bumped five years to age 65, the early retirement will now be age 60 — as long as they have worked 30 years.

In short, all public servants who retire before they turn 65 will face a pension penalty if they don’t have 30 years of service. For example, a bureaucrat retiring today at age 60 with 20 years experience will collect a pension worth 40 per cent of his or her salary. With the reforms, that pension would be reduced by 25 per cent.

The government faced intense pressure from groups like Fair Pensions for All, the Canadian Federation of Independent Business and the C.D. Howe Institute to revamp public servants’ pensions, which they denigrate as “gold-plated” and “unsustainable,” especially when most taxpayers footing the bill don’t enjoy such generous benefits.

Bill Tufts of Fair Pensions praised the government for having the “courage” to make MPs contribute three or four times more to their pensions so it had the “moral authority” to increase the costs and reduce the benefits of its own federal workforce. He called it, however, a critical first step.

“It’s fair that since they moved Old Age Security to age 67 for the rest of us that they would increase their own retirement age. It sets off an epic battle for reform of public sector pensions. It will be a very long and acrimonious battle.”

The changes will delay retirement and create an older public service. Public servants now retire at average of 58 years old, which is younger than the average Canadian who retires at age 63.

Clement acknowledged the changes will have consequences, such increasing costs of an older workforce, but he said those impacts were “factored in the decision-making we announced today.”

Clement, however, said the government isn’t contemplating any further changes to pension plans and won’t be looking at moving to defined contribution plans for its employees.

Increasing the retirement age for new recruits will take years to generate any significant savings. Today, most new hires are well into their 30s when they join the public service and would never have enough years of service to qualify for the early retirement provision that’s disappearing.
The government implemented the right reforms, increasing the contributions by MPs as well as increasing the retirement age for public servants to 65 years old.

Will these proposals create a two-tier workforce among civil servants? Yes but not as bad as unions claim. These reforms are needed  to ensure the sustainability of these plans. I would have moved the retirement age to 67, just like they did for Old Age Security. Canadians are living longer and the retirement age must reflect this fact. When I see doctors like my father and his friends working well past 65, it's tough for me to feel sorry for civil servants and MPs retiring with a full pension at 65.

The real two-tier pension problem remains that public sector workers enjoy the security of a well managed, well governed defined-benefit plan which ensures a guaranteed pension till the day they die whereas private sector workers have to manage by saving enough using RRSPs and TFSAs, leaving them vulnerable to the vagaries of the market.

And to add insult upon injury, Ted Menzies, Minister of State (Finance) wrote an op-ed in the Financial Post in late September, touting how pooled plans will address a savings gap:
Most Canadians know the importance of saving for retirement — and Canadians try to do it in different ways based on different circumstances.

Until a few years ago, however, private-sector retirement savings options were limited — mainly to Registered Retirement Savings Plans (RRSPs).

While our incidence of elder poverty is low, the OECD and other independent organizations have consistently identified a lack of private savings as contributing to a shortage of pension coverage. That’s why our government took action.

First, to directly address savings (especially for lower-income Canadians), our government introduced the Tax Free Savings Account. In a short few years, it has already become the most successful savings vehicle since the RRSP. What’s more, approximately 80% of TFSAs are opened by Canadians in the lowest two income brackets.

Second, we moved forward with Pooled Registered Pension Plans (PRPPs). They will be a low-cost, private savings option for millions of Canadians without access to a work place pension plan. Incredibly, 60% of Canadians do not have access to a workplace pension plan. PRPPs will help address this gap in the savings of Canadians.

PRPPs respond to a real need in the Canadian workplace and were developed after careful consideration. In 2009, our government sponsored a working group on pensions. Its findings indicated that certain modest and middle-income Canadians were at risk of not saving enough for their retirement.

Low-income Canadians would achieve a relatively high wage-replacement rate through Canada Pension Plan, Old Age Security, and the Guaranteed Income Supplement. In fact, Canada has one of the best retirement income systems in the world. It is one of the most effective at reducing incidence of elderly poverty. Canada’s elderly poverty rate stands at 5.9%. That compares to an elderly poverty rate of 8.8% in France, 10.3% in the UK, and 22.4% in the U.S., according to the OECD.

High income earners had more options available to them and were able to save in different ways.

Pooled Registered Pension Plans will help address a savings gap among these modest and middle income earners.

There is over $600-billion in unused RRSP room since 1991. PRPPs will fit under the existing RRSP limit, a savings vehicle that is not being fully maximized by savers in this group. PRPPs will increase pension coverage among that group. That is why at the December 2010 meeting of provincial and territorial finance ministers there was unanimous agreement to pursue the PRPP framework.

Unlike what some have suggested, we are acting to help secure a healthy retirement for all Canadians — and PRPPs are part of that effort.

Like other private savings options, PRPPs will be voluntary. They will be attractive to the saver because of the low cost they will achieve by pooling savings. They will be attractive to employers because they will be simple to implement and some legal hurdles have been moved to the plan administrator. This is especially important for small business.

Because of these design features, I believe they will increase pension coverage, and for Canadians looking for different ways to save, this voluntary option is a very positive development.

Why would someone object to a low cost and simple to administer savings option?
With all due respect to Ted Menzies, who I met when he came to Montreal a few years ago during his public consultations, PRPPs are a joke and the government should be ashamed for banking on them. PRPPs are a dead giveaway to banks and insurance companies and they will end up being a colossal failure.

Instead, the government should have expanded coverage through enhanced CPP, allowed more competition from existing public DB plans like OMERS, and created new defined-benefit plans to meet the pressing needs of workers looking to retire in dignity and security. When it comes to improving our retirement system, every Canadian should enjoy the benefits of a defined-benefit plan.

The dumbest argument against my proposal is that "we can't afford it" as it will add billions to Canada's public debt. We most certainly can afford it. Importantly, if we get the funding right and expand DB coverage, it will save billions in future social welfare costs and lower administrative costs of managing pensions. It will also make our workforce much more productive, allowing companies to focus on business while pensions are managed by independent investment boards that operate at arms-length from the government.

In short, take all this bickering on pensions between MPs and public sector unions with a grain of salt. They will have to contribute more and work longer but at least they still get to retire with a defined-benefit plan, which is far better than what is being offered to most Canadians.

Below, Canadian Taxpayers Federation's Kevin Lacey calls Ottawa's proposed legislation to reform MP's pensions a 'significant win' for taxpayers. More like a marginal win for taxpayers. I'm still waiting for a more profound victory which will come when we bolster defined-benefit plans for all Canadians.

Also embedded a pathetic plug for PRPPs sponsored by the Canadian Life and Health Association. More industry trash. Banks and insurance companies simply can't compete with large, well governed defined-benefit plans and they know it. Mark my words, PRPPs are going nowhere and will do little to address the retirement needs of Canadians.