Budget 2012: Where's the Pension Beef?
For the first time since taking office in 2006, Prime Minister Stephen Harper's Conservatives have put their imprint on Canada through a budget that includes major changes to pensions, industrial research, immigration, energy and the size of government.My first impression on the budget is that it's pretty good. Sure, they cut some programs but it wasn't draconian, most likely because the government is petrified of the looming crisis in Canada's over-leveraged housing market.
The development came Thursday, as Finance Minister Jim Flaherty introduced a budget touted by the Tories as a forward-looking plan to foster Canada's economic strength in the long term.
The fiscal blueprint, although identifying $5.2 billion in annual cuts to program spending within a few years, falls short of the austerity package that some had feared.
"Our government is looking ahead, not only over the next few years, but also over the next generation," Flaherty told the Commons in his budget speech.
"We are avoiding foreseeable problems while seizing new opportunities in the global economy. The reforms we present today are substantial, responsible, and necessary. They will ensure we are focused on enabling and sustaining Canada's long-term economic growth."
The $276-billion budget comes nearly one year into the government's majority mandate, and the Conservatives say they are using it to make ambitious reforms.
Among the highlights:
- The Old Age Security (OAS), the backbone of the country's public pension system, will be changed, starting in 2023, so that the age of eligibility is gradually increased to 67 from 65. The controversial change will affect Canadians under the age of 54.
- Government funding and incentives on industrial research will be shifted to promote commercial innovation to boost the economy.
- Environmental reviews of major oil, gas and mining projects will be shortened to ensure the ventures get off the ground sooner to promote economic development, and some reviews will be handed to the provinces only.
- The immigration system will be reformed to process applicants faster and emphasize getting skilled immigrants into the country to fill vacant jobs.
- Government program spending will be slashed by $5.2 billion within three years, a 6.9-per-cent reduction of the $75 billion in programs that were reviewed.
- Within the public service, 19,200 jobs will be eliminated over three years (4.8 per cent of the workforce), including 600 senior executives.
- The federal deficit, forecast to be $24.9 billion for the fiscal year ending this month, will be eliminated by 2015-16.
- The country's economy is forecast to grow by 2.1 per cent this year and 2.4 per cent next year.
- The military's budget will be cut by $1.1 billion within three years, while the Foreign Affairs Department will see its funding cut $168 million by 2014-15. Foreign aid will be sliced by $378 million within three years.
- Charities will be required to provide more information about their political activities and their funding from foreign sources.
- There are no major tax reductions and the government says there are no tax increases.
- The employment insurance system will be retooled to cap premium increases and to introduce pilot projects that remove "disincentives" for people on EI to also find work.
- The penny will removed from circulation this autumn, saving the Canadian economy about $11 million a year.
- The Canadian Broadcasting Corporation, the country's national broadcaster, will see its government funding slashed by $115 million — about 10 per cent.
One of the most significant changes is on Old Age Security.
Flaherty said Canadians are living longer and that the government had to act to ensure the sustainability of the retirement system for future Canadians, although the parliamentary budget officer and other pension experts argue the system is sustainable.
"We have to be realistic," Flaherty told reporters. "We want to make sure that the OAS is there for people in the future . . . It has to keep up with the times, quite frankly, with the longevity of people."
This is Flaherty's eighth budget and it comes after months of economic uncertainty worldwide. The debt crisis in Europe has sparked concerns about another global recession, and the economic picture in the United States has been showing signs of improvement after months of uncertainty.
Flaherty reiterated the message that Harper has been declaring — that Canada's economic future is tied to its ability to become a trading nation worldwide and to sell its most prized assets — natural resources — to regions such as Asia.
"Our goal is to strengthen the financial security of Canadian workers and families, to help create good jobs and long-term prosperity in every region of the country," said the finance minister.
"Still, it is not enough simply to maintain Canada's advantage among the major advanced economies. We must also position Canada to compete successfully with the world's large and dynamic emerging economies. In a changing global economy, we must aim higher. We must avoid falling behind. We must realize the enormous potential of our great country."
One positive, Thursday’s federal budget includes a new requirement for companies to insure any long-term disability plans they offer to employees, ensuring the disability coverage won’t disappear if a company goes bankrupt. Of course, that won't help Nortel's disabled former employees who are not assisted by this federal legislation amendment.
The increase in the age of pension eligibility doesn't take effect until 2023, giving people plenty of time to prepare. As I stated before, Canadians have to stop whining on pensions. If it was up to me, I would have phased in the increase in OAS eligibility over five years and not waited till 2023 (exempting poorer Canadians).
Of course, I would have implemented draconian reforms on pensions, consolidating many smaller public pension plans into larger ones, just like they're doing in Ontario and BC. But the most important pension reforms were not in the budget. Harper's Conservatives are still banking on PRPPs, just like Quebec is taking the lead with VRSPs.
This is the biggest travesty of the budget which nobody is talking about. Instead of pandering to banksters and insurance hacks, we need to expand the CPP or create new large public defined-benefit plans to cover more Canadians adequately in their retirement. If the Conservatives or any other party really cared about pensions, they'd create a pensions Minister and place guys like John Crocker or David Denison in that position. They're both retired (Denison this summer) and can make a strong case for boosting defined-benefit plans for all Canadians.
Can hear the skeptics crying out loud: "Oh, but Leo, we can't afford DB plans for every Canadian." This is utter rubbish, a dangerous myth! We got enough brain power and experienced leaders to help us expand coverage for all Canadians. I am sure Bernard Dussault, Canada's former Chief Actuary, would relish the opportunity to be part of such a project and so would yours truly.
I'll tell you what we can't afford. We can't afford to wait any longer on meaningful pension reforms. The trend toward pension poverty continues unabated. Jim Keohane, President and CEO of the Healthcare of Ontario Pension Plan (HOOPP), arguably the best defined-benefit plan in North America, sent me these comments on shifting people into defined-contribution plans:
These are all excellent points. As pension deficits mount for U.S. and Canadian companies, the shift into DC plans from private and public entities will have a profound effect on the social welfare system.
There seems to be an underlying myth behind these discussions that defined contribution plans are cheaper than defined benefit plans. Actually, facts show that the reverse is true.
The cost of operating defined benefit plans such as HOOPP is a fraction of the cost of operating the typical DC plan. And switching from a DB to a DC plan doesn’t save the employer any money if the contribution rates remain the same.
Switching from DB to DC plans is really about risk transference. By switching from a DB to a DC plan employers are shifting the risk of future underfunding from themselves to the employee and ultimately to the social welfare system. Savings to the employer are only achieved by lowering the employers contribution rates.
Government employers should view the decision to shift from DB to DC differently than corporate employers. You could say that corporate employers are acting rationally by shifting from DB to DC plans. This allows them to shift risk off of their balance sheet onto the employee and the social welfare system.
However, if you are the government, you are simply shifting the risk from one bucket to another – from you the government as employer to you the government as the administrator of the social welfare system.
In fact this shift makes the problem worse. Due to the higher cost of administering DC plans, for the same contribution levels they produce lower pension incomes (a UK study found that they produce pension incomes which were 50% lower for the same contribution rates!) creating a greater strain on the social welfare system.Front end contribution rates are a function of investment returns and the back end benefits. The front end costs can only be reduced by reducing the back end benefits. Who bears costs and risk are a function of plan design and these issues can be dealt with within a DB structure.
I've long argued that pensions should be treated exactly like healthcare in Canada. Canadians deserve to have the same retirement privileges as public sector workers and their elected officials. By the way, MPs' gold-plated pensions untouched by budget, no change before next election:
So much for sharing the pain.
Retirement just got harder for ordinary Canadians and for public servants, but the gold-plated pension plan enjoyed by members of Parliament has emerged virtually unscathed — at least for now — from Thursday's federal budget.
The budget promises only to begin moving "over time" toward making parliamentarians pay 50 per cent of their pension contributions and vaguely refers to further "adjustments" which won't take effect until after the next election in 2015.
"So far, the government's been pretty hard on ordinary Canadians and there's no evidence that they're willing to lead by example at all," said Gregory Thomas, federal director of the Canadian Taxpayers Federation.
For most Canadians under the age of 54, Thomas noted: "You've just had two years added on to your working life, you've just had your old age security benefits postponed by two years," yet "they don't say a word about the MP pension plan."
"We've been led to believe that this government is capable of providing leadership and making tough decisions but, if it is, there's no proof of that in this budget at all."
The federation has long crusaded against the parliamentary pension plan, under which MPs who've served a minimum of six years are entitled to start collecting what critics contend is one of the most generous pensions on the planet at age 55.
MPs enjoy pension benefits worth up to 75 per cent of their salary — and indexed to inflation — while ordinary Canadians are restricted by law to tax-sheltered pensions worth less than one-fifth of their annual pre-retirement income.
The federation estimates that Prime Minister Stephen Harper will be eligible to collect an annual pension of at least $223,500 by 2015. Pierre-Luc Dusseault, a rookie New Democrat MP elected last May at the tender age of 19, can retire from politics at 27 and still be eligible to collect an annual pension of $40,000 once he turns 55.
Unlike the pension plans most Canadians rely upon, the parliamentary pension fund is immune to market meltdowns. It is not invested in the markets and its interest rate is set by regulation and paid for by taxpayers.
And whereas most private sector plans require employees and employers to each pay 50 per cent of contributions to their pension fund, the government officially reports that MPs contribute just $1 into their plan for every $5.80 contributed by taxpayers. The federation maintains the real ratio is more like $1 for every $23.30 from taxpayers, once disguised interest and accounting sleight of hand is taken into account.
Public service pensions are more generous than what most Canadians can count on — worth about one-third of their annual pre-retirement income — but they're still not as cushy as MP pensions. It appears civil servants are going to have to pay more and wait longer to collect them.
Federal public servants currently pay 36 per cent of their contributions, with the government (that is, taxpayers) picking up 64 per cent. The budget says the Public Service Pension Plan will be adjusted "over time" to a 50-50 contribution ratio, as will pension plans for the Canadian Forces, RCMP and parliamentarians.
Finance Minister Jim Flaherty said the change in contribution ratio will be phased in, starting next year. A spokesman for the minister later said the 50-50 ratio will be fully implemented in 2016.
"It'll take some time to get there but that's the direction," Flaherty said, adding that there has to be more consultations because the changes will impact collective agreements with the public service.
As well, the budget says for those who join the federal civil service starting in 2013, the normal age of retirement will be boosted to 65 from 60.
An official said the savings from the changes to public service pensions will be in the ballpark of $500 million.
There is no such estimate for the savings anticipated from the "adjustments" to the MP pension plan. Officials said that's because the unspecified future changes will require consultation and legislation to implement.
Thomas said the ambiguity "makes you question the government's resolve and its ability to lead through a difficult economic period."
"Are they putting the country first or are they still trying to figure out how to end their days on Parliament Hill with the most public dollars possible?"
While they're still guaranteed a soft landing when they retire, MPs will have to get by for now with a bit less money for running their Parliament Hill offices. One day before the budget, it was announced that spending for the House of Commons will decrease by $30.3 million or 6.9 per cent, including $13.5 million less for MPs and House officers, $13 million less for House administration and $3.8 million less for committees, parliamentary associations and parliamentary exchanges.
The reductions are to be phased in gradually and fully implemented by 2014-15.
I've got no issue with public servants retiring at 65, but MPs with their snouts in the pension trough need to share some of their good retirement fortune with Canadians who elected them in office. In short, let's stop the charade and let's get serious on meaningful pension reforms.
Those of you wanting to see more coverage on Canada's Budget 2012 can watch this Global News report. Below, Canadian Press reporters Rob Russo and Bruce Cheadle say the document looks years down the road as Canada's economy gradually improves after the recession.