Canada's Public Pension Problem?
The ballooning pension liabilities at Canada Post and the scandal over rich pensions at Ontario Power Generation highlight a looming issue for Canadian politicians – the growing cost of public sector pensions.
The Harper government has given Canada Post a four-year break from making special payments to its employee pension plan, which has a deficit of $6.5 billion.
At OPG, Auditor General Bonnie Lysyk found OPG’s pension deficit is $555 million and its top five executives will be eligible for pensions ranging from $180,000 to $760,000 a year.
OPG contributes "disproportionately more" to its pension plan than its employees, with a funding ratio of 4:1 or 5:1, significantly higher than the 1:1 ratio in the rest of the public service, she added.
And those are just a fraction of the public sector pension liabilities across the country at the federal, provincial and municipal level.
Bill Tufts, author of the 2011 book Pension Ponzi, is concerned about the growing burden on the taxpayer of public sector pensions and the gap between public and private sector plans.
He estimates that the taxpayer contribution to public sector pensions doubled in the past 10 years to close to $34 billion a year, counting both the employer and employee contributions of public sector pensions.
Excesses in public pensions
Tufts points to some of the excesses of the public sector pension schemes, including pensions that guarantee 70 per cent of working income and provisions to top up pensions to those who retire before age 65.
“If someone is going to work for 35 years and retire on $100,000 pension and be retired on that for 35 years when the [average] working wage is $50,000 a year, there is no way the math works,” he said.
Tufts also sees resentment among younger public sector employees who are being asked to contribute an increasing share of their income to pension plans to support retiring baby boomers.
“We’re starting to see a bit of blowback from young employees who are sitting there looking at 15 per cent of their salary going into the pension plan...and they’re saying would I be better off with a defined contribution plan,” he added.
Young workers worriedThere is a lot to cover here. First, I thank Bill Tufts of the blog Fair Pensions for All for sending me this article. Unfortunately, I disagree with pretty much everything Bill proposes and think he's a shameless hack for the financial services industry, spreading fear on the so-called "Pension Ponzi."
Tufts writes the blog Fair Pensions for All which comments on pension issues and has called for defined contribution plans – in which a worker’s post retirement benefits would depend on how much is saved during their career – for all public sector workers.
But any changes to public sector pensions will lead to thorny negotiations with public sector unions. New Brunswick Premier David Alward faced protests last year when he announced changes to public sector pensions that included hiking employee premiums, raising the age of retirement and creating a new investment plan.
While public sector pension liabilities grow, private sector pension schemes are falling behind, Tufts said.
“I think we should equalize the pension system so we don’t have large cohorts of employees retiring on $50,000, $60,000, $70,000 a year pension,” he said.
Most Canadians have no pension
About two-thirds of working Canadians don’t have a company pension and only one third of Canadians contribute to Registered Retirement Savings Plans, the mechanism set in place 50 years ago to encourage Canadians to save, according to findings from a pension conference earlier this week.
Two decades ago, Canadians saved about 20 per cent of their income every year. The current rate is closer to 5.5 per cent, indicating many Canadians are not saving enough outside pension plans to support them in retirement.
But the current CPP benefit is $12,516 annually and even with OAS, pension income is just over $16,000, which can mean a huge adjustment for those with no savings.
Jim Leech, the outgoing CEO of the Ontario Teachers Pension Plan, said pensions are a hot button issue and politicians have been too willing to kick the problem down the road, rather than dealing with unfunded pension liabilities.
“We are debating the wrong things,” he said in an interview with CBC News.
“We are debating things like pension envy. You have a pension, I don’t. I’ll tear yours down and we’ll all be happy. Or this discussion between defined benefit and defined contribution.”
Leech is author of The Third Rail, which argues that many public sector pensions must be redesigned to be sustainable. The book also points to the need for reforms to the universal Canada Pension Plan and RRSPs.
The solution may have to be a hybrid in which current plans change and there is more appropriate risk-sharing in defined benefit plans, he said.
Good plans make money
But good pension plans, such as the teachers’ fund are not costing the taxpayer a lot of money, Leech argued.
“The facts are, for every $1 that a retiree gets from the Ontario Teachers Pension plan, 11 cents comes from the taxpayer, 11 cents came from the teachers themselves and 78 cents came from the investment returns from the plan. It’s a very effective vehicle and by far the most efficient way to provide for the financial future.”
Leech is concerned about the retirement of the baby boomers – seven million workers to leave the workforce over the next 20 years. At the same time, they will live longer than any previous generation.
The danger is that they will live those years in poverty, because they haven't saved and they are facing retirement with debt.
“The real issue is – are people saving enough and how can we encourage them to save enough for the future at a time when we’re all living longer and we have low returns,” he said.
Leech calls pensions “the third rail” because politicians are afraid to touch them.
CPP reform stalled
Federal and provincial finance ministers will again try to reach consensus on CPP reform at a meeting this fall. Finance Minister Jim Flaherty has said he doesn’t want to raise CPP premiums when the economy is fragile.
Meanwhile, some provinces, including Ontario, are threatening to go ahead on their own. Saskatchewan has already created a Pooled Registered Pension Plans strategy to help individuals save for retirement.
Leech argues the RRSP system is just as broken as private plans and the public system.
“The pensions people do have aren't sustainable ... they're going more and more into the stock market, and they are underfunded,” he said.
“Older retirees and workers need to understand the effect their benefits will have on younger workers because they will be paying the price, and will not get involved because they know those pensions will never be there for them.”
Importantly, Bill shows incredible ignorance when he calls for defined contribution (DC) plans for all public and private sector workers. As I've repeatedly stated, all this does is shift the retirement risk entirely onto workers, exacerbating pension poverty.
If you're lucky, saved enough money and enjoyed a nice 30-year bull market, making wise investment decisions, you might retire in dignity. But god forbid another 2008 crisis hits your portfolio close to retirement, you're totally screwed!
Too many people just don't understand the benefits of defined benefit (DB) plans. First, a DB plan pools investment risk so your ability to retire in dignity and security doesn't depend on the accident of your birth date. Second, a DB plan pools assets, significantly lowering costs of the plan. Third, a DB plan creates jobs and provides retirees with a predictable income so they can spend and enjoy their golden years. This in turn means less reliance on a government assistance and more jobs and taxes, which helps boost economic activity and reduce debt over the long-run.
Now, Bill Tufts raises some good points on excesses in public sector pensions but he's mostly spreading myths that need to be dispelled. The vast majority of public sector workers don't get anything close to what the executives at the Ontario Power Generation (OPG) received in terms of pensions. (According to the Toronto Star, Hydro One’s pension plan is as lucrative as the controversial Ontario Power Generation scheme blasted by the auditor general).
Also, it's worth noting OPG fired two vice presidents and its chief financial officer Tuesday after a damning report from the province's auditor general about generous salaries, pensions and bonuses at the government-owned utility.
Kudos to Bonnie Lysyk, the Auditor General of Ontario, and her staff for producing a report highlighting OPG's generous compensation. The news release is available here. I hope other auditor generals in Canada will follow Ms. Lysyk and drill into the problems at federal Crown corporations and their generous compensation practices.
For example, while I defended PSP's hefty payouts based on their four-year performance, I strongly feel the compensation at some of Canada's top ten is outrageous, if not ludicrous. If they're that good, why don't they start a hedge fund or private equity fund and make some serious money?
Don't get me wrong, as I stated in my New York Times opinion piece on the U.S. public pension problem, we need to pay public pension fund managers more in line with their private sector counterparts but we also need to conduct thorough performance audits to make sure they're not taking excessive risks to beat their bogus benchmarks and collect millions in bonuses based on four-year rolling returns (it's a great gig for some senior Canadian pension fund managers but their compensation is excessive).
Finally, I agree with the comments Jim Leech makes in the article above. Canadians are not saving enough and our politicians better wake up and finally address the looming retirement crisis.
On that note, I'm glad to see Ontario Premier Kathleen Wynne is seeking her legislature’s blessing for an expansion of the Canada Pension Plan in a final push ahead of a crucial federal-provincial meeting next week:
“It is our responsibility to make sure the people of Ontario can retire securely with comfort, dignity and confidence,” Ms. Wynne said in the legislature Wednesday. “This is a social imperative, yes. But it’s also an economic imperative. If we do not address this looming crisis, we will all have to contend with the consequences.”Unlike the CFIB, which is completely clueless on Canada's two-tiered retirement system, Ontario Premier Kathleen Wynne gets it. She understands Canada's huge pension crisis and is threatening to go it alone if her counterparts don't move to enhance the CPP.
Ms. Wynne tabled a motion calling for the provinces and federal government to agree to enhance CPP.
Finance Minister Charles Sousa and his fellow provincial and territorial treasurers are meeting with their federal counterpart, Jim Flaherty, at Meech Lake, Que., where Ms. Sousa will try to get a CPP agreement. Under Mr. Sousa’s plan, workers and employers would pay more into the plan now and receive richer benefits on retirement.
The federal government has left the door open to enhancing CPP, but is wary of doing it, arguing the extra cost would be a large burden for corporations to bear. Some business groups are against such a move for the same reason.
Some provinces – such as Manitoba and Prince Edward Island – are staunchly in favour of enhancing CPP. Alberta, meanwhile, is on the fence. Premier Alison Redford said last month she has not made a decision on whether to support an enhancement, and is waiting to see how the discussions play out.
Among other things, the finance ministers must decide exactly how much CPP would increase by and how much the economy would have to improve before it kicks in.
Ms. Wynne and Mr. Sousa met with senior citizens’ lobby group CARP, which has been pushing CPP expansion, Wednesday morning.
CARP’s members are threatening to vote against any federal party that refuses to enhance CPP. They argue that concerns over its effect on business are overblown.
CARP member Bernice Rempel, a 69-year-old retired municipal worker who lives in Edmonton, said she is championing CPP enhancements to ensure younger generations – including her granddaughter’s – have enough to retire on.
She said Pooled Registered Pension Plans, which Alberta and other provinces have brought in recently, are not enough, because they rely entirely on individual contributions “That isn’t really practical, because the person working two or three jobs at a time doesn’t have anything left over to put away for the future,” she said.
Meanwhile the Canadian Federation of Independent Business – one of the leading advocacy groups speaking out against a CPP increase – released a new public opinion survey showing concern among working Canadians and small business owners about mandatory CPP hikes.
The poll found only 23 per cent of working Canadians said a mandatory increase in CPP premiums would help them save more for retirement. Those surveyed were far more likely to say a mandatory increase would reduce their ability to spend on essential goods and services and reduce their ability to take advantage of other savings vehicles like RRSPs and Tax Free Savings Accounts.
A large majority (72 per cent) of small business owners said higher CPP premiums would increase pressure to freeze or cut salaries and 55 per cent said it would lead to reductions in business investment.
Small business owners said the best way for government to help Canadians save for retirement would be to control government spending and reduce taxes to allow Canadians to contribute more towards retirement savings.
The CFIB commissioned an online opinion survey of 1,607 employed Canadian adults by Angus Reid Global that was conducted between Nov. 28 and Nov. 30. The margin of error is plus or minus 2.5 per cent, 19 times out of 20. The CFIB also conducted an online survey of 8,346 CFIB members between Nov. 26 and Dec. 9, 2013.
I hope Jim Flaherty and others banking on PRPPs will finally realize the benefits of enhancing the CPP. This is the best solution not only for bolstering the retirement system for all Canadians but also for spurring economic growth and reducing our long-term debt. Importantly, good pension policy is good economic policy.
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