Canada's Looming Pension Wars?
As the City of Regina debated its largest tax hike in more than a decade, 76-year-old George Malish looked at his household balance sheet to see how he would pay for it all. Taxes were rising, along with utilities and phone bills. Yet Malish’s Old Age Security (OAS) cheque had gone up by just 55 cents a month. “I ask [city officials] to please put their heads together and decide how to divide 50 cents a month and forgo the other increases they are demanding,” he wrote in a letter to the local newspaper, suggesting that politicians and bureaucrats should also try limiting their own wage increase to 55 cents a month.I wish the authors of this article had contacted me so I can set them straight. Instead, they go talk to a financial industry hack, Bill Tufts, who keeps perpetuating well-known pension myths.
Despite what he sees as the growing demands on his meagre benefits, Malish considers himself one of the lucky ones when it comes to financing his retirement. Aside from income from CPP and OAS, he receives a company pension after retiring from what he calls “blue-collar work” in 1994. Two decades of inflation have steadily eroded his income, but at least Malish’s pension covers prescription benefits for himself and his wife. “Very few people have that,” he said in an interview. “That’s what’s giving us a very decent living.”
Like many of his generation, Malish is at the forefront of the coming pension wars, the growing divide between the haves, whose retirement is secured by guaranteed workplace pensions, and the have-nots, left to scrape by on their own meagre savings. It’s shaping up to be a battle between politicians and government bureaucrats armed with pensions that offer guaranteed payouts and the remaining 80 per cent of Canadians in the private sector who are preparing for retirement with a patchwork of different savings programs. With the first wave of Baby Boomers heading into retirement, Canadians are only now starting to take stock of what kind of lifestyle they can afford with their savings and comparing that to their neighbours working government jobs. Many don’t like what they see.
“As people are becoming aware of the divide that exists, I think there is going to be resentment over the fact that some people are retiring much earlier and are going to have a much more financially secure retirement,” says Bill Tufts, a benefits consultant and founder of advocacy group Fair Pensions For All.
Already that resentment is starting to spill over into public policy. In Ontario, Liberal Premier Kathleen Wynne has staked her election hopes on voters’ angst over their retirement savings by promising a made-in-Ontario pension plan aimed at middle-class workers. Meanwhile her opponent, Progressive Conservative Tim Hudak, has attacked the plan as a job-killing payroll tax and is promising instead to cut spending by firing 100,000 government workers.
Public sector unions are pushing back against the growing threat of pension envy that is putting pressure on governments to cut back on their retirement benefits. The Public Service Alliance of Canada, the union that represents federal government workers, argues that at $25,000 the average pension payment for its members is hardly lavish.
Yet governments are struggling to afford even those benefits. This month, auditor-general Michael Ferguson warned the pension system for federal public servants was underfunded by more than $150 billion, representing Ottawa’s biggest liability next to the $668-billion federal debt. The federal government also paid $9.2 billion worth of interest payments on pension-related debt —nearly a third of the government’s total interest payments for 2012. Ottawa has also channelled another $1 billion into its pension fund from other tax revenues to help cover the roughly $15 billion in pension benefits it pays out every year, representing 5.5 per cent of all federal government spending.
Proponents of generous public sector pensions have traditionally argued that governments need better benefits in order to compete for workers who can find higher salaries in the private sector. Calgary Mayor Naheed Nenshi said as much this month when he warned that the Alberta government’s proposed public sector pension reform “could have a crippling effect on our labour force,” by encouraging an exodus of municipal workers to the private sector.
But it’s no longer the case that public sector workers are paid less than their private sector counterparts. A study by the Ontario Institute for Competitiveness and Prosperity (ICP), a government-funded think tank, found that for many jobs—particularly non-management positions—government workers now receive both higher salaries and better benefits than their private sector counterparts. Such generous guaranteed pensions make it difficult for politicians and bureaucrats to enact good policy because they can’t empathize with the struggles of average Canadians, says Gregory Thomas, federal director of the Canadian Taxpayers Federation. “You create a separate class of people who really identify with the government as opposed to the people they’re governing.”
Increasingly the anger over “gold-plated” public sector pensions isn’t focused on how much government workers are earning in retirement, but that they have access to a pension at all. Thanks to the decline of manufacturing jobs, the percentage of private sector workers enrolled in defined benefit pensions dropped from 35 per cent in 1970 to 12 per cent by 2010. Nearly all public sector workers in the largest provinces are covered by workplace pensions, regardless of whether they are junior secretaries or senior managers. By contrast, even the most skilled private sector workers have roughly a one-in-two shot of landing a job with a pension. Even then, most of the private sector pensions are defined contribution plans, where the benefit payouts depend on how a worker’s individual retirement account performs. The differences between the two types of pensions are huge. The ICP estimates the typical defined benefit plan for a manufacturing worker is worth $255,000 compared to $43,000 for a defined contribution plan.
That is the kind of discrepancy that riles taxpayers, who end up paying out more to fund public pensions than they get from their own employers. The ICP estimates that governments contribute an average of $4,530 a year for every worker, compared to an average contribution of $3,230 for private sector employers. Those are tax dollars not available to fund health care and infrastructure spending, says Tufts.
Yet others argue that growing pension envy is pushing policy-makers in the wrong direction, by encouraging governments to pare back their own pension benefits rather than expand benefits in the private sector. That will end up hitting taxpayers in other ways, such as through government programs like the Guaranteed Income Supplement for low-income seniors. A Boston Consulting Group study last year, funded by Canada’s largest public sector pensions, found that 15 per cent of pensioners with a defined benefit plan collect GIS compared to as many as 50 per cent of retirees without one. “If there’s not going to be the ability to bargain defined benefit plans then the pressure is going to come out somewhere else,” says Herb John, head of the National Pensioners and Senior Citizens Federation, who retired from Ford at age 49. “It’s like a bubble under a rug. You can’t get rid of it. You can push it around, but it’s always going to be there.”
Many worry that the grumblings of pension envy today will eventually explode in a full-blown crisis as young workers, saddled with student debt, mortgages and stagnant incomes, age into retirement. “The resentment becomes divisive,” says Alexandra Lopez-Pacheco. At 53, she’s a pensionless freelancer whose retirement wealth is tied up in the rising value of her Oakville, Ont., home. But she wonders what will happen to her three children. “When we start losing things that are really essential to society, we start resenting those who have [them],” she says. “We’re not helping ourselves or them. We’re bringing down the bar.” If anything, the pension wars are just getting started.
On Monday, I wrote a no-holds-barred comment on the day of reckoning for pensions where I let everyone have it:
There is nothing that pisses me off more than a bunch of incompetent goofballs in Ottawa and idiots at right-wing think tanks spreading malicious lies on defined-benefit pensions and why we shouldn't enhance the CPP for all Canadians.As you can read, I basically think everyone is full of it when it comes to pensions: the federal government which has yet to enhance the CPP for all Canadians; public sector unions with severe entitlement issues who have yet to embrace the concept of risk sharing; and Canada's public pension plutocrats getting paid like star hockey players for managing billions from captive clients (what a joke!).
But I also got a bone to pick with all these public sector unions who think gold plated pensions are their god given right. Think again. There is nothing written in stone that guarantees you a nice pension for life. Just ask the civil servants in Greece and Detroit what happens when the money runs out.
I worked at various jobs in the public and private sector. There are lazy, incompetent fools in both the private and public sector. It used to drive me nuts when I had some senior civil servant bureaucrat telling me they are counting the days to retire so they can collect their pension.
Let me be clear on something. I am all for defined-benefit pensions across the public and private sector but I am also for major reform including raising the retirement age and risk sharing.
Importantly, if it were up to me, I'd raise the retirement age to 70 because people are living a lot longer and I would pass laws where pension plan benefits are indexed to markets. I would also ensure much more transparency and better governance at all our pension plans, including our much touted large Canadian public pension funds where compensation is running amok.
I had a chat with someone last week who asked me: "How can the board of directors at PSP Investments justify paying Gordon Fyfe $5.3 million? That's as much as P.K. Subban makes and he is a star athlete!" I explained to him that compensation at PSP and elsewhere is based on performance but there is no question that PSP's tricky balancing act is a lot of nonsense and the board needs to review compensation policy for senior executives (also spread that money to the lower ranks since they are the ones who really work their asses off!).
And it's not just PSP. All the major Canadian public pension funds pay their senior executives extremely well and they all justify it with the same flimsy excuses. I blame Claude Lamoureux, Ontario Teachers's former CEO, for all this compensation run amok at Canada's large public pension funds. You see Teachers got their governance right, paid people well to attract and retain talent so everyone else followed them and implemented the same compensation policy based on beating the same bogus benchmarks over a rolling four-year period.
But at the end of the day, these are public pension funds. They're not private funds which have to worry about performance in order to raise assets. They have captive clients giving them billions to manage so I find it hard to swallow all this nonsense that they deserve these hefty payouts because they manage billions and beat some bogus benchmarks based on a four-year rolling return period.
Another thing that really irks me is all the claims that Canada's senior public pension fund managers need to be paid extremely well because they can get get paid better in the private sector. This is utter fantasy and pure rubbish. Not one of the senior pension fund managers at Canada's large public pension funds can ever make anything close to what they are making at these public pension funds. Not one.
I roll my eyes whenever some pension fund manager tells me they could have easily started or worked at a hedge fund or private equity fund and made a lot more money. I tell them flat out: "You're dreaming, stay where you are, you got the best gig in the world, you're making great money taking little to no risk" (of course, some previous pension fund managers bought themselves cushy jobs at funds they invested billions with, which is scandalous!).
There are many other things the federal government could have done right after the crisis to cushion the blow to private sector workers. For example, the current RRIF rules penalize people working well past the age of 65, which is absolutely insane. Many people who work past 65 were forced to take money out of their RRIF at the worst possible time while public sector workers retired with their guaranteed pensions. It's a complete travesty and Finance Canada has yet to implement any changes.
Now more than ever, we need is to get our collective heads out of our asses, sit down and implement policies that bolster our retirement system and economy for the long-run. The benefits of defined-benefit plans are misunderstood and grossly underestimated. I'm glad Ontario is going it alone but the best solution is still to enhance the CPP for all Canadians.
Someone asked me what I thought of Quebec's budget 2014 which was revealed yesterday. Quebec's public finances are a total mess. In many respects, the explosion of our debt is eerily similar to what happened in Greece except we have a much better economy. Nonetheless, the era of austerity has just begun and Quebec needs to do a lot more to cut waste, stimulate its economy and tackle its pension deficits.
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Below, Quebec's finance minister, Carlos Leitao, discusses the new budget. I suspect Mr. Leitao won't be popular over the next few years but he has no choice but to implement some serious cuts and rein in spending. There are many other things his ministry should be doing but I will make my recommendations through the back channels.