Tuesday, January 20, 2009

Who will bail out your pension? Pension reform needed.

Most taxpayers are funding as much into public sector pensions as they provide into their own!

There is the serious possibility of social upheaval that will result from the unfairness of these public sector plans because we have a two-tier system. One tier is for the public sector employee and the other is for the working taxpayer. The only problem is the taxpayer funds them both.

Gold-plated Pensions

Gold-plated pensions are those that are based on final-salary. These are typical of public sector plans. Most private sector plans are savings based; whatever is saved in the fund is available for retirement.

An article last year in the Daily Mail from the UK shows that taxpayers pay almost as much into public sector pension plans than they pay into their own.

In Canada there are a total of 4.6 million defined benefit pension plan members. In the public sector there are about 2.9 million defined benefit pension plan members. This leaves 1.6 million DB plan members in the private sector. Most of the DB plans in the private sector are not final salary, but we will leave that for another discussion.

Most private sector employees in Canada are winding down their DB pension plans. Of the Top 25, in asset size, pension plans in Canada only 4 are not taxpayer funded. Two of the companies who have DB pension plans in this group are in serious financial trouble and several business observers have indicated the company problems are a direct result of these pension plans. Also known as Legacy Costs, we are familiar with the problems at General Motors and Air Canada.1

It is interesting how this report – The Taxpayers Alliance - from Ireland, reflects the same trends occurring in Canada and the associated risks of the high costs of public sector pensions.

Quotes from the report state:

The high level of local authority pension contributions is symptomatic of a growing problem of over-generous and unaffordable public sector pensions, which does not bode well for future financial stability: Demographic changes are putting pressure on pension provisions:

- Life expectancy for men is projected to increase from 77.6 years currently to 85.5 years by 2056, while life expectancy for women is projected to increase from 81.7 years currently to 88.7 years by 2056.9

- There are currently almost four people of working age (aged 20-64) for every pensioner (aged 65+). By 2056, that ratio will fall to just over two people of working age for every pensioner.10 Public sector pension arrangements are not responding to these

Demographic challenges:

- Between 1995 and 2004, the proportion of public sector workers enrolled in final salary pension schemes has increased from 78 per cent to 88 per cent. At the same time the proportion of private sector workers has declined from 23 per cent to just 16 per cent.11

These are almost the same statistics that the CFIB uncovered in their analysis of the public pensions situation in Canada.

It is interesting how Canada has allowed the public sector to retire as virtual millionaires! Currently the amount of money required to fund the OTTP for current plan members is $ 825,000 per member. The same amount would be applicable for Federal workers that earn an average of $71,000 per year. This assumes a pension target of 70% of their last year’s working wages. They need the same $800,000 in their pension accounts at retirement.

Just for fun, calculate how a government worker earning $71,000 per year could potentially put aside $ 800,000 into a retirement plan. Calculate how much you would have to save to create the same pool of money after 30 years working and earning 5% rate of return. Then index the thing for inflation.

Anyways, get back to work; we need your tax dollars!!! Lets just hope this dialogue can begin in Canada as well.

1 - Michael Bloomberg mayor of New York city was quoted as saying "Detroit's expensive pension plans are part of the reason why the automakers are teetering on bankruptcy and pleading for a bailout in Washington." - http://www.nypost.com/seven/12182008/postopinion/opedcolumnists/why_pension_reform_is_fair__vital_144747.htm


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