Tuesday, March 31, 2009

Pension Battle Continues in St John

From the St John Telegraph

The pension battle continues in St John, New Brunswick. It is one of the first of it's kind in Canada and may be the precedent case for public sector pensions across Country.
These plans are broke but no one wants to admit it, least of all those who are expecting a gold-plated pension plan paid for by the taxpayer.
As you can see in the editorial above the hope is that "A stock market rebound will restore some value to the pension fund's portfolio. It won't reduce the city's pension obligations or protect taxpayers from future deficits."
I am amazed by the insight of the Telegraph as they continue to report on this issue. They understand the problem, the unfairness of the situation and the huge cost to taxpayers and our society if the problem is not dealt with.
It is ironic that this situation is occurring in St John where the size of the problem is minuscule compared to pension problems lurking elsewhere in Canada. The Telegraph reports "Saint John's municipal pension plan has a going-concern deficit estimated at $146 million. Deficit payments could reach $9.7 million next year." This compares to the situation in Ontario for example with pension funds short an estimated $100 billion... yes billion.
The Ontario government in their recent budget announcement committed $10billion in pension payments (taxpayers money) to Ontario public sector plans over the next 4 years. The Ontario Teachers plan has accumulated over $110 billion of taxpayers money and is estimated to be short in excess of $30 billion. This is only one of several jumbo pension plans in Ontario with many more across the rest of Canada.
I thank the Telegraph very much for their coverage and the editorial cartoon. You can see the Blood Sucking Parasite cartoon on the side bar of the blog. Keep up the good work.

Wednesday, March 25, 2009

Pension Reform in Canada

It is apparent that the current pension system that we have in North America does not work and needs to be rebuilt.

In the United States many Governors and business organizations have taken on the task of examining what went wrong with our public sector pensions and what needs to be done to reform the system.

Gold-plated Pensions

The problem is that the taxpayer is funding gold-plated pension plans for public sector employees. At the same time taxpayers will never come close to having an adequate pension or retirement savings plan.

In Canada it is estimated that the retirement system currently has $800 billion of assets held for public sector pension employees. In the private sector the amount is only $300 billion held in pension accounts. Despite this accumulation into the public sector pension plans, they are still estimated to be $100 billion short of the funds needed to properly fund them.

The public sector employees make up 20% of the workforce yet has accumulated the largest share of total pension assets. The 80/20 rule applied here; 20% of the workers have accumulated 80% of the pension assets. You can click here to see the list of the largest pension funds in Canada, careful it is a PDF file. Top pension funds in Canada

As the St John Telegraph reports the public sector plans "are considered the best because they promise a certain level of income, regardless of market conditions, and are usually based on the worker's salary and years of service...
Defined-contribution plans, which are used by many private entities, are determined by the accumulated contributions to a retirement savings plan, plus earned interest."

Throughout North America government are having to deal with the problem of these public sector pension plans. Reforms have begun in many States including Rhode Island, New York, Michigan and many more. In Canada however, governments are slow to discuss reforms. The problem is too many politicians, senior government officials and academic experts who need to initiate a public discussion about reform are counting on a gold-plated plan for their retirement.

Reform will be forced upon the system.

One of the first governments to address pension reform appears to be the Province of New Brunswick. As a result of a huge projected deficit, partly caused by required pension contributions, the issue of pension reform is being discussed. It will be a discussion that will be forced to other provinces as well.

Some of the reform issues being examined include:
* Eliminate the rule that allows employees to retire without penalty when they have 85 combined years of service and age, the so-called Rule of 85.

* Remove disability benefits from the pension plan.

* Change the way the city calculates pension payments to retired employees; instead of an average of earnings over three years, payments would be an average of earnings over 10 years.

* Change the annual increase of pension payments retirees receive to one per cent from two per cent.

Although these are admirable changes to the system, nothing more than a move to defined contribution plans will save the system. We will have to watch how this progresses.

Saturday, March 21, 2009

The True Value of Pensions

Today I was at the Farmer's Market in Hamilton for my usual weekly shopping. Outside the Federal Building I came a cross a large protest by the local USW union protesting for protection for pensions.
They have a right to be concerned about their pensions and the security of these pensions. I am not sure who they were protesting to but hopefully it gave them a sense of confidence that their pension would be dealt with fairly. They have worked long and hard for these pensions and trusted the companies they work for to save for their retirement. In hind-sight it was foolish to trust their unions and employers but that is what happened.
The people in the federal building where they were protesting are not very sympathetic as they themselves have fully guaranteed gold-plated pensions guaranteed by the taxpayers.

Accumulated Public Sector Pensions
As I have mentioned before the problem with the pension system is the cost of those gold-plated pensions that are given to the public sector. In Canada it is estimated that Canadian taxpayers have funded into these public sector plans which cover 20% of the workforce, in excess of $800 Billion, yes billion. Still the taxpayer will have to fund hundreds of billions more to fulfill the guarantees made on these pensions.
At the same time the private sector in Canada as accumulated almost $300 billion of pensions. We have funded more into the public sector than we have funded into our own pensions. And only 20% of all workers are in the public sector.
The public sector pension is not truly a pension but a guaranteed retirement income for life. It is based on a 70% of final working income, paid for life, guaranteed to go up each and every year and guaranteed to continue to spouses.

Value of these pensions
Let's look at the value of these guaranteed stream of income. A teacher currently in Ontario retires with over $90,000 of income. The retirement income (pension) value for this teacher is in excess of $60,000.
As a pensioner it has been estimated that the tax burden is 15% lower than a working Canadian. A working Canadian pays for CPP and EI as well as other related payroll taxes. For example, a self employed individual funds almost 10% of salary into CPP. The value of this 15% savings is $9,000 to the teacher's pension.
The OECD has estimated that a pensioner generally has a 30% lower cost of living. Part of the calculation is based on the fact that in Canada 80% of pensioners have no mortgage on their home. Most public sector workers are in the top 20% of income in Canada so probably most have paid off their mortgages. Also there are lower costs associated with not working such as transportation, clothing, telephones and lunches. This 30% adds another $18,000 to the retirement income.
We start with the $60,000 in guaranteed retirement income add another $9,000 for lower taxes and add another $18,000 for lower cost of living and we are now at $86,000. This is the equivalent of a $86,000 working income for the retired teacher.
The average working Canadian earns a little over $38,000 each year.

Time for Reform
These guaranteed retirement incomes need to be reformed.
In this example we have a retired government worker living on a taxpayer funded standard of living at $86,000 per year. Many families have two guaranteed retirement incomes.
Considering most of these retirement incomes are triggered around age 55, many are free to work other jobs. Most of these jobs are in other government departments or the same ones. This is where their connections are and where they feel comfortable working. Worse yet are those double dippers brought to my attention from J. Meyer - Teaching the Double Dip

Saturday, March 7, 2009

The end of part one

Over the past several years as part of my business I have watched the problem of public sector pensions. The problem has grown much more serious, painful and acute in just the last year.
In the early days of media and general public recognition of the public sector pension problem very few commentators discussed the issue. There were a few organizations such as CD Howe and the Canadian Federation of Independent Business CFIB who understood the serious implications of what the CFIB called the Pension Predicament.
Today the issue has become a topic of mainstream discussion throughout our society. At every business or charity function I attend the topic is brought up for heated discussion and every day there is a front page article or pension editorial about public sector pensions. It seems that almost everyone understands the issue and has an opinion on it.
This is a good situation to be in because now society can begin the work of changing the pension system to make it fair for all.
Part of the problem with the pension issue is understanding the nature and dynamics of the serious problem we had created. As a professional working in the area as a consultant to small companies, it took me a while to understand how the system worked in relation to the different types of pensions plans. I always saw a huge difference between the different types of pensions some of my clients had. The public sector employees had pensions that far outshone anything a private sector employee would be given.
Today I understand the pension predicament as the fundamental differences in the way the private sector and public sector pensions work. The private sector plan is a traditional pension based on money accumulated over the working career of the employee. However, the public sector pensions is based on a guarantee of continuing income based on retirement income levels.
In Canada the public sector pension norm is that 70% of retirement income will be guaranteed for life. The income is usually structured to include CPP but comes with several additional guarantees as well. It is guaranteed for life, guaranteed to increase every year and guaranteed to a surviving spouse, usually at 60%. The public sector pension is also know as a defined benefit pension. It should be called a guaranteed retirement income stream.
The fundamental problem for the public sector pensions today is that they are not sustainable and unfairly places onto the backs of the taxpayer to finance.
There is no way that given the promises made, public sector pensions can be sustained. Several attempts over the years have been made by the magic of actuarial analysis to figure out how much these plans should accumulate in order to remain solvent. However, most of these actuarial attempts have turned out to be a slight of hand trick used by the public sector unions to deceive the taxpayer into promising higher and higher guaranteed levels of retirement income.
The trend over time has been for higher payouts at retirement and earlier payouts. The formula for calculating the defined pension (guaranteed retirement income) is based on a formula of working years and the income earned in those years. For example, a typical private sector defined benefit plan would be based on the total working career of the employee. The public sector plan is based generally on the average past 5 years of working. Today a Government of Ontario contract is being negotiated based on a past 3 years average retirement income.
The total commitments made to public sector pensions is estimated to be short over $100 Billion dollars in Canada and in the U.S. a recent report shows them to be short $237 billion. This is after about 30 years of pumping hundreds of billions of dollars into these plans by taxpayers.