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.

1 comment:

  1. Everyone cites the statistic that 11 million Canadians have no company pension plan.

    I have looked at the Stats Can website for the 2007 figures (last available data) and by my simple math, the figure is 12 million.

    It would be great if the 'experts' and the media checked the facts once in a while. I know 1 million Canadians might not seem like much but to me, that's a lot of grief...