Wednesday, April 22, 2009

Here is a classic from my favorite newspaper in Canada the St. John Telegraph.

All taxpayers are suffering the same fate as those in St John. There is a constant demand for our tax dollars to go to fund the compensation packages of public sector employees.

As this cartoon shows the highest expense for any city in Canada is the cost of it's compensation package. This compensation package includes the wages, benefits and pension costs of city employees.

I have done a quick analysis of the local government organizations in my community and their labour costs.
University - 50%
Local School Board - 75%
Local Hospital Estimate - 70%

These numbers include the total compensation package. The recent Ontario Sunshine List reported the employees who earned over $100,000 per year in the Province of Ontario. It did not include the cost of the non-taxable benefits for these employees. Health and fringe benefits are usually worth an additional 10% and the public sector pension is worth another 30%.

The employees on the list actually earned and additional 40% in compensation that was not reported.

So I am amused when for example, in Hamilton the city is debating whether they should fund service upgrades for handicap buses that cost $1.2 million. Last year the city budget for the compensation package was almost $500 million on a total budget of $1 billion. This was an increase of $30 million from the year before. If these salaries were brought back to the same level as those in the private sector the city would save almost $100 million.

Thanks again Telegraph for an excellent cartoon.

Saturday, April 18, 2009

Regina's Pensions

Heated discussions are flaring up over Regina's pension predicament.

There is concern and alarm over the huge shortfalls that taxpayers will have to fund. Taxpayers not only have the burden of covering the cost of their personal retirement shortfalls but in addition must pick up the cost of pensions for public sector employees.

Last year public sector employee pensions in Saskatchewan lost hundreds of millions of dollars.

A quick analysis at one of the smaller pension plans in Saskatchewan highlights some of the challenges ahead.
Saskatchewan Pension Page 32, 33

The Municipal Employees Pension Plan (in Millions)
2007 ........ $ 1,379 assets at year end
2008 est........ 260 lost in market collapse
2008 est........ 19 collected in Employee Contributions
2008 est........ 19 collected in Employer Contributions
2008 est ........64 in withdraws and transfers
Assets end of 2008 est. $ 1,093

2007 pension liabilities $ $1,223,958,000

My estimate leaves the plan short $141,000,000 at the end of 2008.

Lets look at some of the numbers to see just how bad the situation is for this plan and the implications for its ability to pay future pension liabilities.

Employee and taxpayers contributions were $38 million. However, net withdraws from the plan were $64 million. This leaves the plan short $26 million. It is reasonable to expect that this can be made up by future investment earnings. ie. on the $1 Billion fund a return of only 2.6% is needed.

It becomes a little more challenging when we look at how to make up the existing shortfall of $141 million and also the fact that the plan's shortfall will likely continue each year at the same level or increase over the $26 million per year.

Now we need to make up an annual shortfall of at least $26 million, which over the next 5 years to $130 million, and the accumulated shortfall of $141,000,000.

Lets hope the markets take off!

Possible Solutions

Increase Contributions
We can see from this article that increased contributions are to be expected. However, these will come far short of what is needed. Several reports show that the current public sector needs annual contributions of 30% in order to be properly funded. The "high contribution rates" listed in the article of 18.8% (9.42% by the employee and employer) leave the pension still short almost 12%.

As taxpayers we need to ask why when we are already putting 9.42% of employee's salary into the public sector employee pension, do we need to also make up the shortfall?

Of course the usual argument for pensions bailouts by taxpayers, is that they are used as employee retention tools to attract workers. However this myth has been proven incorrect by the CFIB in their Wage Watch report that shows the huge gap in wages and benefits between the public sector and the private sector.

The Wage Watch
shows Regina city workers ahead by 25% and Saskatchewan provincial workers ahead by 22.9% of workers in the private sector.

Other Pension Issues
Retirees get big pay day!
Not only are the pensions paid to the public sector unfair to taxpayers, many games are played to make them more valuable.

This article cites the huge vacation payouts made to retiring employees. The bonus comes from sick days not taken but paid out at retirement. They are accumulated each year. What is not fair is that the are accumulated in early years of employment at lower wages but paid out at the end at the terminating wage level.

In The City of Hamilton financial report the sick leave benefit payout is described as "Under the sick leave benefit plan of the City, unused sick leave can accumulate and employees may become entitled to a cash payment when they leave the City’s employment."

In Regina we saw one payout worth $429,406. Many public sector pension plans have built provisions to allow this to be used as part of the pension calculation.
How Spiking Works

As the Canadian Federation of Taxpayers says... Taxpayers are in deep doo-dooo

What are these Pensions Worth?
Here are links to information about the City of Regina pension
Regina Civic employees Plan
Regina's Defined Benefit Plan

Page 23 - Section 15
a) The annual pension payable shall be computed using, where applicable, the employee's average salary, his average base salary and his average excess salary. The employee's average salary shall be the average highest salary during any five (5) consecutive years of service completed prior to his retirement date.

The pensions is based on the best 5 years of service income.
It looks like those vacation payouts might be included as for pension purposes. Those vacation pay entitlements would add tens of thousands onto the annual pension income. Many would have pensions higher than their base pay. ie. those $400,000 payouts.

Page 25:
iii - (b) For service on and after July 1, 1958, two percent (2%) of his average salary for each year of service and any fraction thereof;

(c) Subject to subsection (vii)(g) herein the annual pension otherwise payable under this subsection shall not exceed the sum of seventy percent (70%) of the employee's average salary

Note: This bring the pension up to 70% of income or 2% per yer. Based on 35 years at 2% this is 70% of income.

Some jurisdictions in the states are coming out with pension disclosure like the Sunshine Act in Ontario.
Boston Pensioners List

What does this mean?

Many Canadians will never be able to save enough to afford a comfortable retirement yet are forced to contribute into the pensions of the public sector. Most public sector employees will retire at a young age with gold-plated pensions far in excess of most Canadians' retirement savings. We cannot let this pension apartheid continue. CFIB states .... The unfairness has gone on long enough

As Pierlot has stated and also included in his report for the CD Howe Institute, A Pension in Every Pot, the public sector workers retires with a pension in excess of $1 million. All this of course is funded by you.

Thanks you very much and get back to work, we need you to pay your taxes!!!

Monday, April 13, 2009

The Heavyweights Step In!

Today CARP, The Canadian Association of Retired Persons released a series of advocacy articles aimed at creating major pension reform in Canada.

At initial glance there are certianly some very intersting proposals and ideas originating from the articles in this month's CARP on-line forum. As Zoomers

Pension Reform: the status quo is not an option
This article has brought attention to the clamour across the country for pension reform. It notes some of the pension reform commisions that have been struck across the country to review pension issues.
One intersting note about this article is the call for universal access by all Canadians to a form of defined benefit plan. These type of plans have been the ones that have created the pension crisis we are in and would only be a intergenerational burden with the next generation picking up the tab.
The most positive call to action for this article is a Pension Summit of the First Ministers and Finance Ministers. Included is a list of the emails for all of Canada's Finance Ministers who will hear the message loud and clear over the next few days.

Need to expand the Canada Pension Plan
CARP calls for a complete overhaul of the CPP program. This is an attempt to ensure that all Canadians will have a reasonable retirement income.
One of the ambitious objectives of this article is for a replacement income of 70% for all retired Canadians. This is a great objective but would call for a doubling of contributions from 9.9% to almost 20% of income.

Pension Reform – It Starts with You
Pierot makes the case for increasing the contribution limits for higher income Canadians to allow for more accumulation into retirement plans.
Pierot makes his case by starting off by pointing out the large disparity between private and public sector pensions. This article classifies public sector plans as first class and the average Canadian's retirement plan as economy class.

"About 2.7 million public sector workers (more than 80% of the public sector) travel first-class as members of defined-benefit (DB) pension plans. After a 30-year career, a worker earning $80,000 will have an indexed pension integrated with the Canada Pension Plan that pays $48,000 per year for life and is worth about $1 million.

The 23% of private sector workers with pension plans are mostly travelling coach. Many belong to defined-contribution (DC) pension plans that don’t promise a guaranteed pension.

With no pension plans, the remaining 77% of private sector workers (10.6 million) are travelling standby."

Whatever the outcome of these articles they are sure to create a ripple throughout Canada. Let's hope for the best.

Thursday, April 2, 2009

Pension Primer - Some of the concepts explained

When I began to study pensions many years ago there were some concepts that I did not initially understand and were confusing but became clearer after I studied them in action.

Pension Types
In Canada there are two types of pensions. There are defined contribution plans and there are defined benefit plans.

The best description for the difference in these is the definitions given by Oxford Dictionary of pensions.
1) a regular payment made by a government to people above a specified age... or to such a person's surviving dependents - Public Sector pensions
2) a regular payment from a fund to which the recipient has contributed - private sector pensions - Private Sector pensions

Pension Income
With the defined contribution plan the retirement income determination of this plan is easy. Whatever you have accumulated in the plan at retirement you can draw down on for income. So as a basic example if, at retirement, you have $250,000 accumulated you could draw down $25,000 per year for 10 year. Of course we have an expectation that the fund will generate investment income and can pay more over our retirement.

Most Canadians have the contributory kind while those in the public sector have the defined benefit pensions. In my opinion defined benefit plans are not really pensions at all but a guaranteed income at retirement.

In the public sector the level of defined benefits or guaranteed retirement income is set at 70% of retirement income. The usual public sector formula is 2% of income per working year. Therefore the usual retirement is set for 35 year producing the 70% replacement income. Some pensions typically for police and firefighters are accelerated to allow for retirement after 30 years.

Currently the Federal government pays an average of over$80,000 per year to it's employees. The average employee therefore will earn a guaranteed income of $56,000 per year in retirement. These plans are "integrated" with CPP (Canada Pension Plan) which is around $10,000 per year. So the pension will pay $46,000 of this income with the CPP covering the rest.

In Ontario a teacher retires in the highest income group at over $90,000. Therefore they will receive a pension in excess of $60,000 per year.

Pension Provisions or Formulas

The public sector defined benefit plan is designed to pay 70% of income during retirement. In addition is offers.

Life time - It funds "income" for the life of the retiree
Indexing - It increases every year for life. Based on "inflation" which is set at some arbitrary number selected by government employees.
Survivor benefits - The surviving spouse of the retiree is guaranteed generally 60% of the income. This is regardless of whether or not they have other sources of income, including a public sector pension.
Trips - Free trips to Florida or Arizona every year (just joking)

Pension Boosting or Pension Spiking
Public sector pensions are a continuation of income into retirement years. The public sector pension attempts to replace 70% of the retirees income. Most formulas for pension income are based on an average of the past few years working income.

We saw recently the release of the Sunshine List in the Province of Ontario. This is the list of the employee who earned over $100,000. There was a fair amount of coverage in the press over those employees who made it to the list from jobs with a base rate much less than $100,000.

Since the retirement income is based on a percentage of working income the higher the final pay rate in the final years the higher the pension. Toronto Star reports on bus drivers in the Sunshine List These employees earning overtime have discovered that 70% of $100,000 is a much better pension than 70% of the $60,000 base rate. This is pension boosting.

Double Dipping
Public sector pensions have a much earlier retirement date than the private sector. Many public sector employees retire in their early 50's. Today the life expectancy has increased to over 80 years of age. Many of these "seniors" are able to continue working and I think should be able to continue working. Take the mayor of Mississauga for example, Hazel is a prime example of a very active, intelligent and capable 80 year old.

Public employees can trigger their pensions and find a new job. When they earn both pension and working income they are "Double Dipping". Report from the Toronto Sun

Taxpayer or Pension Liability
There is a common principle for all defined benefit pensions. Employees may make some contributions but the final liability of funding the pension is with the employer. The employer for public sector pensions is of course governments that are funded by taxpayer money. Ultimately all taxpayers are responsible for public sector pensions.

These numbers are very flexible and are manipulated based on the needs of the pensions at the time.

For example, this came from a Google search America's Intelligence Wire - Mar 21, 2006 - Last week, the Ontario Teachers Pension Plan announced it currently faces a $32-billion funding shortfall. Many factors contribute to the looming crisis . This was at a time when the pension saw an new government coming into power that was beholding to them and they wanted to leverage that IOU into more cash.

A year later the political opposition to large amounts of money being pumped into the plan started to rise. The plan then used it's magic and "The Ontario Teachers' Pension Plan is cutting back on inflation protection for some future retirees to eliminate a $12.7-billion funding shortfall reported" After a large injection of cash from Ontario taxpayers the shortfall estimates were changed.

Then this year after a disastrous year on the markets. It lost $19 Billion on the markets and it lost the return for the year. The expected returns on the $100 Billion plan should have been around 6% or another $6 Billion. The shortfall from previous years $12B, last year's losses $19B and the loss of income from last year $6B turned into.... ta da... are you ready for this....
"London Free Press - ‎Apr 3, 2009‎ - Despite a $2.5-billion shortfall that will likely grow during the next four years, contributors to the Ontario Teachers"

Pension Dumping

Many companies in the private sector have found the burden of pensions unsustainable. In an attempt many companies have used whatever means available to escape from the liabilities of defined benefit pensions.
Many companies have looked for relief from their employees, union and to governments. As a last resort many companies have gone bankrupt.
Unfortunately this is not an option for public sector pensions. They can only dump onto the taxpayer.

Underfunded Pensions
An underfunded pension is one where the commitments to employees for future pension income is not sustainable based on the amount of money currently accumulated in the pension fund.