Friday, December 24, 2010

Need to buy more gold-plated pension?

In the NY Post there is an article about the difference between retirees in the public sector and those in the private sector. It highlights some of the rhetoric used to identify the difference.
Defenders of public employee pension systems often make the case that pension benefits are not all that generous. The outrageous cases you see on the news — Long Island police retiring in their 40s with pensions in excess of base pay, administrators “retiring” with six-figure pensions and then going back to work with another government agency, one ex-FDNY firefighter running marathons on his $86,000 “disability” pension — are the exceptions, they say.
The data, however, tells a different story. According to the Census Bureau, the average New York retiree receiving a corporate or union pension — a retiree from the private sector — was receiving an annual benefit of $13,100 in 2009. For state and local government retirees, that figure was more than twice as high: $27,600. And that average figure includes retirees who were part-time workers or only spent part of their careers in government; full-career retirees often do far better.
The Average Pension is not the Average Pension 
The public sector unions always use the example of the "average pension" when they try and show that pensions are not really too high. One key component is missed in the average pension approach. It includes retirees who have been retired for as long as 30 years. 
An example are the pensions of federal public servants in Canada. It is commonly reported that the average pension is $ 24,506 per year. What is not pointed out that last year the new average pension was $39,312. This is the average pension of someone retiring last year. 
Add a full CPP pension onto the average pension and you have a retirement for a newly retired federal civil servant of over $ 50,000 per year. Much higher than the average working Canadian wage of $44,000. Add in the 70% increase that a pensioner has in disposable income and heck, it's like they never retired at all. Just they do not have to go to the office any more!
Just how much is that pension worth?  
Pension Bomb offers a quick pension calculator. In Canada most pensions would be the same as the after 1/1/2010 pension example. 

Still Not Enough?

If you find that the pension you are being offered by taxpayers is a little anemic take advantage of the pension buy-back. Pension boss’s taxpayer-funded deal
Like many city employees, former pension administrator Lawrence Grissom signed up for a great deal starting in 1999 — he used $116,000 to add five years to his city service record without having to work those extra years.
That boosted his pension by at least $24,000 a year for life.
Unlike any other city employee, however, his purchased service credits didn’t actually cost him anything. Taxpayers picked up the tab.
Now a 68-year-old retiree living in Colorado, Grissom is expected to collect an additional $456,000 in retirement because of the deal if he lives until age 82, the average life span for men.
Grissom’s pension is $118,000 a year, based on the 18 years he worked and the five years he purchased under his special deal. He retired in April 2006 at 63.
Before you get too excited... I know I can hear you already... "but Bill this is an example from California how can it be relevant to us?" sorry but it happens here too. 

It is a common public sector pension benefit called the pension buy-back.  

Ottawa Example  
At the start of the year the the new Auditor of the City of Ottawa had a special provisions written into his contract that gave him a $100,000 signing bonus. This bonus was used to buy-back a pension that he had with another level of government. 

The move was severely criticized especially as it came from someone who had the job of protecting taxpayers interests. I blogged about it in Obscene taxpayer and pension abuse in Ottawa

Ontario Teacher Pension Plan buy-back example: 
For example, in 2009, Nicole takes a leave of absence from her full-time teaching job to travel around the world. Her annual rate of pay immediately prior to her absence is $60,000. Here’s what it will cost Nicole to buy back the leave: $60,000 x 12.0% (contribution rate for 2009) = $7,200 + interest charges

We use the standard interest rates in effect from the end of your leave until your buyback is completed. For example, interest rates were 2.78% in 2009 and 1.90% in 2010. If your leave spans more than one school year, we also apply an escalation factor to your salary to account for year-over-year changes in employment information.
So in this example, a contribution of $7,200 would buy one year's pension worth $42,000. Also it will give an extra year of service boost to her total pension worth about 2% of her income. It will be for the rest of her life worth about another $36,000 over the next 30 years. It also allows her to retire one year earlier that her total working credits would allow. 

How much pension buy-back can I sell you?

Bill Tufts
Fair Pensions For All

Monday, December 20, 2010

Ministers Agree to PRPP ... now the hard part

The UK NEST Plan .3% Management Fees

It appears that Canada the country is on track to solving the pension predicament. 

The Finance Ministers from all provinces have agreed to go ahead with the plan introduced last week by Flaherty, the federal finance minister. He calls the plan the Pooled Registered Pension Plan. The PRPP focused on those Canadians most in need of pension triage. 

The PRPP is being introduced as an alternative to enhancing the CPP plan. An enhancement that the provinces and labour groups across Canada have advocated for. A CPP boost would have the impact of eliminating the billion dollar pension shortfalls that exist in public sector pensions. Most of the pension shortfalls are in provincially administered pension plans so the provinces would have benefited greatly from a CPP enhancement as well. 

Urgent Action Required
This pension reform was needed to help those who are in danger of falling through the gaps in the current system. 

Insurance companies in Canada support the new plan. They administer most of the pension assets in Canada and were at risk of losing substantial assets to the CPP plan if it is boosted. The insurance companies are now on board, selling the benefits of the plan. Sun Life Financial welcomes milestone
 PRPPs will benefit Canadians by making pension coverage more broadly available:
  • Benefit from economies of scale. 
  • A plan that is easy to administer for the employer 
  • The advantages of a pooled plan and the management that it can offer 
  • Automatic enrollment to promote higher participation rates 
  • Linked to salary to provided increased contributions over time. 
Rubber to the Road
Now that the insurance companies are glowing from the introduction of the PRPP, they will have to make good on their promises. 

Part of the promise is to provide pooled investments with reasonable investment fees. If this does not happen the PRPP program will not work. At the same time it will mean billions of dollars coming from the pockets of  the financial services industry in Canada.

Here is an excellent podcast that is an interview with Katherine Strutt the head of Saskatchewan Pension Plan i is from Sheryl Smolkin. It does an excellent job of describing the benefits of the PRPP concept. The interview points out that the cost of management fees in retirement plans are around 2.5% to3%. The Saskatchewan Plan is able to manage the pool for well under 1%. Sheryl has a series of excellent interviews on her website.   

Is this small pension plan Canada’s best kept secret?

The Secound Pension Problem
The trip to Kananaskis primarily focused on one of two major problems affecting our pension system in Canada. This first problem is the low enrollment for working Canadian in pension plans. The secound problem is the serious erosion of value in  retirement plans from MER's or the expenses charged by financial services institutions to manage these funds. 

Please note: I make a portion of my personal income from consulting on these plans for Canadian businesses. The sales and marketing expenses of these plans is a large cost for the Canadian insurance companies.

The Canadian Labour congress did put out some analysis tools to show the effect of high MER's on retirement savings in Canada. Straight Talk on RRSP and mutual fund management fees

In the UK they have introduced a PRPP plan and have called it the NEST program.The only difference from the Canadian plan is that employer contributions will be mandatory in the UK. In Canada, at this time they are voluntary. 

Neil T. Craig, Senior Pension Consultant from Stevenson and Hunt pointed out to me the NEST has a up front management fees of 1.8% on new contributions into the plan. After that however, the plan is managed with only .3% or 30bps in fees. The illustration at the top of the blog includes this up front fee in the calculations of long term pension values. It comes from an article in the Daily. The charges that wipe out your hard-earned pension pot

The Wealthy Boomer had an overview of comments from some of Canada's top pension experts. The most direct comment came from Keith Ambtachtsheer who pointed out the three things needed to make the PRPP fly: 
1.) Auto-enrolment of all workers without a RPP into a PRPP (with an opt-out clause).
2.) A standard default option with a prescribed contribution rate and investment policy.
3.) Oversight of all PRPPs by an independent fiduciary body to ensure cost-effective delivery.
The government has given the insurance companies what they want. Now it is time for the insurance companies to give Canadians what they need. 

Bill Tufts 
Fair Pensions For All  

Thursday, December 16, 2010

The Pooled Registered Pension Plan

There was some very big news today from the office of Finance Minister of Canada. 
He released a report recommending that a new Pooled Registered Pension Plan to be established in Canada. It appears that the idea of enhancing the CPP is no longer viable and the PRPP is in play. 

Benefits Canada reports:
The draft claims that “moving forward with PRPPs will provide Canadians with a new low-cost accessible vehicle to meet their retirement objectives. This will be particularly beneficial to Canadians who do not have the benefit of an employer-sponsored pension plan, including the self-employed.”
A third party would take the role of managing the administrative aspects of the plan, which could be a benefit to small and medium-size employers. However, there are some tasks the employer would need to be responsible for, such as determining employer and employee contribution levels (if applicable), collecting and remitting contributions and informing the administrator of new members a termination of employment.
The investment industry reacted swiftly and favourably.
Canada's life and health insurance industry currently administers 70% of Canadian pension plans, so the in industry sees itself as a potential winner if the PRPP proposal is adopted.
What is a PRPP?

Here is the way similar plans work in other countries.   
The PRPP appears to be modeled after other successful plans around the world including the recently created NEST program in the UK and the Kiwi Saver Plan from New Zealand. In those plans, however, employer contributions are mandatory. It appears that the new PRPP plan will only be mandatory for employees. 

Employers will be given the option to make contributions into the PRPP. 

In other countries the plans are designed so that employees are enrolled on a mandatory basis. They will have to make an active selection to opt-out of the plan. In the experience of those countries that offer the opt-out very few employees actually make the move to opt out of the plan. 

It offers large pools of investments that are managed by the private sector insurance and investment companies. The investor is given the option to choose who he wants to invest it with.

Why a PRPP 

Jim Flaherty draws sharp political arrow from pension quiver
» The nose of the baby boom touched 65 last year, and many, many more will cross that threshold in the next decade. A frightening proportion have done too little to plan for their retirement, and are now faced with the realization that government programs will be nowhere near adequate to help them live the lifestyle they want.

» With interest rates stuck at record lows, even those who start pumping cash into retirement savings accounts today will be losing ground to taxes and inflation unless they take some risk with their money. For the last few decades Canadians have been getting more comfortable with risk products such as equities but the global stock market meltdown slashed RRSP account values and shredded the self confidence of many retail investors.

» Among the casualties of the stock market collapse have been large defined benefit pension plans operated by large corporations for their employees. Recent problems only accelerated a trend that had been under way for years. The “get a job after school, stay with a company for decades and retire with its pension” life arc is rare indeed, at least in the private sector.

Investment Basics
The financial services industry in Canada is very happy about the plan. They will be participating as providers for the savings plans. Although at much lower rates then they provide RRSP's and small group pension plans today. UK Nest program excites asset managers

Here is an example of the types of companies that employees will be able to deposit their savings with. Kiwi Saver Plan Providers. 

The advantages of this plan are reflective in the Saskatchewan Pension Plan. This plan is evidently being examined as a model for the new PRPP. Major changes to the Saskatchewan Pension were announced by Flaherty a few weeks ago. This was odd because pensions are provincial jurisdiction and the Saskatchewan plan had quite anemic performance in terms of member participation. The major plan changes announced for the Saskatchewan Pension were obviously made to help in announcing the PRPP. 

The Saskatchewan Pension Plan has had excellent investment performance.  This is mainly because of the lower investment fees within the plan, which should be a key part of the new PRPP. These MER's have a dramatic impact on the long term effect of pension plan performance. How do investing costs hurt returns?

I expect the only difference to the PRPP will be the ability to choose from various private sector investment management companies to manage your funds. 

The link to the plan can be seen here at Framework for Pooled Registered Pension Plans

Investment Advantage

The key advantage to this plan taken here from the Saskatchewan Pension include: 
  • Voluntary - no obligation to contribute;
  • Flexible - payment at any time during the plan year;
  • Portable - people can join and contribute to the Plan regardless of where they reside; and
  • Professionally managed - The return has averaged 8% since it started in 1986. 
  • Low investment management fees - The Saskatchewan Pension has management fees at about .75%. In the UK the plan fees are expected to be a low as .3%. 
  • Optional employer contributions - the CPP option would force employer into another payroll tax. It appears the employer can have an optional contribution in the PRPP. More dynamic thinking businesses will contribute to the PRPP as a way to retain and attract key employees. 
  • Personal Accounts - Today when a single person dies at age 66 his future CPP earnings are lost forever. With a personal account in the PRPP there will be a benefit to the estate of the deceased.
  • Greater participation - This will give employers the opportunity to provide a retirement plan for employees without the high perceived costs of setting up a pension or savings plan.
Tax Treatment 
The new TFSA has been receiving excellent reviews by investors an excellent tax efficient way to save money. So much so that at a Round Table with the Finance Minister  of Ontario concerns were cited about the long term loss of tax revenue from the TFSA accounts compared to the RRSP. 

The Finance Department has a chance to rectify this  boo-boo and create a mandatory PRPP that is treated the same way as RRSP's and recoup some of the taxes loss when the pension funds are redeemed.

Bill Tufts
Fair Pensions For All

Pension Replacement Levels

What are fair income replacement levels?

Why do we pay 70% replacement pensions for public sector employees? Many will retire with a higher standard of living  and with more disposable income than they had while working. 

Other sources of personal income are not taken into account. What is a fair replacement level?  

Public sector pensions are designed to provide 70% of final year's income. By contrast the CPP is designed to provide 25% replacement income. 

Most Canadian retirees see substantial drops in the cost of living at retirement. The most significant factor is that in Canada about 85% of Canadian over age 65 have no mortgage. On the other hand for most working Canadians about 28% of salary goes into paying a home mortgage. 

At retirement there are reductions in payroll taxes. For example, the CPP pension or EI contributions are no longer required. The CPP is a payroll tax of 4.95%. Also the pensions contributions that public sector employees make, around 10% of income are no longer required.

Many public sector employees will retire with more disposable income and a better lifestyle than they had when they were working.  Is it fair to pay public sector employees a taxpayer funded pension that provide a replacement income of 70? 

I recently covered this issue more fully in How Much is Enough?

 Bill Tufts 
Fair Pensions For All

Wednesday, December 15, 2010

Pension limits for public sector pensions

Pension limits for public sector pensions 

No information is available regarding the amounts paid to current retirees in public sector. For example how many earn more than $200,000 in pensions, how many are over $150,000 and how many are over $100,000?

Many states require this disclosure as part of the Sunshine Laws that many jurisdictions have enacted. Ontario has one for the salaries of public employees but not for pensions. This needs to be changed. 

There are thousands of public sector employees earning pensions in excess of $100,000 per year at all levels of Canadian government.  Most employees in government earning over $140,000 per year will get a pension in excess of $100,000. That is a fixed income for life never to work again.

Some jurisdictions in North America  have put limits on pensions of $100,000 per year. This would be generated from a final retiring income income of about $142,000 a year. ie. 70% of $140,000. One idea is to base to pension limit on a factor of the Canadian average wage. The average wage for working Canadians is a little over $42,000. Set the pension limit at two times this amount and say that a public sector pension limit of $84,000 is fair. 

A supplemental pension is available to big earning public sector employees. These supplementary employee retirement plans were "set up to provide pension benefits to senior employees beyond the maximum permitted registered pension plan benefits as set out in the Income Tax Act." So that once public sector employees went over the pension and earning limits set out for taxpayers they created these special pensions for themselves. 

The supplemental pension limit is around $132,000. Any pensions paid over of this limit are paid into a supplemental pension plan designed to fund the excess amounts. The limit has been raised substantially in the past few years.

While the average Canadian is earning an income of just over $42,000 for working. The PSP federal pension plan shows that the average employee retiring this year starts on a pension over $39,000 most at age 55, for never working again. 

We have to consider the opportunity cost to our society for setting adrift large numbers of public sector employees into retirements at early ages. Most public sector pensions have indexing that will see them will surpass the average working wage within just a few years.

The most popular blog here has been Tales from the other side of the aging catastrophe.
It explains and has examples of what will happen when our society has more retirees than workers.  

Bill Tufts 
Fair Pensions For All

Tuesday, December 14, 2010

Fair contributions for existing employees.

 Cartoon from the terrific editorial cartoon staff at the St John Telegraph-Journal

Currently the federal public sector contributes 8.4% into a plan that is worth about 34% of salary. The taxpayer is left picking up 25.6% of the existing plans. Changes be made to the existing plans to make them more fair?  
PSP Pension profile  Average pension paid - $24,506
PSP Pension rates
PSP Pension financials  Average new pension paid - $39,312
Average Canadian CPP pension - $6,000

Since any major changes in pension plan design for the public sector will be made for future employees, there are millions of public sector employees under the current pension regime.
As serious effort needs to evaluate what is a fair contribution by employees towards these plans.

The CD Howe estimates that currently these plans cost 34% of salary. The current contributions by employees fall far short. It is possible that the CD Howe estimate is too generous.

The head of the federal public sector pension board recently commented
As I observed in the 2010 Annual Report, the first 10 years of PSP Investments were challenging times. According to the Wall Street Journal, the first decade of the 21st century turned out to be the worst ever for US stocks based on records going back to the 1830s. Total returns for the period 2000-2009 amounted to negative 0.5%. That compared with a high of 18% in the 1950s and was even lower than the negative 0.2% return for the 1930s Depression era.
Courtesy: The Pension Pulse  PSP Investments' second Annual Public Meeting

Taxpayers holding the bag 
Holding the bag: It actually dates back to the middle of the eighteenth century in Britain. The original version was to give somebody the bag to hold, meaning to keep somebody occupied or distracted while you slipped away. Figuratively, it meant to leave somebody in the lurch, to let them stay around to take the blame for something that had gone wrong.

This is what taxpayers are left with, holding the bag. 

Bill Tufts 
Fair Pensions For All 

Monday, December 13, 2010

Essential elements of pension reform in Canada - Part I

It is recognized that retirement savings pensions in Canada are in crisis, at least for the private sector. Of course there is no crisis for public sector employee pensions, because they are backstopped by taxpayers.

Canadian Finance Ministers head to Kananaskis for meetings on December 20, 2010. The prime item on the agenda is retirement savings reform. 

Over the next week I will list the key elements that are required to make the retirement savings system more fair in Canada. Fair for public sector employees and fair for the taxpayers that fund the pension system for the Protected Class. 

Convert Public Sector Plans to Defined Contribution (DC) Pension Plans  
By the very nature of their design DC plans cannot have a shortfall. This is the type of retirement plan 80% of workers in the private sector have. A minority actually have pensions and the rest of Canadian have access to RRSP's.

Why do we give very generous pensions to the public sector for which they pay a small portion of the real cost? When they go bust or into shortfall the taxpayer picks up the tab.

This is not fair to taxpayers.

The future benefits for new employees should be changed from Defined Benefit pensions to DC pension plans. All new employees should would be enrolled into DC plans. Current DB plans should be frozen where they are today and all future pensions should be contributed into a DC pension.

There will be controversy over a move like this. Some experts suggest that you can’t eliminate pension benefits already promised? Although this has not been brought forth to higher level courts in Canada, it probably will be upheld because most members of the judiciary in Canada have one of the best pensions paid for by taxpayers. 

If this move is made expect major legal battles over the issue.  The strategy of the unions at this point will be to prolong any changes as along as possible as because a significant number of union members are set to retire in the next few years. The longer it takes to make changes the more members there will be who will get fully loaded gold-plated pensions.

Bill Tufts 
Fair Pensions For All

Tuesday, December 7, 2010

How much is enough?

As we head towards the finance meetings in Kananaskis there is much debate on the issue of pensions. Most Canadians are unaware and have minimal knowledgeable of the real issues surrounding pensions in Canada.

The photo above is from a magazine issue this year from Reason magazine. It describes what has happened in Canada and the US as our public servants have become our masters.  

How much is enough???

One major actuarial firm in Canada attempted to calculate how much Canadians need in retirement. One issue that came to light was the 70% replacement income pensions of public sector employees. 

One of my associates looked into the issue and discovered: 
The standard of living of a public sector couple (one earning $90k and the other $60k) can rise by 72% after retirement.  The example is conservative, meaning the result could have been even higher.For instance, if it is I assumed they would receive just 90% of CPP and assuming their mortgage payments (made over 25 years) represented just 20% of income whereas banks say it is safe to go up to 28% (on the mortgage payments .)
Canadians have been told to expect that 70% of working income needs to replaced in retirement. This is what the public sector and politicians have set up for themselves in pensions. 

The rest of us who pay for the pensions of the Protected Class will have to get by with much less.

This is a stunning report. It was written by one of Canada's top actuarial firms. It shows that a 70% pension for someone in the public sector actually produces a lifestyle equivalent to 170% of their former working salary.

The PDF report is called "Saving for Retirement: a Fresh Perspective" and was written by Morneau Sobeco. It shows that although taxpayers fund public sector pensions at the rate of 70% of retiring income, there are is numerous reasons that most Canadians do not need a replacement income this high. In fact, a replacement pension of 50% would replace 100% of lifestyle income for a public sector employee. 

Why do taxpayers fork over for a 70% replacement pension? 

The first reason is that for most Canadians their highest expense is the mortgage they pay on their homes. Almost 90% of seniors who own a home have no mortgage on it. Statscan Automatically this fact gives retirees a bonus on incomes up to 30% over working Canadians. 

Next on the list is the fact that Canadians stop making payments for retirement saving when they retire. The public sector pension costs 34% of annual salary. Public sector employees pay about a third of this or 10% of their income. This payment stops at retirement and so is another 10% bonus for their incomes. 

The list of deductions from a $100,00 income that Morneau gives includes the following:
      Expenses Specific to Pre-Retirement Period (Annual)
          CPP & EI deductions                           $2,000
          Retirement saving at 9% of pay*               $4,900
          Child-related expenses                              $18,000
          Employment expenses                                $4,000
          Mortgage payments                                  $20,000
                    Total deductions                                $48,900 

The question of how much replacement income is required is starting to be asked by more and more players in the pension reform game. Jack Mintz himself questioned the level of retirement income required by Canadians. He suggested that a replacement for high income earners, such as public sector employees, needs to be only 50%. 

So the question becomes...  
Why do working taxpayers have to fund so much in taxes to pay for the gold-plated retirements of the public sector? 
Especially when the public sector employees will retire into a standard of living much higher than their already inflated government incomes. 

Bill Tufts 
Fair Pensions For All

Thursday, November 25, 2010

The RRSP Credit Idea

This week there was a special session in the House of Commons to discuss pensions.

In preparation for that session some MP's were doing their homework on the issue. I will post my recommendations to one MP in an upcoming blog post.

This week as the discussions about CPP reform heated up The Current on CBC had an interesting series.You can listen to it here. Canada Pension Plan Reform

I will be visiting with Jack Dean of the Pension Tsunami in Los Angeles. Jack is a very interesting man and has his pulse on pension reform in the US. We always have an interesting conversation. I am sure I will have lots to report.

An idea was sent to me by Jack Ellefson of Calgary Alberta. It is a novel idea and one that I had not heard before. Please read it carefully because it contains some excellent ideas. 

Incentives for RRSP and Defined Contribution Pension Plans.

          Canadian pensions are commonly funded with annual contributions of 50% by the employer and 50% by the employee.  But the majority of municipal, provincial and federal employees have their Defined Benefit (DB) pension plans subsidized by their employers.  The civil servant  employer contribution amounts to 66 2/3%, with the employees share at  33 1/3%.  The  “pension adjustment” found on tax filing then allows the civil servant to place the additional 16 1/3% annual contribution into a self directed Registered Retirement Savings Plan (RRSP). Sovereign pensioners have well funded, secure, inflation protected pension  plans, plus the ability to enhance retirement by having the capacity to contribute to a self directed RRSP

            Private sector RRSP and Defined Contribution (DC) pensioners should be accorded similar retirement initiatives.  By following the very successful  Registered Education Savings Plan (RESP) for children’s education, whereby the government contributes directly into the RESP, proportional to the funds contributed.  RESPs receive up to a 20% grant on the first $2000 contribution to a child’s education fund , to a maximum of $400 per year.  A similar program should be put in place to enhance the contributions of RRSP and DC pension investors.

            A maximum RRSP contribution of $22,000 for say 30 years with compound growth at 5% would result in a retirement nest egg of $1.46 million dollars. (Similar growth is expected in DC pension plans, both of which upon retirement are  converted to a Registered Retirement Income Fund. (RRIF).

            Were the federal government to  enhance the individual’s annual contributions by
16 1/3% , to maximum of $4000 per year, the annual contribution would now be $26,000.  This annual contribution of $26,000 would compound to $1.73 million over 30 years at 5%.  But most importantly would provide that extra incentive for Canadians to plan early to develop their retirement savings.

            Federal subsidy to individual RRSPs and DC pension plans , would bring an element of fair treatment for retirement pensions  of all Canadians. RRSP incentives would not be available  to  taxpayers eligible for the “pension adjustment.”

            It is difficult  to estimate the cost of an RRSP incentive program.  The 2009 department of finance “tax expenditures” for RRSP contribution deductions was $7.85 billion. At a 30% tax rate it would imply about $26 billion annual contributions, which at a 16 1/3% incentive would cost about $4.25 billion. While this would be an expensive program, if it were as successful as the RESP incentive program, would foster growth of RRSP investing and would return ever larger amounts of tax payments as RRSPs are converted to Registered Retirement Income Funds (RRIF).

Bill Tufts 
Fair Pensions For All 

Thursday, November 18, 2010

On the trail to Kananiskis

This is an important time for pension reform in Canada. 

Next month in Kananskis the finance ministers of Canada are getting together to develop a plan for improving Canada's retirement security system. One the table are two proposals, one to improve CPP and the other to add  an additional, or supplementary plan on top of the CPP. 

Organized Labour Plan
The public sector unions are in  support of boosting the CPP pension. They are correct that something needs to be done and this plan will be a bonanza for them. 

Public sector unions already have the advantage of being able to get full pensions, when qualified, as early as age 55.

The CLC has put together a good analysis of their position and the problems for Canadians on the CLC website. Retirement Security for Everyone . They have also provided a good overview of the statistics in each province.  What Do They Mean for each Province?

The key point for this initiative is that  the CPP changes public sector unions recommend will have a windfall effect on public sector pensions.  Public sector plans are currently integrated with CPP, their plan to double CPP will greatly reduce the pension shortfalls that many public sector face today. 
The first $11,200 of a defined benefit pension is paid by the CPP. The rest of the pensions is paid from the pension plan. Doubling CPP will mean that the first $22,400 of public sector pensions will be paid by CPP. 

For example, on a $70,000 a year public sector pension CPP pays $11,200 and the pension plan pays $58,800.  With a doubling of the CPP the $70k pension would need only $47,600 coming from the pension plan because CPP contributions would be $22,400 towards the pension,

The impact of a doubled CPP will save tens of Billions of dollars for public sector unions. This is especially important when many of these plans are serious underfunded. 

This concept of CPP integration is described in the article from CLC Time to double pension benefits is right now
In fact, the vast majority of workplace pensions are integrated with CPP, so any increase to CPP premiums will mean you pay less into your workplace pension. Therefore, you get the same pension income, just more of it from CPP. Labour's plan to double CPP benefits would raise the floor of our pension system from $11,000 per year to $22,000 per year. This benefits the 93 per cent of Canadians who are covered by the CPP. It also offers a source of retirement income that is portable across jobs, portable across provinces and territories, insured against inflation, and backed up by the government. 
Here is an interesting editorial from MP Chuck Strahl  describing how the CPP works in conjunction with public sector pensions.  Although he is discussing the current debate on veteran's pensions the same principle applies to all public sector pensions. Strahl defends party policies 
There is no pension clawback at age 65. The issue is that CF members may be eligible for a military pension before they are eligible for CPP. Because they are too young to qualify for CPP, veterans receive a "bridge benefit" for the years until they reach the pensionable age. The bridge benefit is later replaced with CPP.
There is a call for raising the age to qualify for CPP. Pension pay at 67 urged by think-tank Do not expect the public sector to participate in any reductions to the retirement age. They are happy with their early retirement plans. 
Raising the age for CPP pensions becomes a mute point for the public sector. They have this special rule that allows them to collect CPP (bridge benefit) regardless of the age they retire at. Through the bridge benefit the public sector accesses a taxpayer funded benefit identical to CPP, called a bridge benefit. The biggest retirement age in the public sector is age 55.

Note the average new federal employee retiree pension of $39,000 from last year. Although it is not clear in this report, they probably receive the bridge into CPP to give them a retiring income of in excess of $50,000 a year, in the first year.Report on the Public Service Pension Plan

Note from the CLC reports that total RRSP contributions for all Canadians last year were $33 Billion. This is very close to the $30 Billion taxpayers and employees into public sector pension plans last year. The only problem is that public sector pensions represent less than 20% of all workers in Canada. 

If all Canadians deposited what the public sector unions did into retirement funds then we would not have a retirement security problem. But then again most of the public sector deposits are from taxpayers.

Supplementary Plan
There is an alternative plan that is being suggested for retirement security reform. Any changes are designed to help the 70% of the private sector with no formal workplace pension plans. A supplementary plan is a top-up or add-on to the CPP plan. This style of plan has been implemented in many countries including New Zealand, Norway, Sweden and recently the UK. 

Keith Ambachtsheer is Canada's recognized pension guru. He has consulted on government pensions around the world and has led a large part of the discussion on pension reform in Canada. He provides good analysis in a recent editorial It’s time to choose the winning pension reform horse.
Insurance companies have yet to wade in and provide their opinion on pensions but the supplementary option is in their favor. They would maintain control of the management pensions with the supplementary pension system. Managing the retirement savings of Canadians is big business in Canada. 

The biggest complaint about Canada's private retirement savings system, mainly RRSP's, is the high cost of management fees associated with these plans. The CLC alludes to it in their proposal. However, I spoke with one senior Canadian insurance executive who indicated that large insurance companies have committed to managing these plans for .75 BPS, or less than 1%. The plans will be managed under huge savings programs managed much like insurance companies manage DB pension plans.

Life insurance and private investment management companies manage the supplementary system in New Zealand which is called the KIWI plan. It appears this is the way the UK NEST plan will be managed as well. 

One of the major challenges to pension reform is the question, where will the money come from?

The public sector of course expects it to come from taxpayers and businesses. That is one reason they like the CPP option so much. It is funded 50/50 by workers and businesses.

The effect on small business in this country will be very harmful regardless of which option is chosen. They will be funding at least half of any pension reforms under both the current plans.

In the UK where the NEST plan is being rolled out there is a required employer contribution and business of course, get to pick up the administrative costs as well. Small businesses facing "extortionate" pension costs

A couple of articles have touched on the impact of these pension changes. Securing the future by expanding the Canada Pension Plan Mark Newton at Heenan Blaikie  points out that: 
Any type of Canada Pension Plan reform will have a potentially significant impact on employers and employees. Regardless of how the benefits are increased, more money will have to be pumped into the system by both employers and employees. The questions not addressed by the paper are where the money will come from and what the reaction might be, at a time when payroll and other taxes are already high.
For example, a possible reaction by some private sector employers to increases to the Canada Pension Plan might be to reduce contributions to other pension and retirement savings plans, so as to maintain existing payroll costs for pensions and benefits. This would defeat the government's stated objective of increasing retirement income levels. It could also further increase the disparity between public and private sector retirement benefits, insofar as public sector employers would continue to benefit from rich defined benefit pension plans, plus augmented Canada Pension Plan benefits.
By the way, raising the retirement age for CPP would shine the spotlight on public sector plans in a way they might not like.  The various pension plans for public sector employees generally allow early retirement on an unreduced pension at age 60 and even as early as age 55 if employees meet a service condition.
So consider the argument for increasing the CPP retirement age.  It goes like this:  “Canadians are living longer and so pensions are becoming more expensive.  Moreover, the ratio of retirees to workers is increasing, which puts a strain on the economy.  Raising the retirement age keeps Canadians in the workforce longer and makes their pensions more affordable.”
If this is the argument, however, how can public sector pensions justify heavily subsidized retirement at age 60 or even younger given that it is largely taxpayer money that makes this possible?  A higher CPP retirement age means this question will be asked more often.
Reform of public sector plans needs to be included in any discussions about changing Canada's pension system. The gap between public sector and private sector pensions is unfair. It is time for change.

The whole idea of the pension was to provide public servants with a decent retirement when they left public service. It was not to enrich them or to make them wealthy, to allow them to retire younger, with more money, to go off and play golf while the rest of us supported them. This attitude is growing out there in the public. People are beginning to realize what has been done and they are not happy about it.
 Bill Tufts 
Fair Pensions For All

Monday, November 1, 2010

Unions gone Mad

Concern over public sector unions is being reflected across the country. The public sector is the only bastion of unions. Private sector unions are almost dead. It appears public sentiment is turning against the public sector ones.

A battle is beginning and it is tied into the gold-plated pension issue.  

The tide has turned in Toronto with the election of a mayor who had a slogan of respect for taxpayers. Is the rest of the country far behind? It will be very interesting the see the effects of the US election! 

The battle will be a doozy. Are you ready? 

Election Season  
For the first time since the Great Recession voters have had a chance to send politicians their thoughts and anger. Municipal elections across Ontario tossed incumbent mayors. Gwyn Morgan has shed light on some of the reasons behind the election results. 

He wrote an article today in the Globe and Mail Toronto election offers chance to reform public sector 
The article also offers some suggestions to get fiscal control back in Canada and to offer taxpayers some respect. 
End union powers that hold citizens hostage: Turn important unionized monopoly public services into “essential services” in which strikes are forbidden. Insist that essential service union contracts reflect private sector competitive rates. Back that up with severe penalties for unions and union leaders who advocate illegal strikes, and the right to fire workers who strike illegally.
End compulsory union membership: Current laws force those seeking jobs in unionized workplaces to join the union. There should be an end to laws that deprive individuals of the right to work outside a union. This bridge has already been crossed; for example, 22 American states prohibit agreements between unions and employers that make membership and payment of union dues a condition of employment.
 Union membership is dying in the private sector. 
It appears that the only major remaining support for unions is in the public sector. In Canada not many  private sector workers are unionized. On the other had the public sector's 3.6 million workers are almost all unionized. 

There are only 4.4 million union workers in Canada. Statscan - Union Membership in Canada 
US Election 
Unions members in the US are running scared. They are afraid that electing fiscally responsible politicians will hurt them in the pocketbook. 

The highlighting of election spending by unions has forced the spotlight upon them. In this electoral season they will be by far the biggest spenders in the current elections. 

It has not helped that the media has covered the extent of their political contributions and the candidates they have gone to. This election should have been about the fraud taking place in corporate America but somehow it has turned on the public sector.  

Unions in the US have been estimated to  spent $87 million on the current election. This compares to an estimate of $30 million for the national Chambers of Commerce. Considering the rise of the Tea Party this spending creates a big risk for union backlash if the Republicans win. The ‘big dog’ in campaign spending

A columnist by the name of Jeff Jacoby has provided some excellent insights into the problem of public sector pensions in America. His excellent article What public-sector unions have wrought exposes some of these problems.

In the ensuing half-century, (since the '50's) the public sector in the United States has grown enormously. The number of government employees at all levels surged from about 8.2 million in 1959 to 22.5 million in 2009. Historically, government work paid less than comparable employment in the private economy, but greater job security and good pensions compensated for the lower wages. No longer: now government workers tend to fare better than private-sector workers across the board—not only in job security and pensions but in wages and other benefits as well. 

Nationwide, according to BLS data for 2009, state and local government employees were paid an average wage of $26.01 per hour, which was 34 percent higher than the average private-sector wage of $19.39 per hour. Even more lopsided was the public-sector advantage in fringe benefits, such as health and life insurance, paid vacations and sick leave, and—above all—retirement income: state and local governments provided their workers with benefits valued, on average, at $13.65 per hour, a 70 percent premium over the average benefits package in the private sector. In addition to being more expensive, the benefits that come with government jobs are provided to more employees. Life insurance, for example, was offered to 80 percent of employees working for the government but to just 59 percent of workers in the private sector. Traditional defined-benefit pension plans were available to 84 percent of government workers—but to only 21 percent of private employees.  

In 2008, the 1.9 million civilians employed by Uncle Sam were paid, on average, an annual salary of $79,197, according to the Commerce Department's Bureau of Economic Analysis. The average private employee earned just $49,935. The difference between them came to more than $29,000 -- a disparity that has more than doubled since 2000. Add benefits to the mix and the federal advantage is even more striking. Total federal civilian compensation in 2008 averaged $119,982—more than twice the $59,908 in wages and benefits earned by the average private-sector employee. Edwards has tracked the inexorable widening of that gap: federal employees in 1960 averaged $1.24 for every $1 earned by an American in the private sector. By 1980, that $1.24 had grown to $1.51; in 2000 it was up to $1.66. Now it is $2—and climbing.  

IT IS NOT by happenstance that the growth in public-sector union jobs—from a trivial share of overall union membership 50 years ago to a majority today—has coincided with so vast an expansion of government and of its employees' pay and perquisites. As FDR had foreseen, there are crucial differences between collective bargaining in the public and private sectors. Labor unions negotiating on behalf of government employees enjoy at least four potent advantages, which they long ago learned to exploit.  

First, unlike their counterparts in the private sector, government unions are largely free from market discipline. Unions operating in the private economy know that there are limits to the demands they can make of an employer; private firms have to earn a profit to stay alive, and competition swiftly punishes those that fail to control cost and quality.  

A second advantage lies in the difference between public- and private-sector strikes. In business, a strike (or the threat of a strike) is an economic weapon that takes a toll on both sides: management suffers the loss of business, and labor must absorb the loss of wages. Consumers may experience some inconvenience, but they generally have the option of switching to another supplier or deferring their transaction to a later date. In the public sector, by contrast, strikes are political weapons. Because government services tend to be legal monopolies, a strike by police, garbage collectors, teachers, or air-traffic controllers inflicts pain on the public at large.   

A third advantage: in public-sector collective bargaining, labor and management frequently both stand to benefit from higher wages and more munificent retirement income. After taxpayer activists in California last year used the Freedom of Information Act to procure a list of government retirees receiving more than $100,000 annually in pension payments, the Sacramento Bee noticed who was on it:
Managers also dominate the $100,000 club list. These are the people who are supposed to represent the public when employee benefits are negotiated. But when government managers sit down with union leaders to dicker over compensation, they are negotiating for themselves as well. If rank-and-file workers get a wage or benefit boost, non-union managers get a commensurate hike and a matching pension benefit.
But a fourth advantage is more significant than any of these: government labor unions can reward politicians who give them what they want and punish those who don't. As a result, negotiations in the public sector have an inherent bias toward higher salaries, more lavish benefits, and more inflexible work rules. "This is because public unions can organize politically and influence elections,"
The whole of this article is worth reading and I urge you to do so. 
At the inception of unions in the 1930''s the danger of public sector unions was recognized. It was the president FDR who understood these dangers and in 1937 he stated

Danger of Public Sector Unions - FDR 1937 
"... Meticulous attention should be paid to the special relationships and obligations of public servants to the public itself and to the government. All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations ... The very nature and purposes of Government make it impossible for ... officials ... to bind the employer ... The employer is the whole people, who speak by means of laws enacted by their representatives ...

"Particularly, I want to emphasize my conviction that militant tactics have no place in the functions of any organization of government employees. Upon employees in the federal service rests the obligation to serve the whole people ... This obligation is paramount ... A strike of public employees manifests nothing less than an intent ... to prevent or obstruct ... Government ... Such action, looking toward the paralysis of Government ... is unthinkable and intolerable.

Read the full article about his comments at FDR's warning: Public employee unions a no-no

Bill Tufts
Fair Pensions For All