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

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