Tuesday, April 26, 2011

The Agenda - Steve Paikin

The Canadian election is nearing completion and one of the big issues has been pensions. Steve Paikin
covered the issue on his show, The Agenda. I have posted the video below. The show is an excellent discussion but completely neglected the 800 pound gorilla in the room... public sector pensions.

Pensions have been discussed in the current election but the big issues have been neglected. As Catherine Swift recently Tweeted:
Gonna be one interesting election. Unfortunately the big issues continue to be ignored - healthcare, public sector pensions unsustainable.
After the election public sector pensions will be back on the agenda. They are unsustainable and as taxpayer awareness grows people are becoming more resentful and envious. 

Public Pensions, Once Off Limits
The New York Times notes that public sector pensions are on the agenda in a big way. Please see the article below it is a good read. Public Pensions Face Budget Cuts.
When an arbitrator ruled this month that Detroit could reduce the pensions being earned by its police sergeants and lieutenants, it put the struggling city at the forefront of a growing national debate over whether the pensions of current public workers can or should be reduced.
“These things do tend to be herd-oriented,” said Sylvester J. Schieber, an economist and consultant who studies pensions.
The mayors of some hard-hit cities have said that the high costs of pensions have forced them to lay off workers: Oakland, Calif., laid off one-tenth of its police force last year after failing to win concessions on pension costs.
Elsewhere there is pension envy: some private sector workers, who have learned the hard way that their companies can freeze or reduce their pensions, resent that the pensions of public workers enjoy stronger legal protections. But government workers, many of whom were recruited with the promise of good benefits and pensions, say that it would be unfair — and in many cases, very likely illegal — to change the rules in the middle of the game.
Avoid Change At All Costs
Despite the fact that Ontario will pump a record amount into it's public sector pensions, unions will jump up and down denying there is a problem. This year the top 3 Ontario pension plans will attract $4 Billion in taxpayer payments and employees will contribute the same. In addition there are several more pensions requiring taxpayer money such as universities, colleges and the Ontario Hydro and OPG giants, all sucking up huge taxpayer dollars for pensions. Many argue the money that the union members have to put in their contribution came from taxpayers too.

The union tactic will be to deny that changes to pensions can be made. This is wrong but it gives them time to postpone pension changes as they try and take the issue into the courts. Changes cannot be made to past pension accruals but pensions can be changed going forward.

A good example of pension changes was brought to my attention in a article from Kansas. Little relief for Kansas pension woes seen for 10 years Kansas has two proposals in front of it, one from the State Senate and one from the State House. Comparing the plans is a good exercise in investigating and understanding pension plan change options. 

A full detailed report on the plan change options is covered in a Fiscal Impact Report.
The report details the changes investigated by the Senate which actually would worsen the state's pension situation and the House changes proposed.

Note that the Kansas pension has $11 Billion in assets for 277,000 Kansas teachers, state and local government workers, and police officers, fire fighters and judges. The plan has a had an unfunded actuarial liability of $7.7 billion and a funded ratio of 64%.

Contrast this with Ontario Teachers plan which has $107.5 Billion for 295,000 active and retired teachers in Ontario. It has a $17 Billion pension shortfall. You can see how badly Ontario taxpayers have been taken to the cleaners by our public sector pensions. Yet the unions jump up and down denying there is a problem and politicians are deathly afraid of addressing the issue. Until this changes you are going to be paying pensions for your public sector neighbor forever! 

In Kansas the average teachers salary is at $42,000and in Ontario the retiring teachers salary is at $95,000. In Kansas the teacher will get 65% of salary or $ 27,195 on in Ontario the retiring teacher will get $66,500. Each $10,000 of pension costs about $200,000 so the Kansas pension costs about $540,000 and in Ontario $1.3 Million.

Kansas Proposals

Senate Proposal:
  • Investment return in future years is assumed to be 8% on a market value basis, unless
    otherwise indicated.
  • Tier I Members - Employee contributions for Tier 1 members increase annually by 1.0% until 2015, the
    contribution rate for Tier 1 would be 6.0%. Beginning January 1, 2014, raises the benefits formula multiplier from 1.75% to 1.85% for all future years of service credited to Tier 1 members.
  • Tier 2 Members - Tier 2 members who are first hired before July 1, 2013, would be provided a 90-day period of time established by KPERS to choose between two options:
  • Option 1: Continue to pay a 6.0% employee contribution rate, but forego the cost-of-living
    adjustment (COLA) currently associated with Tier 2 and retain the existing 1.75%
  • Option 2: Increase employee contributions by 2% with an employee contribution rate of 8% by CY 2015. Retain the COLA and receive higher 1.85% multiplier for future service, effective January 1, 2014.
Note: Ontario pensions generally accrue at the rate of 2% per year. Some have faster accruals. So for 35 years of service in Ontario an employee gets 70% (2% per year times 35 years) 

House Proposal 
  • Reduced Benefit Formula Multiplier. For both Tier 1 and Tier 2 active members, reduces the
    benefits formula multiplier from 1.75% to 1.40% for all years of service earned on and after July 1, 2012.
  • Sale of State Surplus Real Estate Groups.
  • Defined Contribution (DC) Plan for Future Members. On and after July 1, 2013
  • Employee Contributions. Active members would be required to contribute 6.0% of their
    compensation to their individual mandatory contribution accounts. The contributions would
    be pre-tax for federal income tax purposes. All employee contributions vest immediately.
  • Employer DC Contributions. Employers would contribute 3.0% of each active member’s
    compensation to an employer contribution account for that member. Employer contributions
    would vest after five years of service.
In the proposed changes we can see huge differences. Even though the House plan is much more drastic, the article states that "neither will restore full financial health to the pension funds for at least another decade,"
    Big challenges Ahead

    As you read through this article you can get a taste of the challenges that need to be made in Canada as well. Unfortunately it is a very complicated issue and most politicians and union member have no understanding of the issue.

    If you are able to understand the issue from the Kansas examples, it is imperative that you make your voice heard. Politicians don't want to touch the issue, unions have no remorse about plundering your pocketbook and most of us can't understand the details.

    The next move is for governments is to study the issue so they can understand it. It is a national travesty that in Canada over the past few years we have had several Expert Commissions on Pensions, two federal government studies, the Quebec Pension Plan report and all provinces have completed major reviews of retirement savings. Yet not one word was written on the biggest crisis of all, public sector pensions. 

    The next move? In the words of one politician about the Kansas situation:
    Kansas state Sen. Jeff King, an Independence Republican serving on the conference committee said that because of projections like that one, he favored going along with another recommendation in the Senate package, which calls for the establishment of a six-month blue ribbon commission formed specifically to weigh such alternatives.

    Thursday, April 21, 2011

    University Pensions Driving Tuitions Higher

    It appears that Dalhousie is suffering from the same financial problems as many universities across the country. The pension costs for an aging workforce are killing them. Dalhousie spending big bucks on university brass

    We are now seeing the conflict plaguing all government organizations. The gold-plated defined benefit pensions that the staff in the public sector enjoy have melted down and are no long sustainable without large injections of cash. It creates a choice between more services for students or more gold-plated benefits for management and staff.

    The large increases in tuition are expected to generate an additional $14.6 million in revenue. It happens to coincide with a $11 Million injection (Note C)  into the pension staff planned last year. This is on top a regular annual pension contributions of $19 Million. It appears that the pension fund is short in excess of $100 Million and the administration is worried about being able to retire in comfort.

    In 2002 the university contributed $4.7 Million into the pension fund and it has increased every year since then and last year the regular pension payment was $19 Million. Despite more than $135 Million of taxpayers money going into the fund since 2002 it is still woefully short. The employees contributed $91 Million over that same period.

    The Economist this week featured a report on pensions of the kind offered at Dalhousie. They noted "A pension promise can be easy to make but expensive to keep. The employers who promised higher pensions in the past knew they would not be in their posts when the bill became due" Well the bill is due and at most universities the numbers of retirees is reaching record numbers. These easy promises are becoming expensive.

    The pensions plans are not sustainable and it is unfair to ask students to pay more or suffer less services to pay for these gold-plated plans.

    Pension contributions on the plan are woefully short and they will suffer shortfalls for many years to come. That is why the request to the government for solvency relief is so important. Solvency relief is like a mortgage that is amortized over 30 years instead of 10 or skipping a payment on your credit card.

    Why not have employees pay their fair share?

    The taxpayer (university) funds 16% of employee salaries into the pension fund and the employees only have to come up with 6.15%. The CD Howe has estimated that the true cost of these pensions are 34% of annual salary. The shortfalls are built in at these contribution rates. Even worse, as salary costs skyrocket so do pensions. Pension funding is like trying to chase a rocket, unless pensions are capped it will never happen.

    The pensions are based on 70% of the last 3 years of salary of the retiring employees. The faculty at the university is earning an average wage over $100,000 per year,  this means a pension in excess of $70,000 per year including CPP. Many of these employees are eligible to retire at age 55 and will earn this pension for the rest of their lives. If they live to age 80 this will be over $2.3 million in pension income when indexed for inflation. To fund a pension like this takes pool in excess of $1 Million.

    Then there are the Super Sized pensions, those of the senior administration staff. The article mentions that one income is at $360,000. This income level will generate a pension in excess of $250,000 for life and will require a pool of  $4 Million.

    Its time to change these pensions. Firstly, convert them into defined contribution, the kind most taxpayers have. Limit them to a reasonable amount say $80,000 per year, twice what the average wage earner makes. Make the employees pay their fair share and not rely on the generosity of taxpayers who will never see a pension close to this. Why allow workers to retire at age 55 when government around the world facing the same crisis are raising the age of retirement?

    Our students deserve better than this, its time for a change. 

    Bill Tufts 
    Fair Pensions For All 

    Monday, April 18, 2011

    Rising gas prices sandbag economy

    Rising gasoline prices are having a dramatic effect on the Canadian economy.  A $1 rise in the price of gasoline will suck $32 Million a day out of goods and services that Canadians would otherwise be spending money on. This adds up to over $11 Billion  a year. 

    There is a multiplier effect on this money as Canadians decide to use their car less and stay home When they stay home they are not spending money in restaurants, amusement parks, cinemas or other places we go to for entertainment. Alternatively for some markets there may be a rise in spending as Canadians choose less costly alternatives for spending their money. For example, MacDonalds over a full service restaurant. 

    My contention is that overall the cost of gasoline will be a big drag on the economy as it sucks money from other areas of spending. If that money was spent in a restaurant for example, the restaurant will be using it to pay salaries and food and beverages. This would all contribute to the growth of our GDP. True the money spent on gasoline will be considered part of our GDP, but how much of it will truly go back into the economy. will gas stations be hiring more staff or building more stations? Probably not. 

    Some interesting information for this analysis come from Statscan - Motor vehicle fuel sales and Gas Buddy. Canadian spend about $4 Billion a month eating and drinking outside the home Food services and drinking places

    Bill Tufts
    Fair Pensions For All

    The media is starting to get it.

    One of the key purposes of this blog is to bring attention to the growing pension problem and to try educate those who make policy (politicians) or report on pensions (media). It is a complicated issue that has concepts and a language that is difficult for many to understand. In interviews with other pension experts one of the interesting aspects of pensions is that most employees who have defined benefit pension plans have no idea of the value of the plans.

    Clarity is required to have a well educated public discussion on pensions.

    To try an bring about clarity the CNPA association for newspapers in California focused on the issue at a recent conference. The coverage of the conference was reported on in Publishers preview pension problems The article pointed out: 
    • Public employee unions want to deny the problem but the truth is dawning on them and their members.
    • Many politicians underestimate the problem either because they don't understand it or don't want to tell the voters they have to cut services and raise taxes to correct a problem they didn't see coming when they gave away the store.
    • Some politicans do get it. They are bargaining hard with unions and pushing reforms. They are having luck reducing the pensions of employees who will be hired in the future.
    At the pension portion of the conference one presenter was Dan Borenstein. Dan is a veteran in the pension battles reporting for the Contra Costa Times. He has brought to light many pension problems in the state of California.

    There continues to be a litany of problems for public sector pensions. Not only in the US but here in Canada as well. In Canada we need reporters who will become pension crusaders. Until that happens the issue will remain under the sight lines of most Canadians and politicians who hate the issue will continue to sweep it under the carpet until there is a rising crescendo of taxpayer voices that demand to be heard. In the meantime the problem will float merrily along with more and more lip service being paid to it, without any real action being taken.

    In the meantime we hope that more article like this one will be seen in the Canadian media. There was no recession for gov't pensions. The article points out that: 
    Only government-employee union officials at this point are denying the reality of California's pension crisis, as public pension debts estimated as high as a half-trillion dollars are crushing state and local governments and threatening to increase the burden on already hard-pressed California taxpayers. Meanwhile, the disparity keeps growing between government employees, who retire with guaranteed cost-of-living-adjusted benefits that too often top $100,000 a year, and private-sector employees who must rely on 401(k)-style plans supplemented by the increasingly shaky Social Security system.
    As you are aware the issue is as big a problem in Canada. A 401K is the US version of our RRSP. Lets hope the media gets on board with a thorough discussion of pensions and begin to address the issue more. Oh well, maybe when the election is done. We remember Kim Campbell stated, an election campaign was no time to discuss serious issues!

    BIll Tufts
    Fair Pensions For All

    Tuesday, April 12, 2011

    The Roadmap for the Future

    As our book nears completion and the last details are put in place and polished up there is some apprehension about whether we have covered all the necessary material bases and whether the concepts that we have developed and the ones we have used are appropriate. It is nice to be vindicated with news that covers some of our ideas and adds strength to our concepts.

    A recent article in the Financial Post garnered much attention over the past week and was mentioned in the Daily Reckoning newsletter in the article from Bill Bonner. I recommend you sign up for the free newsletter from the Daily Reckoning. It is focused on investing but also provide great political and social commentary and how it relates to our investments. 

    Bill Bonner noted an article from Christopher Caldwell in the Financial Times called, A Bankrupt Nation Wakes Up. In the article Caldwell quotes an up and coming new Republican from Wisconsin who is ringing the alarm bells about the sustainability of  social security, pension and healthcare costs:
    Mr Ryan views debt as an “existential threat”, a great drama whose cause is self-indulgence and whose end is enslavement
    “We face two dangers: long-term economic decline as the number of makers diminishes and the number of takers grows and, worse, gradual moral-political decline as dependency and passivity weaken the nation’s character.”
    In retrospect, the story of the past half century is that Americans found a way to extract money from future generations and leave them with the bill. What they have been enjoying is not prosperity but luxury. As Mr Ryan sees, they face the serious and open question of whether they are morally capable, over the long term, of living within their means.
     Please check out Ryan's program and analysis called Road Map for America it is an excellent work that outlines the dangers of the  coming demographic timebomb. You will be hearing lots about it in the months to come!
    Bill Tufts 
    Fair Pensions For All

    Tuesday, April 5, 2011

    Total government spending on Wages and Salaries

    In dong some research for my upcoming book I found some interesting statistics about the total cost of government employees.

    In 2010 the Province of Ontario spent $118 Billion. Of this amount $71.2 Billion went into the wages and salaries packet of provincial employees. This means that 60% of the total spending in the province of Ontariowas for wages and salaries. Does this include the benefits and pensions as well? I suspect not.

    The province spent another $ 9.5 Billion or 8% of its money on debt service. This means that the operating budget on discretionary items in the province was $110 Billion. This moves the wages and salaries up to 65% of spending and then we can add in another $8 Billion in pensions this year. So it appears the government spending amount for the compensation package of it's employees is in excess of 70% of total spending.

    I guess we know where Drummond has to look.

    You can find this information here. Statscan Tables by Subject

    Thursday, March 31, 2011

    Laurentian Medical College makes cut backs on staff to pay for pension

    There was an article in the Sudbury Star that shows the increasing danger of gold-plated pensions.

    24 jobs cut at Northern Ontario School of Medicine. 

    NOSM is operated by Laurentian University in Sudbury. It is unacceptable for the people of Ontario at a time when there is a strain on our health system and a shortage of qualified health care employees to be cutting back staff to pay for gold-plated pensions.

    This came out on the same day that the province released its Sunshine List and shows over 240 staff at Laurentian earning over $100,00 per year. This is up from just 180 in 2008. Each one of these positions comes with a pension worth 70% of this income.

    One manager at the University earns $304,000 which does not take into account the gold-plated pension. A manager will be entitled to a pension valued at $212,000 per year or 70% of his final salary when fully qualified. This type of pension has a cash value of about $3.4 Million.

    Last year the college contributed $ $11.7 Million into their staff pension funds. This amount is up from $5.9 million in 2008, an increase of $5.8 million or 98%. If used to hire additional administration staff at $50,000 per year, this amount would allow for an additional 116 staff members.

    Management decides to allocate this money in pensions and benefits rather than hire more staff. This was not money going into enhanced student services but to bolster the personal pension accounts of managers.

    We are now seeing the conflict plaguing all government organizations.   It is the choice between more services for students or more gold-plated benefits for management and staff. Being forced to cut back and create savings where do you think the money will come from, compensation packages or services.

    It appears that the students and taxpayers of Ontario will lose on this one.

    Bill Tufts
    Fair Pensions For All

    Is the Air Canada pension plan too rich?

    In 2009 the Air Canada pension plans were short $2.9 billion despite the fact between 2004 and May 2009 the company had pumped $1.7 Billion into the plan. 

    Now they are requesting money from Canadian taxpayers. With Ministers, high level officials senior government officials and Members of Parliament. All of whom have gold-plated pensions funded by you. 

    What do you think their response was? I you know please send me an update.

    See the video here.

    The Conversation Continues

    Bill Tufts 

    Friday, March 18, 2011

    Ontario Teacher's Pension to Hit the Wall in 2014.

    From the archives a member of the Ontario Secoundary School Teachers Federation (thanks Joe)

    Despite hefty contributions and huge asset accumulations there is a crisis and it will hit in 2014 with a vengeance!

    Bill Tufts
    Fair Pensions For All

    Thursday, March 17, 2011

    Working on pension issues

    I have not had much time to be posting news to my blog. Does someone want a job? 

    It is a very sad week for me as my brothers wife passed away unexpectedly yesterday. She was the mother of 5 boys. May she rest in peace and God be with my brother and his  family.

    Pension News

    It was a busy day today. I got a call for a CHML radio interview from an article written in the Hamilton Spectator. Then there were two other editorials, one in the National Post and one in the St John Telegraph Journal. Then just now another request for interview from a show in Halifax on the MLA pension issue in NB.

    Here is a copy of a radio interview on a local radio station CHML 900 in Hamilton

    There was a live radio interview the Rick Howe Show from Halifax.  It was on teh new New Brunswick pension proposal. 

    It was referred off this editorial in the St John Telegraph Journal

    Also there was an editorial that was printed in the National Post.

    Hamilton Spectator

    Your keeping busy blogger 

    Bill Tufts
    Fair Pensions For All

    Tuesday, March 15, 2011

    UK pension comparison

    Chart from Statscan 2007 Note: RRSP assets in Canada total about $700 Billion

    I received an excellent analysis and comparison of pensions in Canada and the UK.

    Bob Parsons had written to me in response to the blog I wrote about the Hutton pensions report that was released in the UK. There are big difference between the public sector plans in Canada and those in the UK.

    The UK pensions are not pre-funded and are paid on a pay as you go basis. This has created huge problems for the UK as the economy has slowed down and there has been a choice to be made for politicians between services and the compensation packages of the public sector.

    It feels like the taxpayers is losing as the public sector and politicians dictate where our tax dollars go. Most taxpayers feel it is going directly into the pockets of the elected officials and the civil service.

    As I am doing some research for my book I ran across a report from the BNAC back in 2009 that provided a good comparison between the UK, USA and Canada. Basically all systems are in trouble and the UK is the worst off of all. British-North American Committee (BNAC) report

    One of the reasons that the systems has gotten out of balance was described in this short editorial letter Market Balance Needed

    On to Bob's letter. Thanks for sending this excellent letter Bob

    After seeing the post you made on Lord Hutton’s pension report I became curious to find out what type of pension plan public servants in the UK have compared to our federal government pension plan.

    I printed off the nuvos pension scheme guide pamphlet. Here are some of the things I discovered.

    1. In the UK employees can opt out of their pension plan. We can not do this in Canada. (Section 5 Do I have to join nuvos?)

    2. They only pay 3.5% we pay over 7% for superannuation and CPP which in my case last year was resulted in me paying  9.25%. (Section 9 How much do I pay?)

    3. They build up pension value at 2.3% a year compared to our 2% for the Canadian Federal Government public employee pension plan. (Section 17. How do you work out my pension?)

    4. They use the Retail Price Index which provides a much higher rate of increase than the Consumer Price index we use. (Section 18. Will the pension I have build up in value?)

    5. They can earn a pension up to 75% of base salary while we can only earn up to 70%. (Section 21 Is there any limit to the size of my pension?)

    6. They base their pension the highest of
    a) Your pensionable earnings in your final year, or
    b) your highest pensionable earnings in any of the last 10 scheme years: or
    c) your highest average of three consecutive years’ pensionable earnings.

    Ours is based on the best 5 years. (Section 21 Is there any limit tp the size of my pension?)

    7. They allow you to take part of your pension as a tax free lump sum. We can not do this (Section 22 Can I take a tax-free lump sum?)

    8. They are allow to collect their pension while continuing to work, although you have to 75 to do this. We can not do this. (Section 29 What if I want to work beyond my pension age?)

    Even with Lord Huttons recommended increase in contributions for employees they will be paying far less than we are here in Canada.

    Some other factors you have to take into account is that we have started to fund our pension plan since 2000. We have build up net assets of over $50 billion. The fund has being growing at a rate almost twice as much as the federal government is paying for public service pensions on an annual basis. I believe the UK is still a pay as you go scheme. So we are in much better shape.

    In 2009 federal government paid 1.01% of total government expenditures on public sector pensions. (Public Accounts 2009, Public Service Pension Plan Report 2009). In terms of GDP it is below .2% of GDP. Your colleague Leo over at Pension Pulse ran an interesting article on the UK public servant pension plan. He showed a graph that showed that their public sector pensions were more than 1.6% of their GDP which is more than 8 times ours.

    I had a quick look at several US state public servant pension plans. They have costs between 3 to over 6% of total expenses. In many states employees do not pay anything toward their pension costs and in the ones that do I could not find any that contribute anywhere near as much as we do. Even Scott Walker is not asking his employees to contribute anywhere as much as federal employees in Canada have to pay.  In every state I looked at they do not collect full income taxes on pensions, must do not collect any.

    I read your proposed solution, which is to copy the US federal employee pension plan, which is based on three elements. The first is an indexed defined benefit pension plan which is I think based on 1.1% of earned income each year. The second element is Social Security which is also an indexed defined benefit plan. The third element is a defined contribution plan in which the US government matches employee contributions up to a certain level. To be fair to public servants in Canada you need to increase the first element to make up for the fact that Social Security pays far more than CPP if you want to have equivalent pension plans in both countries.

    The bottom line is that public employees in the UK currently get one hell of a better pension for 3.5% of their pay than we do here in Canada. Our pensions also pale in comparison to those at the state and federal level in the US. We pay a lot more for less pension benefits.

    Bill Tufts
    Fair Pensions For All

    Monday, March 14, 2011

    Net worth continues to climb - but for whom?

    There was an article today in the Globe and Mail that shows that Canadians are still in deep trouble on household debt
     Net worth continues to climb
    Wealth in Canada continues to rebound from the great crash. 

    Overall household net worth increased 2.2 per in the fourth quarter to $6.2-trillion, following on the third quarter's 3-per-cent climb, Statistics Canada said today. 

    On a per capita basis, that's an increase to $181,700 from $178,200.
    "The gain in the Standard and Poor's/Toronto Stock Exchange composite index of about 9 per cent in the fourth quarter was reflected in rising values of household equities (including mutual funds) and pension assets, albeit at a slower pace than the previous quarter," the statistics gathering agency said.
    This is good news for those Canadian who has some savings and pensions but for the great unwashed masses this really means nothing. 
    The last Statscan report on Inequality in wealth shows some pretty grim statistics. Although the numbers were from 2005 not too many Canadians who has seen much of an increase in their personal wealth. The trend is the wealthy continue to get wealthier and the rest... well not as well. 
    • Between 1999 and 2005, the median net worth of families in the top fifth of the wealth distribution increased by 19%, while the net worth of their counterparts in the bottom fifth remained virtually unchanged.
    • As a result, the top 20% of families held 75% of total household wealth in 2005, compared to 73% in 1999 and 69% in 1984.
    • Part of the growth in net worth among families in the top 20% of the distribution was fuelled by increases in the value of housing.
      • In both 1999 and 2005, the vast majority of these families (at least 95%) owned a house. During the six-year period, the median value of their principal residence rose a solid $75,000, reflecting sharp increases in housing prices.
      • In contrast, the value of holdings on a principal residence changed little among families in the bottom 20%. At most, 6% of these families owned a house during this time.
      Here is a chart from Statscan chowing that the top 10% of Canadians control almost 60% of the total wealth of the country.  I am afraid that this will part of the reason for social unrest in North America.

      Maybe this is what Michael Moore was ranting about in this video from the Wisconsin protests.  Michael Moore says 400 Americans have more wealth  Please listen to Part 2 of the video as well, it comes on automatically.

      Here he is interviewed in a very interesting video on The Rachel Maddow Show. Last Saturday there were in excess of 100,000 protesters in attendance at the Capital Hill in Wisconsin 

      As we do research for our upcoming book there are more and more instances of commentators suggesting a complete meltdown of our economy. One similar to what has happened in Japan. But the chances are we will not be able to borrow to the extent of 200% of GDP that Japan has. Japan has borrowed this money to sustain their standard of living.

      The Japanese stock market is down 75% since it's highs in 1989 
      Courtesy Seekingalpha.com

      Hang the rich: Great war inevitable, pundit predicts

      Richard Worzel - Revolting Civil Servants

      Stephen Gray  -Are we seeing political treason?

      Bill Tufts 

      Fair Pensions For All

    Friday, March 11, 2011

    Landmark Report on Public Sector Pensions

    In the UK a special report on pensions looking into the sustainability of public sector pensions has been released. 

    Lord Hutton a former Labor minister in the UK released the report that shows that the current system of public sector employees pensions is not fair to taxpayers or adequate for employees in its current form. 

    He is urging that profound changes be made to the system for it to be sustainable in the long-term.  His point of view is that we cannot continue on as were are and major changes are required.

    The UK has a pension system that is very similar to the one that Canada has for its public sector employees. It is based on the same plan design and very similar pension formulas. The report would be the star of a good road map towards changes here as well.

    Hutton examined whether the current system is fair to employees and fair to taxpayers. What he discovered is that taxpayers are responsible for most of the future risk associated with these types of plans. These risk include investment; inflation; salary; and longevity risk.

    There are also several gaps in fairness between what the public sector gets in pensions and what government workers get or should I say don't get. 

    The two major recommendations were made in the report.
    ·         The public sector should move from a final salary pension scheme to one that is based on a career average
    ·         The age of retirement should be the same for all taxpayers both in the private sector and the public sector.

    The UK has seen a similar trend in pension coverage. In 1997 about 30% of employees had access to a DB plan with overall coverage including DC edging 50%. By 2010 those numbers had dropped dramatically with only about 10% of employees in DB plans and overall coverage about 35% including DC plans.

    About 80% of the public sector in the UK has a defined benefit final salary pension plan.  

    The report outlined several key principles along with extensive discussion on each of the main points.

    Affordable and sustainable - As employees get closer to retirement age their wages rise dramatically and the value of their pensions do as well. A greater cost falls onto taxpayers as the wage levels rise 
    In final salary schemes, members will have paid contributions to the scheme based on something similar to their average salary, but will receive benefits based on their final salary. Taxpayers will pick up the cost of the difference between average and final salaries and members will benefit where final salaries are higher than average salaries. This effect will be particularly visible where people have experienced rapid salary growth. In average salary schemes, members bear more of the risk – salary levels throughout a member’s career will determine their income at retirement as well as their contributions to the scheme.
    Adequate and Fair - There is a big gap between those at lower pension wage level in the public sector and those at higher levels. This is unfair because high income employee receive almost twice the value of their contributions than lower income employees do.
    The report points out the there are many risks associated with pensions over the long term including investment risk, inflation risk, salary risk and longevity. The current system puts most of the risk on taxpayers for future funding .

    Supporting productivity:- It is interesting that the report points out the "golden handcuffs" created by defined benefit plans prevents labour mobility within the economy. It recommends that more flexibility would be better for the economy
    Supporting productivity:- It is interesting that the report points out the "golden handcuffs" created by defined benefit plans prevents labour mobility within the economy. It recommends that more flexibility would be better for the economy

    Transparent and simple: - The report complained that there is little transparency on the cot of PS pensions. that taxpayers have no way of estimated what the costs are associated with a PS pension.
    Transparency and effective oversight of public service schemes is required for public service workers and taxpayers to have confidence in the system and improve the quality of debate about the future of public service pensions.
    This report is the basis for a good formula that would make Canada's pension system fairer and more sustainable., as well.

    Focusing on fairness there were many interesting observations made by Hutton.

    The report points our the generational risk in the current DB plan. For example, as the real costs of DB plans become apparent the younger employees pick up more burden.

    For example, the OMERS pension plan offered its members a multi-year contributions holiday. As well since the early 2000's contribution rates have doubled. The early members in the DB plan paid at the old rates but new members will be paying much higher rates for most of their careers.

    The sustainability of the system was questioned. It recommended some sort of a cap on taxpayers contributions into the plans. For example in Ontario the cost of taxpayers contributions into it's biggest 3 plans has grown by 400% over the past decade. At the same time pension plan shortfalls have not diminished. OMERS is on it's way to projected $8 Billion shortfall and Ontario Teachers is still sitting on a $17 Billion shortfall. 

    The Commission recommends that public service employers take greater account of public service pensions when constructing remuneration packages and designing workforce strategies. to accrue further benefits in the present schemes for many decades would be unfair and inequitable to the new members coming behind them.

    There is clear evidence that the administration of pension schemes can benefit from
    economies of scale, particularly where existing schemes are below 100,000 members.

    This bodes well for the creation of Canada's new PRPP. The report shows that the costs of administering a plan can drop to one-quarter the costs when comparing administration costs at small plans and large plans 
    One of the complaints that Hutton has was that during his investigation he found that there are big gaps in transparency and a lot more needs to be know about public sector pension plans. In this way both the employees and taxpayers can have confidence in the system.

    There should be a fairer sharing of risk between government (and ultimately
    taxpayers) and scheme members.

    In a recent OMERS report they highlighted the value of a employee pension.

    A member who retires at age 60 with 32 years of service and “best five” salary of $48,000. Total contribution of $50,000 was matched by employer. Total payment to member and surviving spouse, including inflation, is $960,000

    Part of the report included benchmarking the UK against other systems in the world. The BBC summarized a few of these plans and they provide an interesting analysis.

    Public pension schemes elsewhere

    • ·         France: Public sector workers typically retire before 60, but there are plans to bring them in line with the private sector, who by 2012 will need 41 years of contributions with benefits based on the best 25 years' salary. There are also plans to raise the retirement age from 60 to 62.
    • ·         Sweden: Payments are based on earnings across the career not just the final salary, with an automatic link between benefits and life expectancy.
    • ·         Netherlands: Private and public sector schemes are similar, each with defined benefits. Dutch typically pay 1.75%-2% of earnings for each year of contributions.
    • ·         Chile: Mandatory defined-contributions in public and private sectors. Employees pay 10% of their earnings, with top-up benefits for the poorest 60% of pensioners.
    • ·                 Greece: Retirement age raised from 60 to 65, and minimum contributory                   period on full benefit up from 37 years to 40 by 2015.
     Here is an excellent interview in video on the BBC with Hutton. Here what he says about the issue

    Bill Tufts 
    Fair Pensions For All

    Tuesday, March 8, 2011

    Tuitions rising over the cost of sky high salaries

     This picture is the scene in Thunder Bay over rising tuitions.

    I have been very busy the past few weeks writing with Lee Fairbanks our upcoming book on pensions. Our deadline for completion of the original manuscript is April 1st. Therefore I have not had much time to devote to my blog.

    There were a series of articles about education that caught my eye. All about rising salaries and compensation paid the staff at universities.

    It highlights the cost to society of having a shadow workforce that gets high and a large benefits package but never has to show up for work. These are retired public sector employees.

    Students were protesting over the rise in tuition at Lakehead University. There are some very interesting insights into the situation written by someone from the next generation. The very ones saddled by the cost of this shadow workforce, paid very handsomely by taxpayers and do not work.

                                           So what do we do now? 
                                           Board ignores alternatives to tuition hikes

                                           University faculty demand salaries, forcing tuition rates through the roof.

                                           No really... we are fairly paid ... except for that double a few years ago 
                                           From the same Victoria newspaper 

    This all ties in very well with the excellent video on the sidebar with Bill Gates talking about the current challenges to education. I urge you to watch it.

    Bill Tufts 
    Fair Pensions For All

    Sunday, February 27, 2011

    Leo's Pension Pulse

    My friend over at the Pension Pulse Leo Kolivakis has run a very successful and insightful pension blog since 2008. He always has very informative insights and discussions into the pension world. 

    I sent him an email yesterday that he had analyzed by the former Chief Actuary of the Canada Pension Plan (CPP), Bernard Dussault. Leo posted his response to my email. It makes for very informative and interesting dialogue.

    Put Leo on your blog list as he does an excellent job and for the past 3 years had made a post on pensions every day, even the weekends!

    Day of Reckoning on California Pensions?

    I hope you enjoy this discussion 

    Bill Tufts 

    Fair Pensions For All

    Saturday, February 26, 2011

    The Pension Monster comes to Canada

    Like the great Ogopogo monster in the Okanagan Valley in BC there is a monster that everyone knows is out there but it is rarely ever seen. 

    Today the Pension monster surfaced in Montreal in an article from the Montreal Gazette. The article is 
    Montreal Island's two most senior political leaders are planning to ask the provincial government for a special law to help curtail the growing local tax burden associated with municipal pensions.
    This is an unusual move because most politicians in Canada get a ride on the monster as well. It is a personal conflict of interest for politicians to castigate the monster because he is their friend as well, most city politicians have a pension funded by taxpayers. 
    According to their plan, people who are currently receiving a municipal pension would not be affected. Only current and future municipal employees would see lower benefits - but not retroactively.
    Current employees would keep whatever entitlements they have built up over time, based on years of service already accumulated. But changes would be made over time to reduce benefits going forward.
    The problem with pensions they way they are designed today is that they are unsustainable and unfair to taxpayers. 
    In Westmount, employees with 30 years of service can retire at age 50 with 75 per cent of the average of their last three years of earnings. This has encouraged a lot of early retirements in Westmount, which is why the westend suburb now has almost as many retired workers on its books (236) as full-time equivalent employees (295). Soon, Westmount will be like General Motors, with more retired than active workers.
    Part of the problem is that pensions are based not on what the city or employees contributes but on what the employees earn when they retire. Employee compensation in Montreal has been skyrocketing like all governments at all levels across Canada. 

    Another article in the Gazette shows how this happened. So much for economies of scale
    The spending of the island's municipalities rose from $2.7 billion in 2002 to $4.1 billion in 2011. That's a jump of 50.1 per cent -21/2 times the inflation rate.
    Salaries have gone up by 29 per cent, well above that 20-per-cent inflation rate. How, you ask, can this be? Hasn't the Tremblay administration been holding increases to no more than two per cent a year? Yes, but that does not tell the full story. Ways exist to get around it. One is "grade inflation:" People get new titles, qualifying them for raises. Another is overtime. A third is arbitrators' rulings. Last year, for example, an arbitrator gave police a 1.5-per-cent "metropolitan premium" because their work was more difficult than that of other Quebec police.
    But benefits -mainly pensions -are growing far faster. As the table indicates, they've grown by 126 per cent since the merger. A major reason is the 2008 recession, which inflicted great losses on pension funds. Provincial law requires municipalities to compensate for these losses. Prodded by Trent, the Tremblay administration plans to appeal to Quebec to reduce municipalities' need to compensate so generously.
    But another reason for this 126-per-cent rise is that municipal pensions are far more generous than those in the private sector. Firefighters, for example, earn $65,585 after 41/2 years' service; they can retire after 30 years with 73 per cent of salary and after 41 years with -incredibly - 100 per cent.
    There are solutions but is there political will? 
    The current practice of paying out generous defined benefit pensions is unsustainable fiscally - and unsupportable politically, Trent said. Two thirds of Canadians don't have any pension plan at work at all, he noted.
    "Why should they, through their municipal taxes, be supporting these very generous pension benefits?"
    Taming the Beast 
    We have all seen the monster and we know that the ride he provides for some is very comfortable, but like most monsters, for the average person he is very dangerous. 

    I was recently invited to a conference in California about pension reform. There was a lot of discussion on how to tame the beast. One idea focused on the ability of municipalities to go bankrupt in order to off load the legacy liabilities they have. Another large part of  the discussion surrounded the extent to which pension can be rolled back or more appropriately made more sustainable. 

    One word of warning is that implementing new rules for future employees will not control costs for the city. The articles above mention that new employees coming into the system are not being hired as full time employees but as contractors. This trend will continue. 

    Because of the ponzi like nature of  defined benefit pensions the need fresh contributors  coming in to be sustainable.

    Benefits must be amended for existing employees. 

    A top labour lawyer at the conference examined the concepts that will allow for the changing of future benefits for existing employees. part of it is on vesting rights. 

    Vesting - Vesting means that you are unconditionally entitled to receive the pension you have earned under the pension plan, whether that benefit is payable now or sometime in the future. 

    Accrual - refers to the level of benefits that the employee has already earned based on the number of years employees have worked.

    Before I begin my analysis let me say that I respect the hard work of police and firefighters across our country. It is part of what makes our democracy strong.
    We only need to look across the world to see what is happening in other countries to appreciate what we have here. I am only talking about effective pension management solutions, not denigrating any public sector worker. 
    Lets look at the firefighter above. Assume we have a firefighter who has worked 15 years. Assume he is earning $70,000 per year.  

    The usual formula for pension accrual for "public safety workers" is 2.33% for every year the employees works. 

    Based on his current employment record he has vested his pension with 15 years of working, So based on the formula he will get 2.33% X 15 years equals 35% of his income. He has accrued 35% of his income and this is vested because he has completed this amount of time. 

    The future earning he has will accrue at the same rate 2.33% and each year that he works becomes another year of "vested" service. 

    What the big question in Canadian law is "Can the future accrual rate be changed?" 

    The firefighter when he first began working he had an accrual rate on his pension based at 2%. Changes over the last 10 years have boosted the accrual rate to 2.33%. When the change was made all of his past service was changed to the new accrual rate. This boosted the liability substantially for all municipalities across Canada because the change was made retroactive for all the years public safety employees had already worked. 

    In this example say a firefighter had been with the city for 25 years. Under the 2% accrual rate he had a vested pension worth 50% of his salary but the day after the pension changes were made he had a pension worth 58% of his earnings. At 30 years the number was 60% versus 69.99%. 

    Pension earnings in Canada's public sector have always been based on a target replacement ratio of 70% of the worker's salary. So the firefighter above at 30 years working had the target pension at an accrual of 2.33% compared to the old plan where he would have had to work 35 years to get the 70% replacement pension. 

    Confusing I know. 

    Potential Solutions 
    In California the solution that Jeffrey Chang presented was that future accrual rates can be changed but the vesting had to stay in place. This seems like a reasonable solution. 

    Convert DB to DC 
    The first solution would be to change the nature of the plan convert it from a defined benefit (DB) to a defined contribution. It is only the public sector that has DB plans based based on these generous accrual rates. The employee would be vested to his current DB portion but any future pension would be based on a DC plan accumulating future pension contributions. 

    Hybrid - Multi-Tier 
    Why should the public sector employee get a pension substantially greater than the working Canadian's average wage. Give them a base of say 50% replacement income and any additional contributions they or taxpayers make go into a DC plan. So they would be guaranteed the 50% but any portion over and above would be calculated on a DC formula. 

    Eliminate Final Pay Formulas 
    The example for the earnings of the firefighter above is understated. They used a salary estimate that is estimated on the average wage of a firefighter in Montreal. Based on the salary grid and on seniority a firefighter going into retirement has a much large salary. It is the final years that are used to calculate the pension. In the private sector it is done on a career average basis. This opens the door to much abuse in order to raise salaries in the last few working years to enhance pensions. Why use only the last 3 or 5 years of salary to base the pension?

    Cap Pensions
    What is a reasonable limit for pensions? Our work shows that a formula base on the average working wage is a good solution, Why should a public sector employee retire at age 50 earning for the rest of his life substantially more than the average working taxpayer. A moving formula could be say 1.5 times the average Canadian working wage. This should be more than reasonable pension income. Earlier this week we wrote about an Ontario worker who is currently on track for a $750,000 per year pension, of course funded by taxpayers. An alternative would to be to place a dollar cap on pension for example $95,000 per year. Currently across Canada at all levels there are tens of thousands of retired government workers earning in excess of $100,000 per year in pensions.

    Raise the Retirement Age
    Canadians in the past had a targeted retirement of age 65. A majority of workers today will work far past that age and a minority will be working into their 70's. Why should the public sector retire as young as age 50? 

    Eliminate Double dipping 
    Many of those retired firefighters will continue working after they retire with no reduction in their pensions. Even more insulting many will return to government to continue working.

    The conclusion is that changes have to be made. The longer we postpone the changes the more painful it will be for taxpayers and employees. 

    Taxpayers will suffer big drops in the services that government can provide as they struggle to pay employee legacy costs. 

    For employees the risk is great too. Many have 40 years to go in retirement. This is a long time and there are many financial challenges that face Canada in the years ahead.

    We need to move to pensions that are fair for all and sustainable. 

    Bill Tufts 

    Fair Pensions For All