Tuesday, April 26, 2011

The Agenda - Steve Paikin

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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%
    multiplier.
  • 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.

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