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2011-05-05T15:11:00.004-04:00

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The Agenda - Steve Paikin

2011-04-26T05:13:00.124-04:00

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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.

University Pensions Driving Tuitions Higher

2011-04-21T10:41:00.001-04:00

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

Rising gas prices sandbag economy

2011-04-18T13:51:00.001-04:00

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.

2011-04-18T11:01:00.002-04:00

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

The Roadmap for the Future

2011-04-12T09:32:00.009-04:00

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

Total government spending on Wages and Salaries

2011-04-05T15:01:00.000-04:00

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

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

2011-03-31T22:02:00.001-04:00

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?

2011-03-31T17:58:00.003-04:00

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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

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

2011-03-18T11:07:00.001-04:00

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

Working on pension issues

2011-03-17T08:42:00.002-04:00

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
http://www.900chml.com/Station/BillKellyShow/Audio.aspx

There was a live radio interview the Rick Howe Show from Halifax. It was on teh new New Brunswick pension proposal.
http://www.news957.com/inside/staff/124014--rick-howe

It was referred off this editorial in the St John Telegraph Journal
http://telegraphjournal.canadaeast.com/opinion/article/1389230

Also there was an editorial that was printed in the National Post.
http://www.nationalpost.com/todays-paper/CUPE+numbers+base/4446407/story.html

Hamilton Spectator
http://www.thespec.com/news/local/article/502317--wages-and-benefits-strangling-city-budgets

Your keeping busy blogger

Bill Tufts

Fair Pensions For All

UK pension comparison

2011-03-15T22:29:00.003-04:00

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

Net worth continues to climb - but for whom?

2011-03-14T17:11:00.004-04:00

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

Landmark Report on Public Sector Pensions

2011-03-11T13:51:00.000-05:00

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

Pensions Commission

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

Lord Hutton Explains Pension changes

Bill Tufts

Fair Pensions For All

Tuitions rising over the cost of sky high salaries

2011-03-08T08:40:00.004-05:00

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

Leo's Pension Pulse

2011-02-27T14:54:00.001-05:00

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

The Pension Monster comes to Canada

2011-02-26T11:08:00.001-05:00

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

Island mayors to ask Quebec for pension relief

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.

Example

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

Weekend funnies

2011-02-25T19:01:00.001-05:00

Today's headlines are so funny you have to laugh.

London Ontario -Police swell sunshine list by 68%

Paramedics in Ottawa ecstatic over a salary increase of 13 % despite wage freeze in Ontario

Disillusioned over 4.4% wage hike in Edmonton

St Albert - Councilors and employees approve themselves big wage increase

In Regina out-of-scope healthcare employees get 18.8% or $70,000 raise.

It is ironic I had just finished writing a letter to the Leader Post. The letter pointed out the game of leapfrog being played by the executives that had just given themselves handsome raises. I wrote that

Despite all of the wordsmithing about out-of-scope employees, salaries significantly "under market" and comparing it to pirates in Alberta salary increases of 20% or $70,000 per year are a taxpayer rip-off. How much did they pay consultants to get a report that justified these types of increases?

Don't expect it to end anytime soon. Consultants will soon be reporting to healthcare executives in Alberta that Saskatchewan just got raises valued at 20% and they should be getting the same. The it will be Saskatchewan's turn again. It's just a game of leapfrog that keeps putting taxpayers further and further behind.

The Leader Post article stated that

The health regions, the Saskatchewan Cancer Agency and SAHO worked with The Hay Group, a management consulting firm, to do the market review, which indicated that some pay ranges (bands) were no longer competitive. A broad range of out-of-scope health-care jobs include administrative positions, nursing supervisors, program directors, vice-presidents and CEOs.

Then the next report I saw that was the cause for uncontrollable laughter. It was the report from St Albert. This is where the councilors and employee both went to the taxpayer trough.

And how did they justify it?

Council approved a compensation review implementation plan and a compensation philosopy policy, both in reaction to a compensation report delivered by the Hay Group in November.

Be watching for the next report.... I wonder how much taxpayers have to pay for these consultant reports. For some they are priceless.

Here is another update on a report done by the same group in Vancouver. City staff survey produces $92,000 bill

Rob Ford commissioned the same group to make a compensation report. Here is what the report by the same group said to the mayor of Toronto Councillors should reject raise, budget chief says

Nothing New
This game is going on for a long time. My only thought is what are these guys thinking?

Across North America government are suffering financially. Taxpayers have suffered job losses, reduced wages and a significant portion of wealth was lost in the stock markets. Yet
the cities listed in the above headlines continue on like we are still living in boom times.

When will they bump up against the ceiling of reality? Or maybe they believe the following article and think they can turn the ship around with more spending?

Government budget cuts pose threat to recovery

Deep spending cuts by state and local governments pose a growing threat to an economy that is already grappling with high unemployment, depressed home prices and the surging cost of oil.

Lawmakers at state capitols and city halls are slashing jobs and programs, arguing that some pain now is better than a lot more later. But the cuts are coming at a price — weaker growth at the national level.

Across the country, governors and lawmakers are proposing broad cutbacks — lowering fees paid to nursing homes in Florida, reducing health insurance subsidies for lower-income Pennsylvanians, closing prisons in New York state and scaling back programs for elderly and disabled Californians.

"The massive financial problems at the state and local levels

But those same governments cut spending at a 2.4 percent rate at the end of last year. And economists predict they will slash their budgets by up to 2.5 percent this year — potentially the sharpest reduction since 1943. The deepest cuts are expected to occur in the first six months of this year.

The worst cuts so far_ 3.8 percent — came in the January-to-March period of 2010. That was the sharpest quarterly drop since late 1983, when the U.S. economy was recovering from a severe recession. Most economists think the cutbacks this year will exert an even bigger economic drag than last year.

Many governors, including those in Florida, New York and Colorado, are pursuing tighter budgets. Their proposals include laying off public workers and teachers, reducing spending for education and health care, and ending some social services. They're also targeting public pension funds and health insurance plans and seeking larger contributions from public employees.

State and local budget experts fear the cutbacks will intensify this year. States are struggling to close budget gaps of about $125 billion for the upcoming budget year, according to the Center on Budget and Policy Priorities.

State and local governments have cut more than 400,000 jobs in the past two years. Budget pressures will force an average of 20,000 more job cuts each month for the rest of this year

Bill Tufts

Fair Pensions For All

Ontario Hydro - Abusing Taxpayers

2011-02-23T09:03:00.004-05:00

It looks like electric rates are rising again in Ontairo. The OPG wants an increase of over 6%. They made the 6% look like a bargain as they originally were asking for a 9.6 per cent rate increase. Don't be deceived about it being over green energy or a $18 Million fine they had to pay.

It is about the machine feeding itself. The rate increases are due to outrageous compensation packages paid by OPG. My recent blog on Hydro Ontario showed how most of the cost of running the organization was associated with the huge labour costs.

Well there is a sister to Ontario Hydro called OPG. It employs about 12,000 across Ontario. Over half of these employees or about 7,900 showed up on the Sunshine List for 2009. This is the list of earners on the government dole making in excess of $100,000 per year.

The Sunshine List only shows the salaries of these employees. It does not include the total compensation they receive in pensions and benefits. For most of these employees the taxpayers of Ontario will kick in another 35% towards these fringe items. So that a employee that shows up with $100,000 on the Sunshine List is costing the taxpayer around $135,000,

Assuming that the employees on the Sunshine List earned just $100,000. their total compensation cost you as a taxpayer over $1 Billion. Of course there are all those employees not on the list probably earning close to $100,000 and many on the list far exceed the $100,000 threshold.

Obscene Compensation
The number of employees on the Sunshine List from OPG is an insult and affront to Ontario taxpayers. But they are just small fish compared to the big Kahunas. (Joe M keep me posted on this),

A 2009 compensation report from OPG shows the real damage to taxpayers of the irresponsible use of taxpayer money to fund the personal pension plans of those running the organization.

Although the numbers seem to be fraudulent and put out as some sort of a joke, I think they are real. That makes them even more horrifying. We can see why Clitheroe wanted to sue taxpayers over her paltry $350,000 a year pension.
Statement of Executive Compensation - OPG

The first portion of the report on page 7 shows the pension and compensation values of the senior executives. A new President and CEO was awarded a 3 year agreement beginning in 2009. That is all the time he will need to become faboulously wealthy and get onto the next government appointed job.

His total compensation was $1.591 Million in 2009. It only shows as $1.011 Million on the Sunshine List for the same year. This compensation appears to be only for half the year as the outgoing CEO and President made $1.717 Million the same year as well and $3.451 Million the previous year. Of course the outgoing President only shows earnings of $2.475 Million on the Sunshine List the same year he made the $3.451 million.

Thats not all
There is lots more pain to come for taxpayers. The employees working for OPG have a long list of special benefits they are paid. None of these benefits are paid to the private sector but are part of the public sector collective agreements. They include a laundry list of goodies such as retiree health care plans (for those who retire before 60, they still get benefits), sick time payouts, vacation leave payouts and termination severances.

The total liability on these benefits is close to $2 Billion. See page 125 of the OPG Annual Report

In 2009 the company contributed $ 271 million into the company pension plan. Since the wages are so low at OPG employees only contributed $ 86 Million into the plan.Most companies in the private sector split the cost of pensions with their workers. At OPG employees contribute only 24% into their gold-plated plans.

Oh by the way. This is not enough money for the pension fund. They are figuring these rates at 7% rate of return for the pension fund. Any guesses who will be covering future shortfalls?

OPEB's or Other Post employment Benefits are escalating at OPG. They are a debt paid to employees who no longer work there but participate in the other benefits. Can you imagine your employer saying here is your gold watch but we are going to pay for your health benefits for the next 10 or 15 years? As you leave we will pay you for 20 years worth of sick days you did not take. We know it is hard to take 10 sick days a year.

More to Come
If you are not feeling ill already go to page 8 look at the value of the pensions for the executive. The NEW CEO is "entitled" to $750,000 year or $62,500 per month at age 65. Of course, this amount will increase every year and probably by the end of his contract will be close to $1 Million. That is $1 Million a year in pensions payments for retiring.

One executive member has already accumulated in excess of $4 Million in pension entitlements. One would think that someone earning $750,000 a year could save for their own retirement. How do you spend all that money? You would not have to save any of it for retirement, that has already been taken care of by taxpayers.

This is the real reason Clitheroe tried to sue Ontario taxpayers for a $33,000 per month pension. She had pension envy.

Bill Tufts
Fair Pensions For All

"Boot Camp" Examines Pension Cloud over Government Budgets

2011-02-19T11:08:00.002-05:00

Over the past week I was in California.

It was chance to get away and do some work writing for the upcoming book I am writing with Lee Fairbanks called Pension Plunder.

I was invited to the Bootcamp by Jack Dean the publisher of Pension Tsunami.

Jack works with California Pension Reform CFR and they were the hosts for the event. California provided a nice break from winter and the Bootcamp provided me with a good reason for a get-away

I had a chance to share lunch with Marcia Fritz the founder of California Foundation for Fiscal Responsibility and Scott Baugh Former Republican Leader, California Assembly. It was a very interesting day and provided lots of insight into issues that elected officials and city managers have in dealing with the aging time bomb.

The seminar was a sell out and there were an additional 350 people listening to the program live over the internet. There were a wide range of people in attendance from self proclaimed unions thugs to elected city councilors, mayors and taxpayer groups. At lunch we were joined by the City Manager and an elected official from Loma Hills California.

The event was presented to better help key decision makers better understand the pension tsunami and hear about timebombs set to go off for municipalities around California. The biggest surprise were the costs of OPEB's (Other Post Employment Benefits).

Although the focus of the event was California all governments at all levels have identical problems when it comes to the issue of employee entitlement packages. A lot of discussion was had around the changes that have to be implemented in order for the system to survive.

Marcia told me the biggest challenge of the issue is understanding exactly what the problem is and making people aware. There is a lot of myth and misinformation out there about the problems that exist and the Bootcamp was a great way to start to begin the discussion on what needs to be done.

The feature speaker was Girard Miller and he had some very interesting perspectives. His presentation was called The Power of No. He has written many articles and papers about pensions and the key issues surrounding reform. Poor Pension Math

I hope that in future blogs I will be able to share some of the details of the information that we heard. There was a wide range of experts and they focused on those issues that can make a big impact for taxpayers and their employees.

"Boot Camp" Examines Pension Cloud over Government Budgets

Lawmakers Head to Pension Boot Camp

Bill Tufts
Fair Pensions For All

Ontario Hydro a big shock for taxpayers

2011-02-11T11:14:00.001-05:00

Ontario Hydro releases 2010 results.
http://www.newswire.ca/en/releases/archive/February2011/10/c9885.html

Every year taxpayers in Ontario are made aware of how Ontario Hydro is being used by its employees as their personal piggy bank.

Politicians and management refuse to stand up to the Hydro employee unions and in fact have promised to guarantee their gold-plated benefits and well into the future. The government makes the promises and you will be paying for them

The top earners from the Sunshine List every year are usually from Hydro. Last year the head of Ontario Hydro was third on the list at $977,000 and the head of Ontario Power Generation came in first making more than $2.2 million.

In addition to the top dogs Hydro over 2,000 employees make it to the list that reports on employees earning over $100,000 per year. This number is only the base salary paid.

Salaries are only part of the story. Employees at Hydro also earn gold-plated pensions and platinum benefits. Benefits and pensions contributions are worth about an extra 35%.

Ontario Hydro just reported their 2010 results and the trend to skyrocketing pension and benefits costs continues. This year Hydro paid almost half a billion dollars for these benefits.

This year the company paid combined pension and benefits expenses of $ 453 million. Costs were $191 million for pensions and $262 for benefits.

Pensions costs have skyrocketed from $86 million in 2006 to $191 million this year. This is a 122% increase.

In most companies the employees are responsible for a portion of their retirement costs. In the private sector a 50/50 contributions is standard practice. At Hydro however, the employees contribute only 15% of the cost of the gold-plated pensions. Over the past 5 years the company has contributed $585 million into the pension plan and employees made a paltry $99 million contribution.

Employees are entitled to pensions unheard of in private sector. They are entitled to 70% of their average terminating salary. Employees hired before 2005 get a pension based on their top 3 years of salary. Newer employees are entitled to a 5 year average plan.

A recent piece of taxpayer paid propaganda was mailed to Ontario households with a warning from McGuinty that hydro rates will rise for many years to come in Ontario. Now we know why.

The story only gets better. Ontario Hydro does not have to pay all of its costs incurred in a single year. There is a category called Future Employee benefits or OPEB's, Other Post Employee Benefits. These are benefits accrued this year but to be paid in future years. It is a loan to employees for future goodies. The liability of OPEB's at Hydro is now just short of one billion dollars. The actual total this year is $980 million up from $716 million in 2005. An increase in liability of 36% since 2005.

OPEB's mean that Ontario taxpayers in addition to paying gold-plated pensions pay for more benefits at the time of retirement or after they retire.

Some of the OPEB's include the employee termination packages such as vacation time payout and vacation time payouts. A bonus to be received for terminating employment. Also most will retire around age 55 they are entitled to full health benefits until age 65.

The total of goodies paid to employees plus the loans you have made to them have added up to $2.9 Billion over the past 5 years. Hydro has returned to taxpayers a profit of $ 2.4 Billion.

Please don't be fooled by election bribes in the form of energy tax credits from the provincial government. For Ontario taxpayers Ontario Hydro continues to be a shocking experience.

Bill Tufts
Fair Pensions For All

Great Canadian Pension Reform Debate and PRPPs

2011-02-04T11:33:00.002-05:00

In a recent edition of the Daily Reckoning the author Bill Bonner had this to say about fairness.

And here's another important point. Since more wealth is only interesting from a RELATIVE point of view...that is, it is only useful when it gives you higher status...a normal, healthy human being cares more about "fairness" than he does about absolute wealth. Of course, fairness can mean practically anything you want it to mean. It can mean fairness of opportunity - as in, we all play by the same rules. Or it can mean fairness of outcome - as in, we all end up in the same place.

In an up and coming economy, with limited government and low taxes - like the US in the early part of the last century - people care more about fairness of opportunity. People are making money. They're creating status for themselves. Things change fast. You are responsible for creating your own wealth, power and status.

Later, as the economy matures, fairness of outcome becomes more important. New wealth is harder to get. It's harder to move "up" in society. People get a hold of the government and turn it into a zombie- protector. They use it to make sure the rich get richer and the poor stay poor.

The banking and investment community is currently in the process of positioning themselves for the PPRP. Terence Corcoran commented on pensions in his article entitled The Great Pension Myth.

If you missed the news and don't have a clue about what these new PRPPs might be, don't worry. I'm not sure the ministers even know what they are. There's certainly no possibility of PRPPs coming into existence any time soon. The politicians issued a brief description of what pooled pensions might look like, then they "tasked federal, provincial and territorial officials to work collaboratively to examine, among other things, changes that would be required to permit defined contribution Pooled Registered Pension Plans across Canada."

While experts have been on the pension-reform case since the stock-market crashes of the last decade undid their pension models, the issues -- technical, ideological, economic, tax, political, jurisdictional and regulatory -- are numerous and complicated. They don't lend themselves to easy solutions, unless you're a union leader and can parade mythologies as reasonable options. All we need, they say, is a massive expansion of the Canada Pension Plan to give all Canadians generous pensions.

The core mythology of pensions is the all-too widely accepted idea that it is possible and even easy for individuals to get more out of their savings and investments beyond a reasonable but modest rate of return. That's the great pension fantasy, an extravagant promise that somehow there is free money to be had.

There are, essentially, only three sources for this free money. 1) New funds can be voluntarily contributed by corporations and employers offering pensions as an employment perk, adding to the total savings returned to the individual. 2) New money can be taxed from others and transferred between generations or income groups to provide higher returns to one set of individuals at the expense of others -- a form of wealth redistribution. 3) Expert investment advisors and managers can achieve dramatically superior investment returns that will reward each individual with larger retirement savings and payments than they could achieve on their own.

There are no other possible sources of bonus pension benefits beyond what the individual contributes. One of those sources, moreover, has proven to be mythical. The stock markets have turned out to be unreliable over the long term, and expert managers rarely emerge as superior performers. It is also logically impossible for all pension managers to beat the market.

The Great Canadian Pension Reform Debate is essentially an attempt to come up with a new way to keep the fantasy alive. However complicated the issues, Canadians should know this basic fact: There is no free pension payoff and any extra returns and bonus payouts will have to come from somewhere.

In an excellent piece the Alberta Venture magazine produced a thoughtful analysis of the current pension situation in Canada.Second Life

Things aren’t much better when it comes to employer pension plans, given the fact that Albertans have the dubious distinction of having the lowest corporate participation rates in Canada. Nationally, approximately 40 per cent of employees belong to a registered pension plan (RPP) offered through the workplace. In Alberta, though, that figure drops to 33 per cent, and if you take out the RPPs in the public sector the total shrinks further to just 18.3 per cent. Mintz thinks that’s a reflection of Alberta’s low union rates relative to other provinces, and the Alberta Federation of Labour agrees. As its 2009 policy paper, The Looming Crisis in Retirement Incomes, states: “It’s simply a fact that workplace pensions are rapidly becoming a thing of the past in non-union companies, and unless the rate of unionization rises, we can expect further declines in pension coverage.”

As a result, the next generation of Albertan retirees are even less prepared than other Canadians for their so-called golden years. Pension analysts caution that Canadians on average are currently on track to replace only half of their pre-retirement income, when 60 to 70 per cent is the generally recommended guideline for comfort. But Alberta’s “replacement ratio” is only 45 per cent, which again is the country’s lowest. In fact, according to a University of Waterloo retirement study funded by the Canadian Institute of Actuaries, two-thirds of private-sector workers currently earning between $30,000 and $100,000 won’t have enough retirement income to cover basic living expenses. Canada still has the lowest poverty rate among seniors in the world, but how much longer will that last?

Governments around the world are particularly worried about the state of the first pillar, government-funded pensions and programs, which will be under even greater pressure in the years to come as the massive baby boomer demographic becomes a senior citizen explosion. Under such a scenario, the sheer volume of new retirees drawing on entitlement programs would threaten to deplete reserves that a comparatively smaller workforce won’t be able to replace in time for their own retirement. Germany and Australia have already reacted to this potential crisis by raising the eligible retirement age from 65 to 67, while the United States and Great Britain are quietly shifting theirs to 67 and 68 respectively. Here in Canada, calls for an increase to CPP premiums have come from labour leaders and the political left, but in December of 2010 Finance Minister Jim Flaherty announced that the Canadian government would go in a different direction. Rather than making significant changes to the CPP, the government instead decided that it will create a new pension instrument called the Pooled Registered Pension Plan, a voluntary program that will be administered by the financial industry.

While the shakiness of the first pillar is grabbing headlines worldwide, the second and third pillars aren’t in much better shape. When Nortel declared bankruptcy and refused to honour its pension obligations, retirees discovered that the once ironclad reward of a corporate pension for years of dedicated service may be no more than a hollow and unenforceable promise. Others watched their retirement funds evaporate as RRSP savings lost up to 30 per cent of their value during the recent economic downturn and related stock market collapse. And as more soon-to-be retirees approach their golden years without having paid off their mortgages, even the idea of cashing in by downsizing one’s home is becoming a dubious option.

Beginning in the late 1990s, businesses began to shift the burden of providing for retirement from their shoulders and back onto those of their workers. The gold-plated defined benefit pension plans of the past are fast becoming an endangered species in corporate Alberta, rarely seen outside the safe confines of unionized and public-sector workplaces.

The defined benefit plan guarantees a worker a set income for life after retirement, one that’s usually indexed for inflation. The precise amount is determined by an employee’s cumulative contributions from years of service and the total wages that they earned during that time. If that sounds a bit like CPP, it’s no coincidence. The CPP is a classic example of a defined benefit plan, although one that’s maintained by the government rather than a corporation.

For businesses, the defined benefit system system worked well in an era when employees tended to stay with one company for the bulk of their career. It also reflected the spirit of the time, one in which corporations took on a paternalistic role in their relationship with employees in exchange for their loyalty. Not surprisingly, corporations were more adept at reading the writing on the wall about the looming pension crisis than governments were, and they acted accordingly. Several decades ago they realized that saddling themselves with predetermined payments to an ever-increasing pool of former employees, who also happened to be living longer, was no longer financially sustainable.

If the plus-45 set is mourning the passing of the defined benefit pension plans that their parents enjoyed, there’s a younger generation of workers who may not even know what they’re missing. Kristin Smith, a pension lawyer with Spectrum HR Law LLP in Calgary, feels the up-and-coming generation of employees have moved past the direct benefit versus direct contribution debate. “Most have never had a direct benefit plan so it’s not an issue. For them it’s something from the past that their parents had.”

Something else their parents didn’t have is responsibility for managing their own portfolios. “Employees must become more engaged in their retirement future,” Smith says. “But are they prepared to do so? Some do better than others, but employees who invest conservatively in low-risk default options like money markets or GICs may find they aren’t earning enough to pay for their retirement.” The issue of financial literacy comes up over and over again at conferences, she says, but it’s yet to be adequately addressed. Making matters more complicated is the fact that companies are legally prohibited from providing direct advice for group RSP or direct contribution plans. But, Smith says, they can help with financial education by bringing in outside advisors and providing the best information available in order to encourage employees to make good choices.

This leads us to the current plan on the table the Pooled Pension Retirement Plan. A good overview of what is currently know about the PPRP was released on a blog by http://calgary-accounting.com - What is the framework for Pooled Registered Pension Plans?

So far the plan is well thought out and building on previous work done on retirement savings plans. On of the key foundations that can be seen in the PPRP design is the work of CAPSA. This work was initiated to deal with the decline of defined benefits pension plan. It set out the guidelines that employers needed to adhere to to properly manage defined contribution savings plans in the workforce.

Bill Tufts
Fair Pensions For All

The future of pensions in Canada

2011-02-03T10:44:00.005-05:00

Recently Arnold Schwarzenegger spoke at the Montreal Board of Trade. An article about his event was posted in the Montreal Gazette I am a little bit unique. In his first comments he spoke about the pension issue.

In California, public pension underfunding was pegged at about $50 billion, but analysis by university researchers revealed it was $500 billion, he said.
"Now the federal government is for the first time looking into what is the liability (for) each state. This will be a disaster in the future when it all comes out," he told a Board of Trade of Metropolitan Montreal luncheon.
"Right now they know about it and they should do something about it and they haven't done anything about it."

By now everyone recognizes that there is a pension tsunami coming. We are still not aware of the true extent of the damage it will cause and a lot more investigative work needs to be done to disclose the real numbers.

In anticipation of the seriousness of the tsunami some policy makers are attempting to bring about changes that will deal with the crisis. One of these is a recent proposal to allow American state to go bankrupt. The proposal was outlined in an article from the Los Angeles Times and was written by Jeb Bush, past Governor of Florida and Newt Gingrich, a Presidential hopeful. In Better off bankrupt they highlight their proposal.

During the 2008 financial crisis, the federal government reacted in a frantic, ad hoc fashion, tapping taxpayers for bailouts galore, running roughshod over the rights of bondholders and catching the American people unaware and unprepared. In contrast, we still have time to prepare for the looming crisis threatening to engulf California, Illinois, New York and other state governments.

The new Congress has the opportunity to prepare a fair, orderly, predictable and lawful approach to help struggling state governments address their financial challenges without resorting to wasteful bailouts. This approach begins with a new chapter in the federal Bankruptcy Code that provides for voluntary bankruptcy by states, a proven option already available to all cities and towns across America.

The figures for next year's budgets are staggering. California, which faces a $25.4-billion budget shortfall, will pay $100,000+ pensions to more than 12,000 state and municipal retirees this year. A Stanford study puts the state's unfunded pension obligations at more than half a trillion dollars. Illinois has a $15-billion budget deficit, prompting its governor and lame-duck Legislature to hike its personal income tax rate by 66%. New York, where 73% of the government workforce is unionized, is staring at a $10-billion deficit.

One of the key issues they try to address is:

Second, as with municipal bankruptcy, a new bankruptcy law would allow states in default or in danger of default to reorganize their finances free from their union contractual obligations. In such a reorganization, a state could propose to terminate some, all or none of its government employee union contracts and establish new compensation rates, work rules, etc. The new law could also allow states an opportunity to reform their bloated, broken and underfunded pension systems for current and future workers. The lucrative pay and benefits packages that government employee unions have received from obliging politicians over the years are perhaps the most significant hurdles for many states trying to restore fiscal health.

Recently Paul Helyer was quoted in the Winnipeg Press regarding his retrospective look at the Canada Pension Plan. The article was called Best pension plan we never got

When the original plan was presented to the Pearson cabinet in the spring of 1963, I considered it unimaginative because it addressed solely the amount of retirement income, and then only in part.
It ignored other critically important areas such as portability (from job to job), early vesting rights in private plans, the gross inequities between citizens and the economic impact of another pay-as-you-go program that would be paid from current taxes.

I considered the proposal thoughtfully and came to the conclusion that I couldn't support another unfunded plan in addition to the old age pension. It was too much at odds with the long-term interests of the baby boom generation, which would have to pay the taxes for both.

I decided to oppose the proposal to the best of my ability and, when I lost, as seemed inevitable, resign.

The alternative was universal, funded, totally portable, fully vested from Day 1, equitable, and adequate to meet the needs of all retirees. In effect, from the day a student got his or her first paycheque from McDonald's, deductions from both employer and employee would be made and deposited to the latter's retirement account.
The system would apply universally to both part-time and full-time employees in all income brackets, and be merged with all existing plans with grandfathered benefits so no one would be worse off as a result of the transition. The self-employed would be included.
Funds would be administered by 10 or 12 large Canadian financial institutions that would have included the big banks and insurance companies as well as major trust companies (before the banks were allowed to buy or merge with the trusts in order to eliminate competition).

The CPP plan did not enjoy the swift and easy passage its sponsors had hoped for. Provincial acquiescence was far from automatic.
In fact, Quebec decided it would prefer a funded plan of its own so the CPP could no longer be touted as a national plan.
Federal scouts were sent to Quebec and they came back recommending that Ottawa adopt the Quebec plan, that was partially funded, if only to make it look national in scope.
When this was agreed, the PM said the compromise was sufficient that I should stick with the ship, which I did.
When I review the file on the CPP, however, I shake my head in dismay. Every problem that could arise, did. The plan was badly underfunded so deductions had to be raised; political interference in management of the funds has been a source of constant irritation to those who seek objectivity in these matters; and, worst of all, there is no pretense of equity that was presumably the rationale for the CPP in the beginning.
So here we are, almost a half-century later, back at square one. Based on a proven record of being unable to learn from our mistakes, one can assume the policies and politics of expediency will prevail once again. Pity!

Our system of entitlements and pensions in Canada is based on the concept of an ever growing economy. Its like a giant ponzi scheme. The new people coming in work harder and increase productivity to create more wealth. Not only enough wealth for there current needs but enough to carry the wave of retirees before them. Those who are now on pensions and need healthcare.
It's the demographics stupid (Clinton).
For the past 15 years that I have been in the financial services industry we have been selling all of the features of an economy growing under the tsunami of baby boomers. We all know the story starting with diapers and going through to mutual funds. Everything the boomers needed exploded.

Now we want to sell a different story that demographics are not important any more. We won't end up like Japan. Pensions are sustainable. Let's not be so sure.

At the recent CFA (Chartered Financial Analyst) conference in Edmonton, one CFA noted the future may be anything but friendly. Looking ahead to modest recovery -- or to Armageddon

The scariest of the forecasters was Richard Worzel, billed as Canada's leading futurist, who said "forecasting one year is crazy," and opted to dwell on what the next decade holds. He says in the next 10 years the TSX will decline 70 per cent, the S&P500 some 75 per cent, the Canadian 30-year bond yield falls to 1.25 per cent, the Canadian dollar to 80 cents US, gold will soar to $2,375 US an ounce, and oil will dive to $47 US a barrel. In other words, the future is anything but friendly.

"Over the next 10 years we will see slowing labour-force growth, which means lower GDP (gross domestic product) growth; steadily rising oil prices and other forms of inflation, which will further slow economic growth; steadily rising numbers of natural disasters disrupting economic activity; and a financial debacle that will make the crash of 2008 look like a Sunday school picnic."

Worzel said that with three-quarters of the Earth's surface covered in water, and virtually all our discovered oil on or very close to land, we're not running out of oil, merely of cheap oil.

One hope for salvation is that "over the next 10 years we are going to see a 1,000-times increase in the power of computers, and that allows the potential for dramatic increases in productivity."
And otherwise?

"There's a highly predictable financial disaster coming towards us due to our own bad habits, bad planning and bad behaviour," he said.

"The U.S. deficit is higher than anytime -- other than when it's been at wartime -- in the last century. And it's happening at the worst possible time in history because of the aging of the biggest generation in history, the baby boomers."
He said pension and health-care liabilities will spread well beyond Europe.

"America will suddenly look like Greece, with civil servants picketing in the streets and demanding that their benefits not be cut, while sitting governments have no choice but to do so. The same demographic problems and same over-promises made to civil servants and same financial pressures in retirement and health-care benefits will bedevil all developed countries, including Canada.

"The Canada Pension Plan is actually in very good shape because of the reforms made in 1996, but health care is a huge liability in Canada."

The motto for investors, like the Boy Scouts, is "be prepared."
"Conduct yourself as if it were business as usual now," Worzel said. "But have a Plan B in your back pocket for when the world goes to hell in a handcart.
"And when that day comes, head for the exits without looking back, because it's going to be bad."

The train wreck is coming, how bad will it be and how can we best mitigate the damage?

Bill Tufts

Fair Pensions For All

The Alabama State Pension System on Way to Collapse

2011-01-26T08:58:00.007-05:00

Are Union Pensions Bankrupting America?

Read the transcript here. Show transcript

Bill Tufts

Fair Pensions For All

Unions are Pissed!!!

2011-01-23T20:20:00.004-05:00

NUPGE and OPSEU are mounting a campaign in opposition to the Ontario corporate tax cut program. Is there any disclosure on these unions? How much are they spending every year? Where are they getting their money? How much are the senior executives in the unions being paid?

Unions are a huge lobby group in Canada. They siphon money paid by taxpayers into the civil service. Why is there no disclosure required for public sector unions?

Check out their parody site here. People For Tax Cuts

Unions are worried about any money that may not be available to pay their outrageous wages, benefits and pension demands. Of course they are saying that it will come out of the pockets of Ontario taxpayers. what they are really worried about is that it will come out of future wages increases and gold-plated pension contributions.

I have to admit that they have a point if the big-cats in the corporate sector are getting a big tax cut. But they miss the point that it is the business sector generating economic activity that feeds us all.

OPSEU out to kill corporate tax cuts with humor

Be sure to check out all the You Tube page with all of the video, all 15 of them!

Bill Tufts

Fair Pensions For All

The Real Story on Canada's Debt?

2011-01-22T21:13:00.001-05:00

This week I was out to a breakfast for the Minister of Economic Development for Ontario.She was proud of the fact that Ontario's Debt to GDP ratio was running at less than 30%. She spoke of it being important relative to Canada's competitors in the developed world. She then went on to state that is one of the lowest in the world.

The Minister compared Ontario's debt to the country debt of Greece, Ireland and a few other countries I was embarrassed that she was saying something that ridiculous especially when she was with the Revenue Minister of Ontario.

Several stories have popped up lately in the Canadian media saying how good and stable the financial situation is in Canada. What is the real story?

Canada's Debt to GDP ratio

The last report in the Globe and Mail showed Canada's GDP at $1.3 Trillion. The Harper Index

If we look at the debt numbers we see that Canada is not in rosy shape. Compare the numbers that The Economist present in The Global Debt Clock. It puts Canada at 82.5% somewhere between Greece at 119% and Ireland at 65.6%.

To look at the debt numbers we can go to the Minster of Finance Fiscal Reference Tables - October 2010

Canada's Debt

(millions)
Newfoundland and Labrador                         $   8,457
Prince Edward Island                                             1,584
Nova Scotia             13,319
New Brunswick           8,353
Quebec             142,847
Ontario                                                                    193,589
Manitoba                                                                  12,253
Saskatchewan                                                          3,638
Alberta             -23,738

British Columbia                                                  28,037

Total Provincial Debt                                      388,333

Table 15- Canada Federal Debt                   582,472

Total Combined     $ 970,805 Billion

Based on my estimates the Debt to GDP ratio looks to be at 74.6%.

Serious Problem

Despite the congratulatory comments Canada is getting from around the world... we have a serious debt problem.

At least there are a few commentators out there that agree with me. An article in the Calgary Sun talks about the issue Canada’s fiscal health ignites fierce fight

Gaudet places debt reduction above all. He argues “federal plans for deficit elimination are too timid. Better fiscal health means shedding some spending.” In December, however, the IMF released a report that suggests it was generally pleased with the way Ottawa is handling the economy, aside from warnings about health-care spending and possible sluggish growth.

“Canada has weathered well the global recession, reflecting a strong economic and financial position at the onset of the crisis and a sizeable macro policy response,” the report says. (That macro response was largely stimulus, and thus deficit, spending.)

It says the “financial system has avoided systemic pressures amid the global turbulence, thanks in good part to strong supervision and regulation.”

None of that pablum for Gaudet. So averse is he to deficits, he’s pushing a drastic plan to balance the budget in short order.

At least I am not a alone in my cynicism of the situation. An article from the Centre for Tax and Budget studies at the Fraser Institute in the National Post declares:

The bottom line is that the government's current plan to return to balance is based on slowing the growth of federal spending increases over the next five years, while hoping revenues catch up as the economy continues to recover.

Interestingly, when the plan was announced in last year's budget, The Globe and Mail noted that the Conservatives had "launch[ed] an age of austerity." The National Post applauded the plan as a "genuine effort to restore balance to the nation's books."

Forgive us for being a little more realistic, but the current plan calls for spending to increase at a rate less than population growth and inflation in every year between 2010-11 and 2014-15, something the Conservative government has not managed to do in the five years it has been in office.

A true austerity plan aimed at balancing the budget would have taken a page from former prime minister Jean Chretien and finance minister Paul Martin's 1995 plan. The reforms by Chretien/Martin eliminated a deficit much larger than the current one (4.8 % of GDP compared with 2.8%), within three years.

Chretien and Martin's 1995 plan proposed cutting program spending by almost 9% over just two years to get a handle on federal spending. These weren't reductions in spending growth. These were actual reductions in spending.

Even more impressive is that Chretien and Martin outperformed their goal and reduced spending by 9.7%.

Finally in an interesting comparison of our situation to the United States, Diane Francis wrote Canada’s profligate provinces

Canada, on the other hand, has a public debt problem that could be more serious than the one south of the border.

The Canadian federal government likes to go around the world crowing about its low public debt. Not true. Canada’s federal government certainly cleaned up its act since 1996 when its debt to GDP ratio hit 68.4%. Today it is 45%.

But that’s only half the story.

Canada’s debts are at a ratio of 90% of GDP mostly due to chronic overspending by Quebec and Ontario. Their profligacy is in stark contrast with Canada’s three westernmost provinces.

A simple extrapolation of their deficits will land them in the same category as Greece or 130% of GDP if their cultures of spending don’t change.

Bill Tufts
Fair Pensions For All

Clash of the Titans

2011-01-20T19:31:00.001-05:00

The CLC is pissed and wants to find out who the party pooper is. Who killed CPP reform? CLC asks

The Canadian Labour Congress (CLC) is looking for the culprits that stymied the enhancements to the Canada Pension Plan (CPP).

The CLC publicly announced that in late December 2010 the group filed two Access to Information requests to seek internal government and external lobbying materials related to the CPP and private sector pooled registered pension plans.

“Last summer, Jim Flaherty said that improving the CPP was the best way to ensure the retirement security of Canadians,” says CLC president Ken Georgetti. “But the minister has changed his mind and now favours vastly inferior private sector plans. We want to know who got to the government, and we hope this Access to Information request will provide that information.”...

“They were going to go ahead with a two-pronged approach to retirement security, and a significant part of that was an enhancement to the Canada Pension Plan,” he says in the clip. “It seems to me that the power of the financial services industry just showed how quickly they can change the mind of a government that was persuaded by facts, to turn them around and reward these banks that actually put us into the depression we have found ourselves with regard to our economy.”

Clash of the Titans

The lead-up to Kananskis was an eventful time. This lead-up was covered in my blog On the Trail to Kananaskis.

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.

As we know know the result was indeed the supplementary pension top-up or as we call it now the Pooled Retirement Pensions Plan.

Beware of unions bearing pension solutions.

The CLC is being deceptive in not disclosing a major benefit for them in an enhanced CPP. It will eliminate the shortfalls from the gold-plated public sector pensions. Catherine Swift covered this issue and her editorial to the National Post.Is the Piggybank Broken? — Demand fairness

I must confess when I first saw the zeal with which this proposal was being promoted by government worker unions, I was perplexed. Weren’t these the people with the generous pension plans? The plans that have very early retirement provisions, indexed to inflation so their real value never declines, and that include extended health benefits that the rest of us can only dream about? Why would these entitled folks even care about CPP, which was only designed to provide a fairly basic level of retirement support — $11,000 annually at best?

And then it struck me. All public-sector pension funds in Canada are in a major deficit position. Simply put, they don’t have enough money to fund the promises they have made to existing and future retirees. And yes, fellow private-sector taxpayer, you and I are on the hook for these deficits.

At the federal government level alone, current deficits are about $200-billion — big bucks. Provinces and municipalities are experiencing a similar pension tsunami. If the public-sector unions succeed in convincing governments to substantially increase CPP premiums, then the deficits that currently exist in public-sector pension funds will be sharply reduced. And that will in turn lessen the pressure to make major structural changes in public-sector pensions to bring them in line with their private-sector equivalents, perpetuating the pension apartheid that currently exists.

This was not the only reason in the decision to go to the PRPP. An important factor is that the financial services industry in Canada is a big part of our GDP. Moving the management of Canadians reitrement savings would have a major impact on one of Canada's major GDP producing industries. Statscan - Gross domestic product at basic prices

The study of GDP is an interesting analysis. To highlight the major sectors in 2009

(in Millions) 2005 2009

All industries 1,158,680 $ 1,194,541

Mining and oil and gas extraction 55,941 51,476

Manufacturing 187,901 151,120

Finance and insurance, real estate etc. 222,677 250,938

Public administration (Direct Government) 65,115 73,216

Educational services 55,292 61,302

Health care and social assistance 72,735 81,090

Total Government (above 3) 193,142 215,608

Sorry there is some sort of a glitch in Blogger that prevents these numbers from lining up?

It appears that there is a clash of the Titans. A battle between the two fastest growing sectors in our economy, financial services and government. It will continue to be interesting to watch this battle progress.

Bill Tufts

Fair Pensions For All

The Pension Problem Presses Relentlessly Onward

2011-01-18T15:35:00.003-05:00

Note: Chart from Statscan Pension Satellite Account. Trusteed plans are pension plans

It has been quiet on the pension front for a while after the Finance Ministers meeting in Kananaskis.

Kananaskis helped to solve some of the country's pension problems. One big burden for taxpayers will continue, this is the cost of public sector pensions.

As I have watched the pension issue it has traveled across the big pond from Europe and arrived in the US and is on it's way to Canada. It has been a slow moving Titanic, picking up some speed with the recent financial crisis. The icebergs have been spotted but the Titanic cannot be stopped.

Brief History

The first issues in pensions were spotted in Europe. When Sarkozy came into power in France he identified the problems with pensions. We know the rest of the story and the riots that persisted as he tried to implement minor changes. Next the story moved to the UK and Ireland. The problems on the island intensified with the onset of the financial crisis. Both these countries are in the process of dealing the pension issue now.

Next stop was the United States.

The pension issue has reached a crescendo in the US. Many states are in severe financial difficulty over their pensions and are having to make drastic changes. Fingers are pointed in all directions as to who was at fault.

Two interesting articles are presented in USA Today. One article Lavish benefits hurt states points the blame at unions and politicians.

The fact is, the financial situation for many states is dire. Like the federal government, they are getting clobbered by rising health costs. Unlike the federal government, they have a massive problem of lavish retirement benefits for public employees. The Pew Center on the States underfunded these plans by $1 trillion. estimates that state and local governments have promised $3.35 trillion in benefit plans and have

In some states and localities, it is not uncommon to see pensions of 2.5%-3% of a worker's final salary, times the number of years worked. At 3%, a worker can retire in his or her 50s, after 33 years of service, and continue drawing the same income. With deals like this, plus retiree health benefits, New York City now spends $144,000 a year for a sanitation worker, according to the Manhattan Institute think tank.

These lavish deals are draining money from core services, including teachers in the classroom, cops on the beat, prison beds, libraries and parks. In some states, even cuts in these programs, plus tax hikes, aren't enough to balance their budgets.

It is time for a major rethinking. An obvious solution is one that most Americans know well — 401(k)-type savings plans. Their widespread usage would make it harder to hide liabilities from taxpayers while reducing "pension envy" between private and public sector workers. At the least, such plans should be universal for new state and local hires.

A prime reason that pension costs have spiraled out of control is that spineless public officials can satisfy an important constituency by creating liabilities that won't come due until well after they leave office. When that important constituency is organized labor, which can apply political pressure and, in most states, bargain collectively, this possibility soon becomes an imperative.

The Other article in USA Today puts the Blame Wall Street

Let's be clear: Underfunded pension systems resulted from unprecedented losses of asset values caused by reckless behavior on Wall Street and the refusal of some politicians to make their required payments. As recently as 2007, pension funds had, collectively, 96% of the assets required to meet future expenditures. But Wall Street drove America's economy and retirement security into a ditch. And now both pension and 401(k) accounts alike must be rebuilt.

An excellent interview with the mayor of San Diego talks about how the blames falls not just on one party but many. California Foundation for Fiscal Responsibility

The Fiscal Reality

The reality is that defined benefit pensions have become a Ponzi Scheme that cannot be stopped and like all ponzi schemes will end with someone holding the bag.

Unfortunately it will not end well for anybody. It is destined to be a lose-lose situation for both pensioners and taxpayers. Pensioners at the bad end will find they have paid for pensions all of their working careers and find the pensions short. Taxpayers will learn that dollars are going to retired workers rather than the roads, schools and hospitals that deserve their taxes.

It is a trade-off for the pensions and benefits of retired workers or the goods and services that government are supposed to provide. There is an excellent article here from Seeking Alpha called Why Public Sector Union Compensation Matters

Now the generosity of the public sector pensions is even being questioned by the brethren in the private sector unions. As the article states:

As Bill McGurn points out in a recent Wall Street Journal column, public sector unions don’t just have to worry about a taxpayer revolt. They also must be concerned about a mutiny among private sector unions. Private sector unions with insight into corporate balance sheets and market competition recognize that $1 million pensions are unrealistic burdens to place on employers. Attempts to change the subject and blame “corporate greed” simply do not resonate. Put simply, it is difficult to conceive a way to address the current – and projected – state fiscal crisis without dramatic reductions in state and local employee benefits.

Finally the issue is coming to Canada. As Dr Suess told in the Grinch ... It started in low... then it started to grow. Two recent articles in Canada record the growing concern with pensions in Canada. Like the rest of the world the issue will cause much grief.

National Post - Civil servants have become a highly privileged class

Public-service pensions: too rich for the rest of us?

The public sector should be treading lightly on the pension issue and try and protect what they have. Unfortunately they will stick to demands that will end catastrophe.Good news for taxpayers or a dose of double dipping?

Have you heard St. Thomas-Elgin General Hospital CEO Paul Collins retired last year?

As it turns out, Collins' retirement lasted perhaps a day or two and then Babcock and the board rehired Collins and installed him in his former post at the same compensation, almost $205,000 in 2009, at the same time he is collecting his pension.

Bill Tufts - Fair Pensions For All

Need to buy more gold-plated pension?

2010-12-24T08:51:00.001-05:00

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

Ministers Agree to PRPP ... now the hard part

2010-12-20T18:56:00.001-05:00

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

The Pooled Registered Pension Plan

2010-12-16T15:43:00.010-05:00

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

2010-12-16T07:00:00.000-05:00

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?

Benefits Canada - Reforms needed for increased retirement savings

Bill Tufts

Fair Pensions For All

Pension limits for public sector pensions

2010-12-15T06:10:00.000-05:00

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.

California's $100,000 Club

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.

The lid blows off in Calgary

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.

Supplemental Pension Plan

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

Fair contributions for existing employees.

2010-12-14T06:33:00.010-05:00

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.

CD Howe - The Public-Sector Pensions Bubble - PDF

'True cost of public sector pensions'

Public Sector Pensions Report: Transparency Standards Lacking

Bill Tufts

Fair Pensions For All

Essential elements of pension reform in Canada - Part I

2010-12-13T12:11:00.002-05:00

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.

Is the Piggybank Broken? — Demand fairness

A Call for Pension Reform

Bill Tufts

Fair Pensions For All

How much is enough?

2010-12-07T18:36:00.001-05:00

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%.

His PDF report can be read at Summary Report on Retirement Income Adequacy Research

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

The RRSP Credit Idea

2010-11-25T16:53:00.002-05:00

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

On the trail to Kananiskis

2010-11-18T09:20:00.013-05:00

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.

Challenges

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.

In the Wealthy Boomer Jonathan Chevreau wrote:

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.

Quote: Jack Dean, Pension Tsunami

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

Unions gone Mad

2010-11-01T15:39:00.003-04:00

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

Canada's Pension Options

2010-10-26T18:30:00.003-04:00

It appears that most Canadians have recognized that Canada has a retirement crisis that needs to be fixed.

The debate is focused on two options. These are included in an article from the Globe and Mail entitled Upgrades to Canada Pension Plan likely to miss fall deadline.

Governments consider ways to boost retirement savings
Option 1: Building on CPP; Option 2: setting up supplemental, private-sector-run plan
Federal and provincial officials are working on two options to encourage Canadians to save more for retirement. Finance Minister Jim Flaherty announced in June that a majority of provinces supported both of these options in principle.

Option 1: Enhancing the Canada Pension Plan in its current form. This option has the benefit of simplicity because the CPP already exists and has a solid reputation. Any increase in retirement benefits must be paid for by higher premiums. Several unions want benefits to double, but Mr. Flaherty has suggested the changes would be more modest. Alberta opposes this option, warning it will cost jobs and take away consumer choice.

Option 2: Creating a supplemental pension plan run by the private sector. This option aims to help workers who are self-employed or work for a small business that does not offer a company pension. The challenge with this option is that it does not currently exist, so private-sector firms will need to be found that are willing to run the system at low cost. Officials are also grappling with how to ensure there is proper oversight so that prices are fair for consumers. There is also a debate about whether companies of a certain size should be required to offer this on an “opt-out” basis to ensure the program has enough members.

Yesterday the Globe and Mail updated the debate aver this issue in Pension reform won’t be easy, Jim Flaherty warns

“This is not something that will happen quickly,” he said. “We have to first of all agree on where we’re going and make sure everybody’s happy with that. We already have at least one dissenting province and as you know there’s a quota rule in there, and I don’t know what the position of Quebec is.”

Reforming CPP requires the support of two-thirds of the provinces representing two-thirds of Canada’s population.

Alberta Finance Minister Ted Morton supports this private-sector option, but remains strongly opposed to enhancing the existing CPP.

Mr. Morton told The Globe’s editorial board earlier this month that he fails to understand why broad enhancements to CPP are on the table when several studies have shown the problem of insufficient retirement savings is primarily limited to middle-income earners who work for small private-sector employers.

“So why, when you have a fairly narrowly defined retirement-income problem that needs to be solved, why do you come in with a CPP hike that hits everybody?” he asked rhetorically. “And particularly, why do you do it when we’re trying to come out of a recession and job creation is probably the most important thing governments are doing. In the end, it’s a payroll tax.”

Canadian pension expert Keith Ambachtsheer, who warned in September that the talks have fallen behind schedule, has recently offered another update.

Mr. Ambachtsheer, the director of the Rotman International Centre for Pension Management, said opinion appears to be coalescing around the idea of paying for benefit enhancements for middle-income earners by increasing the Year’s Maximum Pension Earnings (YMPE), which is currently set at $47,200. Under that scenario, CPP premiums would not increase for those earning less than the maximum, but those earning above the YMPE would pay CPP premiums for a longer period until they hit the new maximum.

“And there are those who continue to argue that ‘don’t fix what isn’t broken,’ and that we should instead focus our attention fully on the ‘private pension innovation’ path,” writes Mr. Ambachtsheer.

“There is increasing recognition that even the ‘raise the YMPE’ path has considerable implementation challenges attached to it.” Questions remain, he said, over how high to raise the YMPE, how to integrate with current [defined benefit] plans, how to test and explain intergenerational fairness and how to deal with serious disappointment by many when they realize that, whatever is done, it will only have major impact decades from now.

The increased CPP program is endorsed by Canada's public sector labour unions who have already accumulated pensions worth in excess of $800 Billion. This contrasts with the CPP which has assets a little over $ 129 Billion. NUPGE - The top ten reasons to expand the Canada Pension Plan

Expanding CPP will go a long way to improve the financial security of Canadian seniors.

Like all public programs and services, CPP is an important tie that binds us together as a nation. It is an expression of our collective commitment to one another and to the fundamental principle that all citizens have the right to income security and dignity.

We must seize the opportunity that exists today and demand that our political leaders across the country embrace this most sensible, affordable and effective approach to improving retirement security for all Canadians.

The Supplementary pension is one that has been implemented in other countries around the world. The UK is in the process of introducing the NEST program and New Zealand has plan called the Kiwi Saver. James Daw does a good job looking at some of the options available for the supplementary plan. Pension gap gets less air than long guns

Sweden, Norway, the United Kingdom and New Zealand — have done recently to promote increased savings at a reduced cost, and what Saskatchwan pioneered in 1986.

Sweden started in 2000 to require workers to contribute 2.5 per cent of pay to individual pension accounts to provide benefits beyond its public pension plan.

Norway opted to require employers to offer defined-contribution pension plans for employees, and contribute 2 per cent of pay on incomes up to about $150,000.

The United Kingdom is set to require anyone without an occupational pension plan to contribute 4 per cent of pay up to about $55,000 a year to individual pension accounts administered by the government starting in 2012. It will require employers to contribute 3 per cent of pay by 2017 and the state will contribute 1 per cent.

New Zealand, which had a more generous version of our tax-supported Old Age Security pension but nothing like our tax-deferred RRSPs, started a Kiwi Saver program in 2007.

Workers were enrolled automatically and, unless they opt to drop out within the first eight weeks, are to contribute 2 per cent of salary (or up to 8 per cent if they wish), while employers are to contribute 2 per cent by 2011. The government offered cash and tax incentives to promote savings, but these were reduced after a change of government.

Both plans will be a significant hike in payroll taxes for Canadian businesses. Will the cost outweigh the benefits of implementing either option?

What About the Public Sector?

It may appear surprising that the NUPGE (National Union of Public and General Employees) has anything to say about the pension issue. They have negotiated gold-plated pensions for their members at taxpayer's expense.

Public sector plans in Canada have accumulated $800 Billion in assets for the benefit of their members. And appear to be in the postion to pay out many multiples of what the average Canadian will get from the existing public CPP, OAS and GIS plans.

Ambachtsheer alludes to this in his comment

Questions remain, he said, over how high to raise the YMPE, how to integrate with current [defined benefit] plans, how to test and explain intergenerational fairness and how to deal with serious disappointment by many when they realize that, whatever is done, it will only have major impact decades from now.

He realizes that currently public sector pensions are designed to pay out 70% of retiring income. Of this a portion is covered by the CPP and the rest is picked up by the pension plan. By doubling the amount paid by the CPP, shortfalls in public sector pension will be dramatically reduced or eliminated.

For example a government employee retiring on a $100,000 income will expect a pension of $70,000 per year. The pension will be covered by CPP payments of $11,208 and the remaining $58,792 per year will be picked up by the pension funds. By doubling the CPP to $22,416 the pension only needs to cover $37,584.

In the above example the pension would need about $ 940,00 to cover the pension for the government employee. By doubling the CPP portion the amount required by the pension plan drops to $761,000, a difference of $179,000.

So you can see the motivation for the public sector to be behind this move.

The taxpayers is out of pocket for gold-plated pensions either with the status-quo or the supplementary plan. It is just that the supplementary plan is more politically expedient for the public sector pension plans. The shortfall is covered by CPP payments rather than the unions having to fight government to cover pension
shortfalls.

Many public sector pensions will now have actual surpluses. What do you think will happen to those pensions with surpluses?

A) The surpluses are returned to taxpayers

B) The unions will fight for more pension enhancements? ie. earlier retirement ages or higher payouts?

It appears the options have been set for pension reform.

Will it really eliminate the problem of Canadians living in poverty? The average CPP payout today is around $ 6,060 per year. A doubling will bring them to $12,120.

How many retired Canadians can live off $12,120 per year mount?

Either way the public sector will still be getting gold-plated pensions.

Bill Tufts
Fair Pensions For All

Opportunities for Canada's pension funds

2010-10-25T13:32:00.001-04:00

The UK is under severe financial distress, or so thinks the current government.

As a result the British government is looking at ways to lessen their financial problems. Like all governments in times like these they look at selling assets to help pay for the high costs of the public sector and its pension liabilities. One way the UK is looking at raising funds is by selling the forest of Britain. Most of these forests will end up in the hands of Canadian pension funds.

MSN picked up the news and reported on it in Britain plans huge sell-off of forests in bid to cut deficit

LONDON — Britain's government will soon unveil plans to sell around half of the woodlands it oversees, paving the way for a huge expansion in holiday resorts, golf courses and commercial logging operations, The Sunday Telegraph reported.

Environment Secretary Caroline Spelman will unveil the plans to dispose about 50 percent of the 748,000 hectares (1.85 million acres) of forest within days, according to the newspaper.

Laws overseeing so-called ancient forests, such as the Forest of Dean and Sherwood Forest, are most likely to be changed to allow companies to cut down trees, according to the Telegraph.

"We are looking to energize our forests by bringing in fresh ideas and investment, and by putting conservation in the hands of local communities," a source close to the Department for the Environment Food and Rural Affairs (Defra) told the newspaper.

A third of the land will be sold before 2015, and the rest by 2020, a government source told the newspaper.

Legislation dealing with forests dates back to the Magna Carta, which was forced onto King John in 1215 and formed the basis for English law, the newspaper reported.

Boon for Ontario Teachers

One pension fund ready to jump at the opportunity is the Ontario Teachers Pension Plan (OTPP). they rub their hands together over opportunities like this. These investments produce high level and long term profits. Best of all they do not have to disclose any of their dealing with these assets. They come under the umbrella of private equity.

Ontario Teachers has privatized many assets that are capable of producing 20% to 25% returns. These are fantastic returns in times like this.

OTPP already has a big foot in the door in the UK.It has purchased many former government assets already and will be eager to get more onto their books.

Teachers Private Capital

Teachers has made a big purchase of New Zealand forest and will be familiar with the steps need to acquire the forests of the Britain. Ontario Teachers Buy New Zealand Forests

A group including Ontario Teachers' Pension Plan and Boston-based Prudential Timber Investments Inc. agreed to buy 106,000 hectares of trees from Fletcher Challenge Forests Ltd. for NZ$725 million ($469 million)

Foresters such as Fletcher are selling forests to concentrate on more profitable timber mills and distribution as the local dollar's surge, 23 percent this year, erodes the value of export log sales. Investors such as AMP Capital Investors (New Zealand) Ltd.'s Nat Vallabh say the North American funds can take a longer-term view of their investments.

The forest ``is regarded as one of the best plantation forests anywhere in the world,'' said Ian Jolly, a New Zealand spokesman for GMO Renewable Resources, investment adviser for Harvard Management Co. New Zealand has 1.8 million hectares (4.4 million acres) of forest

As well as forests Teachers is familiar with assets in the UK.

2010 - £150m bid for Acorn Care and Education

2010 - Ontario Teachers’ Pension Plan buys British national lottery operator

2009 - Bristol international Airport positive for Teachers

2005 -Ontario Teachers' and AIG Highstar Capital II to acquire InterGen

It has several other investments in the UK as well. So expect to see more activity in these types of acquisitions. It has no shortage of cash from Ontario taxpayers.

Teachers has over $96.4 Billion accumulated assets for its 289,000 teachers and retirees. This contrasts with the Canadian Pension Plan (CPP) that which has $129 Billion for 18,000,000 working Canadians.

Bill Tufts

Fair pensions For All

UK makes dramatic pension changes

2010-10-20T17:38:00.001-04:00

The UK sees their system of government as being in big trouble.

Today they made changes that attempt to turn the tide for the UK. For starts the UK slashes 490,000 jobs amid deep budget cuts

The British government announced deep budget cuts Wednesday, as it tries to fight what its finance minister called "the largest structural budget deficit in Europe."

The changes will include "ruthless privatization" and will leave "no stone unturned in our search for waste," Chancellor George Osborne told lawmakers in the House of Commons.

The government will slash 490,000 jobs from the public payroll over four years, he said.
But the cuts will also be guided by the principle of "fairness," he said, adding that "those with the broadest shoulders will bear the greatest burden."

He specifically named banks when saying "those with the most should pay the most," amid widespread British anger at bankers.

But Osborne's predecessor warned against trying to cut the deficit too quickly.

"If the private sector doesn't come in and take [government spending's] place, you run the risk of derailing the economy," said Alistair Darling, who was chancellor until the Labour Party lost elections in May.

The long-awaited cuts follow a "comprehensive spending review" by the new British government, which came to power in May.

Paying interest on government debt currently costs 44 billion pounds ($69 billion) a year, the Treasury said in outlining the spending review -- more than defense, policing, housing or transportation.

The government forecasts public spending peaking this year, then falling to 2003-04 levels by 2015-16. That will still not quite balance the budget, it predicts, but will come close to doing so.
It announced deep cuts to the defense budget on Tuesday, with the armed forces losing 10 percent of uniformed personnel in the next five years.

As we have seen around the world the biggest costs associated with running governments is the cost of the compensation packages for the Protected Classes.

The first place to start in cutting the cost of government is the gold-plated benefit packages for the public sector. In North America and in Europe the biggest challenge has been that the politicians have given themselves the best pensions of all.

Cut MP Pensions

Politicians know that any changes they put onto the peon class will affect their pensions. Therefore no pension changes have been made in most jurisdictions because it will affect the retirement packages of the politicos. So it is promising to see that first place the UK government has started is at the top. MPs’ final salary pension scheme to end

During the Comprehensive Spending Review, Chancellor George Osborne told the Commons that the current final salary scheme for members of parliament will have to end.

Osborne said: “It is clear that the current final salary pension terms for MPs are not sustainable and we anticipate that the current scheme will have to end."

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “I think what he was doing there was demonstrating that the MPs will be the first wave of public servants to face reforms of their pensions.

“He was seeking to diffuse any criticism Sutton’s review and making it clear he is putting MPs in the front line of any suffering that is going to be experience by publically paid employees in respect to their pension rights.”

The Telegraph reports that:

It was “not sustainable” for the generous final salary scheme, which means MPs can retire on more than £30,000-a-year after only 20 years’ service, to be continued.

At present, MPs are able to contribute as much as 12 per cent of their salary into the fund.
The Treasury is paying out more than £8 million a year for their pensions – the equivalent of around 18 per cent of their salaries. MPs qualify for the pension even if they are voted out of office after only a few years.

In a report this summer, the Senior Salaries Review Body recommended that MPs’ pensions be switched from final salary to an amount based on their average career earnings.
It also suggested that the pension age be increased from 65 to 68, with a contribution rate of 5.5 per cent of pay.

Mr Osborne said: “It is clear that the current final salary pension terms for MPs are not sustainable and we anticipate that the current scheme will have to end.”

Higher Pension Age
We have seen the protests that have rocked France over moving the pension age from 60 to 62. The UK has taken the dramatic move of increasing the age of retirement faster than previously planned.

State pension age will rise to 66 by 2020

All Britons under 57 will have to wait until age 66 before they receive their state pension, Chancellor George Osborne confirmed today.

The pension age for both men and women will rise to 66 by 2020.

It marks a considerable acceleration from the 2026 target set by Gordon Brown's Labour party before this year's General Election but is slower than the 2016 date hinted at by the Coalition earlier this year.

Announced as part of the cuts in the Government's Comprehensive Spending Review, the new reforms mean that all Britons born after 6 April 1954 will have to wait until they reach 66 before claiming the state pension.

For women, the rises will happen far more rapidly than expected. From 2016, the women's state pension age be increased so that it reaches 65 (equal to the male age) by November 2018.

Then, between 2018 and 2020, the state pension age for both men and women will gradually rise to 66.He said 'Raising the state pension age is what many countries are now doing. It will save over £5bn a year.'

Healthier lifestyles better medical care now sees the average British male live 77 years, and female until 81.

Back when the state pension age was set at its current 65 level in 1925, only a third of men and 40% of women were expected to live to see their 65th birthday.

Official statistics project that by 2034 the number of people aged 85 and over will be 2.5 times larger than in 2009, reaching 3.5m and accounting for 5% of the UK population.

Public spending has already rocketed by nearly £14bn since 2005/06 when the 'babyboomer' generation of post-war children started to retire. It had been expected to increase by another £4bn by 2012.

Higher Public Sector Pension Contributions

The public sector is expected to shoulder a fairer share of the cost of their gold-plated pensions. Public sector faces higher pension contributions

Workers in public sector pension schemes are likely to be asked to make higher contributions to their retirement funds in the future.

There has been much public anger over the size of pensions that some of the higher paid in the public sector – such as politicians – receive in retirement.

The reach of public sector pension schemes in the UK is significant, with about one in five people entitled to some form of public service pension.

However, the rising life expectancy over the last few decades has stretched the public sector pension system to breaking point.

Somebody retiring now can expect to spend 40% of their adult life in retirement.

"This has driven up costs - by a third in the past decade - and these extra costs have fallen almost entirely to taxpayers," said Lord Hutton.

"The final salary link in public service pensions is inherently unfair and can lead to high flyers getting almost twice as much back in pensions than those on more modest earnings for the same amount of pension contributions."

These are the types of changes that need to be made to public sector compensation. It will be another matter to see if they are allowed to pass. Based on the protests in France the UK may see it own bit of pension outrage. Survey finds half of UK public sector workers ‘prepared to strike’

The public sector may have no alternative to major protests if they want to stay on the taxpayer funded gravy train. But then again the MP's may be too happy to acquiesce if they think they can keep their pensions as well.

Are the MP's and public sector in the same boat? In any professional services business this type of transaction would be considered conflict of interest.

Bill Tufts

Fair Pensions For All

Police and firefighters cost $180,000 per year in San Jose, California

2010-10-14T17:00:00.003-04:00

The Economist reports on the pension crisis in America in a recent article Hard-pressed American states face a crushing pensions bill

CHUCK REED is the Democratic mayor of San Jose, California. You might expect him to be an ally of public-sector workers, a powerful lobby in the Golden State. But last month, at a hearing on pension reform held by the Little Hoover Commission, which monitors the state’s government, Mr Reed lamented his crippling public-pensions bill. “City payments for retirement benefits have tripled over the last ten years even though our workforce has declined dramatically, and we have billions of dollars in unfunded liabilities that the taxpayers must pay,” he said.

Mr Reed estimated that the average cost to his city of employing a police officer or firefighter was $180,000 a year. Not only can such workers retire at 50, but some enjoy annual pension payments greater than their salaries. They are also entitled to cost-of-living increases of 3% a year, health and dental insurance for life and lump-sum payments for unused sick leave that could reach hundreds of thousands of dollars.

Now the problem is making headlines, especially in California, where taxpayer groups have been highlighting the generous pensions of some former employees. More than 9,000 beneficiaries of CalPERS, the largest state retirement plan, receive more than $100,000 a year.

The stage is set for conflict between public-sector workers and taxpayers. Because almost all states are required to balance their budgets, any extra pension contributions they make to mend a deficit will come at the expense of other citizens. Utah has calculated it will have to commit 10% of its general fund for 25 years to pay for the effects of the 2008 stockmarket crash. But attempts to reduce the cost of pensions are being challenged in court and will be opposed by trade unions, which still have plenty of members in the public sector.

New Jersey provides a prime example of America’s pension difficulties. In August the Securities and Exchange Commission (SEC) charged the state with fraud for misrepresenting the underfunding of its pension plans to municipal-bond investors. This was the first time a state had been charged with violating federal securities laws. It settled the case without admitting or denying the SEC’s findings.

A study by Ms Norcross and Mr Biggs outlines, using the Treasury yield as a discount rate, how New Jersey has run up a pensions deficit of $174 billion. That is equivalent to 44% of the state’s GDP, or more than three times its official debt.

Understated Liabilities

The Wall Street Journal reports that a major part of the problems are the accounting rules that are applied to pensions. An article today shows that Cities Hide Pension Liabilities

Many of the largest U.S. municipalities are understating the true size of their pension obligations by using inappropriate accounting methods, leading to $574 billion of unfunded pension liabilities, according to a study released Tuesday.
Those unfunded pension benefits are in addition to $3 trillion of unfunded liabilities that the study's authors have said exist among state pension plans.

Supersized Superannuation - Canada's Problem

Earlier this year the CD Howe Institute released its analysis of the underfunded situation in Canada. They called the report Supersized Superannuation: The Startling Fair-Value Cost of Federal Government Pensions This report shows that Canada has a serious problem with its plans.

As long as bureaucrats and politicians have a retirement that is dependent on these gold-plated taxpayer funded plans; this problem will be kicked down the road.

It is hard to change the system.

The public sector unions have take municipalities and states to court to have any pension changes overturned. The courts have upheld the pensions in their current form. They cannot be changed for existing employees.

Of course the unions have a point when they feel they are the scapegoats for a broken system. Especially when the financial institutions that were bailed out by taxpayers are abusing taxpayers.

Another indication of our broken system is the bonuses that Wall Street are taking home this year. Wall St. soaking up record bonuses shows that executives of financial companies are expected to receive a record $144 billion in pay and bonuses this year.

Someone has to pay these bills of course. It will be taxpayers everywhere who are responsible for bailing out both incompetent corporations and pension shortfalls.

Many will not be able to sustain this burden.More seniors spending golden years in bankruptcy

Bill Tufts

Fair Pensions For All

Fair Pensions For All

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Police and firefighters cost $180,000 per year in San Jose, California