Ontario's Sunshine List and Super-Sized Pensions

Today in Ontario the Sunshine List of employees earning over $ 100,000 was released. It always makes a big splash. Ontario's Sunshine list - the salaries I question: Blizzard

Super Sized Splash
The Canadian Taxpayers Federation did a quick tally on the numbers from the Sunshine List. 
Ontario public sector $100,000 club grows by 19%

One of the tidbits they found was that there were 164 on the list who earned over $400,000. A quick analysis shows that if all are fully qualified for their pensions the value of these 164 pensions will be over $700 Million. One of my favorites is U of Calgary president eligible for $4.5M pension

Super Sized Pensions   
Public sector pensions are estimated at 70% of salary. This means a $400,000 salary will gain a $280,000 annual pension.

The cash value of the pension is 16 times the annual income amount. So a $280,000 pension has a value of $4.4 MILLION. This refers to the amount of money you or I would need in a bank account in order to fund a pension of this magnitude. It assumes the pension starts at age 55 and pays until age 82, the Canadian life expectancy.  

Most public sector employees are eligible for pension at age 55. If they retire at this age and live to the average life expectancy of 82, this is 27 years. A pension of $280,000 over 27 years adds up to $ 7.5 Million. The lower amount of $4.4 Million assumes that earning on the pension will make up the extra. Hence, 164 pensions valued at $4.4 Million each is about $721 Million.

The lump sum is also know as fair-value of the pension or present value of a member's earned pension. In simple terms, it is the amount of money that would have to be invested today to pay for the member's future pension.

Super Sized Taxpayer Contributions  
Pension limits in Canada are around $82,000. In order to get these higher pensions a special pension rule was created for the public sector. Called a SERP, it allows for an unlimited amount of funding. We looked at this in an earlier blog. 

Statscan shows that these plans have accumulated $199 BILLION to pay the pensions of these Super-Sized pensions. Note these are called Government Consolidated Revenue Arrangements in this illustration. 

Taxpayers have contributed more into these plans ($199 Billion) than we have accumulated into the CPP plan. ($122 Billion). Note also that of the $1.2 Trillion in pension funds, $805 Billion of this has been funded by taxpayers on behalf of public sector employees. 

Not only do these guys get the big bank roll today, the ice cream on the pie is the pensions to come. In fact most of these guys will earn far more in their retirement years than they ever earned working. Remember they did not earn $400,000 for their entire careers. 

All this is funded by taxpayers earning an average wage of $40,000 per year. 

As Kevin Gaudet says:

“There is an increasing divide between those who work in the private sector and those privileged and protected workers in the public sector. This has to end,”

Ontario Budget Another Disaster

The Ontario Government released the annual budget. In it they tried to explain the reason for the disastrous state of the provinces finances.

Sensing the wrath across the country over a  public sector gone wild, the government set in motion a series of sleight of hand tricks. The words sounded good but the actions did not back the rhetoric. Once again the taxpayer is being heaped with taxes to protect the public sector compensation package.

Ontario government moves to contain public-sector wages

The front page headline from the Globe and Mail is exactly what the public wanted to hear. Upon further inspection it was a devious slight of hand. The article shows how the government will be controlling labour costs and save $375 Million over each of the next 2 years.

James Daw of the Toronto Star points out what really is happening with public sector compensation. The budget notes show that costs for the Ontario Teachers' Pension Plan and other pensions and benefits will be $1.627 Billion this fiscal year, up $754 million in the past three years. So it appears that even though a few dollars might be saved by some salary freezes the total compensation spending spree continues unabated. 

It appears that rather than directly paying the public sector employees. Employees now get the money through a back door pension contributions. This is better for the employees too as direct wages are taxable but pensions are "non-taxable".

Lack of Leadership

In the fight to control compensation as the single biggest expense of the government, McGuinty and crew failed to show leadership. The Globe points out: 

 The new wage law will take effect immediately and will apply to all organizations covered by provincial salary-disclosure rules with the exception of municipalities. That exclusion, characterized as a policy decision to reflect municipality’s status as a separate level of government, also allows the province to avoid a showdown with the powerful police and firefighters’ unions.

Protecting friends at the expense of all 

One project that was shelved in order to cover the increased contributions into pension was Toronto's transit expansion. Either it was money for public sector pensions or infrastructure. Since infrastructure does not vote the money is going to pensions. Budget slashes billions from Toronto transit expansion

Why should things change now? Statscan shows that Canada's infrastructure is valued at $290 Billion but over the same period of time taxpayers have accumulated about $ 555 Billion into public sector pensions. So it was no surprise that more money being poured into the pensions of the pension class trumped infrastructure investments.  

Well at least there were no surprises in the budget. It is business as usual in Ontario.

Flaherty announces pension consultations

Canada's Finance Minister announces countrywide consultations on Canada's pension system.

Overview of Canada's current system
CTV coverage
CBC coverage

The initial information from the government shows how good our system is in Canada. It is one of the best in the world and provides some of the highest retirement income for seniors in the world.

Interesting Facts 
The "pension assets" in Canada are listed by the Finance department as being $1.8 Trillion:

They break down like this in a Statscan 2007 report

CPP/QPP -                                                              $ 157 Billion

Public Sector
Public sector pensions                                             $ 606 Billion
Super Sized public sector pensions top-up              $ 199 Billion
(Government consolidated revenue arrangements)

Private Sector 
Registered Retirement Savings Pensions                  $ 739 Billion
Private sector pensions                                            $ 314 Billion

Other - annuities, insurance companies                   $ 102 Billion 

I an assuming that the $ 300 Billion difference between 2007 and the 2009 numbers are the market losses over the past 2 years. Note the public sector employees (25% of workers) have accumulated a total of  $ 805 Billion in retirement assets and the private sector pensions and RRSP's have accumulated $1.053 Billion.

Pension reform needed
One interesting issue has not discussed. If the system we have is good enough for taxpayers, why is it not good enough for the public sector. Canadians have had to funnel billions of tax dollars into public sector plans to provide gold-plated pensions for MPs, MLA's and public employees.

You can see from the numbers above there are two levels of pensions in Canada. One for the taxpayers and one for the public servants.

The most glaring difference are the rules that the public sector has created for themselves. In the numbers above we see the special top-up public sector pensions. These are technically known as SERPS or Supplementary Employee Retirement Plans. They are designed for civil servants who go over the usual pension limit the average taxpayer must abide by.

They are described by Osler as:

Most SERPs are retirement or pension plans that provide for retirement income payments in excess of those provided under “registered pension plans” (which are qualified or tax assisted plans). Registered pension plans are subject to “defined benefit” or “defined contribution” limits designed to limit the benefits that may be funded through such plans on a tax assisted basis. Because of those limits, registered pension plans often do not provide adequate income replacement for higher income employees, and SERPs are commonly used to supplement or “top up” the benefits (of public servants)

These are the really big earners who earn over $120,000 per year. The Ontario Sunshine List has over 53,000 of these guys.

Illinois Reforms Pensions
In the US they are having to deal with the financial repercussions of these plans and have started to make changes. Sweeping state pension overhaul proposed

Illinois has tabled some excellent reform ideas to make the system more fair. I will contrast them with Canada.

1. Anyone hired by schools, universities, state or local governments after Jan. 1 would have to work until 67 to get full retirement benefits. In Canada the usual pension age is 50 for emergency services and 55 for the rest of the public sector. 
2. The pension would be based on the highest consecutive 8 years out of the last decade of service. In Canada the gold standard is 3 years.
3. Maximum salary for figuring a pension would be capped at $106,80. In Canada with SERPS there are no limits. On the Sunshine List there are hundreds of public sector workers who will earn, when fully qualified over $200,000 per year. Thousands at over $100,000 per year and at the bottom end tens of thousands are guaranteed a $70,000 per year in pensions. Even the bottom ones are almost twice the average Canadian's working wage.
4. Annual pension cost-of-living increases, now an automatic 3 percent, would be limited to half the rate of inflation or 3 percent. In Canada the 3% is pretty standard or the rate of inflation whichever is lower. (Guess who setts the inflation rate? Government economists)
5. As for double dippers, the proposed law would ban people from collecting one government pension while taking another public sector job. The first pension would be suspended during the duration of the second job. Upon retirement, the person could then collect both pensions. In Canada there is limited control on double dippers, they usually have to move to a different level of government ie. municipal to provincial to federal.

As you have a followed this blog you have seen the uproar and out rage across Canada, North America and across the world. Lets hope their days are numbered. 

The Grapes of Wrath
I have been reading an amazing book called the Grapes of Wrath by John Steinbeck. He won the Pulitzer Prize for it. A story of the Great Depression, it is as relevant today as when it was written.

Men who have created new fruits in the world cannot create a system whereby their fruits may be eaten. And the failure hangs over the State like a great sorrow. ...and in the eyes of the people there is the failure; and in the eyes of the hungry there is a growing wrath. In the souls of the people the grapes of wrath are filling and growing heavy, growing heavy for the vintage.

Will the process move all Canadians to the same level of pensions? Or will we continue on with our two-tier pension system?

Pension Pulse - Leo Kolivakis pension crisis pioneer

Pension Pulse provides excellent insight into the crisis and the current affairs of pensions. 

Leo has an excellent blog that follows the pension world. He is one of the first to pull the alarm on pensions and the problems that we face today. He forecasts and explains the the disasters we face tomorrow.

My hat goes off to Leo for the excellent insight he offres and the hard work keeping his blog up-to-date.

Leo works hard and updates his blog almost every day.

Today's blog is and excellent update on the situation Pension Woes May Deepen Financial Crisis

Canada's Biggest Industry

We have some pretty significant challenges in North America. The biggest challenge is how are we going to pay all of our bills? Our governments are spending like drunken sailors and when the hangover is done someone has to pick up the tab.

I have bad news, you will have to cover the bill. The sailors will have already left with whatever money is left over.

Today I had a very interesting conversation with a business owner Mike who provided me with the chart above. It shows what has happened to manufacturing in North America. This has serious consequences for us all.

Mike spoke to me how as a professional engineer he had missed the boat by not working for the government. How his friends in government make more as janitors than him as a business owner. When you consider the pensions they have and the fact they can retire as early as age 55 he is not far off.

We agreed that the system is broke and the only solution is bankruptcy. Our society needs to start over and restructure in a way that is sustainable. The sooner the bankruptcy comes the better, the sooner we can start over.

The Impossible

There was an excellent article this week from the Globe and Mail; Can Ottawa tame its deficit beast?

The article has some interesting stats about the value of public sector wages and salaries. These have surpassed manufacturing in Canada as the largest single industry.

The article shows that the total value of the public sector compensation package in Canada is $176 Billion. Statscan shows that manufacturing had a GDP of only $150 Billion in 2009. This makes the public sector employment the secound largest industry in Canada, next only to the financial and real estate industry.

The problem is that the secound largest industry in Canada does nothing to drive our economy in fact, it has the opposite effect. As Ross Perot aptly described Free Trade, "you can hear the sucking sound", the same can be said about the public sector in Canada. It adds nothing productive to our economy. It is only a consumer of the nations wealth

When the secound largest industry in our country is the public sector payroll, we are in big trouble.

Pension Boosting

The pensions systems is broken. Everyone knows and acknowledges it, except those who have a vested interest in the system and will receive benefits in the millions of dollars from it.

Firstly, there are the law makers. They are the first in line for lucrative taxpayer funded pensions. Former Reform MPs set to collect large pensions.The pensions mentioned here are in the range of $150,000. At age 55 the fair cash value of these pensions are about $2.4 million. Over the course of an estimated 30 years of pension payments the MP's will stand to collect $4.5 million. Many provincial MLA's not wanting to miss the boat have bought a ticket to the gravy train. $800,000 per Lucky MLA

Tell me that one of these guys could go home and tell his wife about pension reform ... "guess what we did in Parliament today". Then he will have to explain what happened to their $4.5 million. It ain't going to happen! 

Next in line are the senior bureaucrats who as management are supposed to protect the interests of taxpayers. They are in a position to makes changes but they too have a large personal vested interest. In fact, they have even implemented juicy rules for themselves to ensure high pension payouts go directly into their pockets. See my last blog where a senior bureaucrat gave himself a juicy pension even though he had stopped working 10 years before. We cannot count on any changes to be implemented at this level.

Finally there is the last level of average public sector employee. They have gotten together to use the political power of their unions to pile onto the taxpayer. This has ensured special rules for them as well. Even the Auditor of Ottawa could not resist the goodies in the cookie jar. $104K payout to City of Ottawa auditor upsets taxpayers

Pension Spiking
One issue that has not gotten much traction in the debate is the issue of pension boosting or spiking, It happens here in Canada but the ones who can do something about it are powerless because it will cost them personally millions of dollars. 

Buy Backs
These are special rules that allow public sector employees to give pensions a good boost by buying additional pension time. This is the rule that the public employee from my last blog used to give himself a juicy gold-plated pension. For just cents on the dollar public servants can boost pensions by hundreds of thousands of dollars using a  Service Buyback Package. This is a standard tool in pension gaming.  

Vacation Time and Sick Day Payouts 
Last year the City of Toronto had a city employee strike. One of the big issues in the strike was the sick pay issue. No one discussed the connection between sick pay and the ultimate impact they have on pensions. The unions fought tooth and nail to keep this benefit. They realized the future impact any changes would have on their pensions.  

Sick-leave bank becomes pivotal issue in Toronto strike 
Pension Calculus Draws New Scrutiny 
City Wants Police Union To Pay More For 'Spiking' - Video  
California takes aim at big pension payouts for public employees 
State must act on county's pension abuse 
Public Pension Plan Targets ‘Spiking,’

Overtime
For the rank and file members of the public sector this is the easiest way to boost pensions.

Colin Craig of the Canadian Taxpayers Federation, brought my attention to a Winnipeg Overtime and Sick Leave Audit. It shows the boosting that takes place. Of course the report makes no reference to the pensions drivers over this issue or the long term costs.  

Winnipeg Overtime and Sick Leave Audit
Police OT is a pension lode 
Using overtime to increase pensions draws protest 
Overtime an issue in police budget 

A search for solutions in Alberta

Alberta has requested public input into pensions.

It is a follow-up to the Expert Commission on Pensions. In the consultation they are asking for input into specific ideas. Most of these issues are based around increasing the level of pension coverage for individuals in middle income ranges.

The pension consultation process asks 15 specific questions about the available options. It is appears straight forward and everyone can answer the questions the way they are posed.

I encourage you to complete a response and send it in. The future you will be impacting maybe your own.  You can find the consultation paper at Pension Consultation

Public Sector Pensions 
If you can catch it Barrons has an excellent article about the problems with public sector pensions.  
The $2 Trillion Hole

We know the problem but where is the solution?

 

An interesting article caught my attention today. TD's Don Drummond to rest his calculator end June.

The part of the article that amused me was that at age 56 and after 10 years at TD Bank, Drummond is eligible for a FULL federal government pension. He had retired 10 years earlier from the federal government but is still eligible for a full pension.

In an interview, Mr. Drummond, 56, said the plan was always to retire after 10 years at TD because he would be in a position to get his full pension from the federal government without actuarial penalties (under arrangements for people who reach the deputy minister rank).

Prior to joining TD in 2000 as chief economist, Mr. Drummond worked at the Department of Finance for 23 years, rising to the rank of associate deputy minister.

Some of the comments from friends that were sent to me included:

Wow, took the pension, now he will consult and double dip...or join the Caisse. (wink, wink)

He was still making contributions to his public service pension - I just about fell over. And of course he'll be working somewhere else tomorrow and have his full pension. It never ends. 

Wow, what an eye-opener.

Mr Drummond is one of the better economic minds in Canada.I have admired much of the work he has done.

But this situation points out all that is wrong with our current system. A system that need reform urgently. Mr Drummond did not make the rules he only plays by them  

Pension Reform
Reform is long overdue and everyone knows that it need to be done. However, it is a game of chicken. Who goes first?

The mayor of Chicago recognized several years ago the changes needed to be made and today he stated:

that the day of reckoning has arrived for a financial crisis that’s choking local taxpayers:... the crisis that won’t be pretty or politically popular.

“I hope it’s controversial. It has to be. If it’s not controversial, then it’s not worth anything,”

 Same Pensions, Same Problem
Across North America public sector pensions have basically the same design. It is the design of these pensions that has to change.

The Chicago Sun-Times ran a feature last fall that highlighted the problems.

The article What they get . . . shows the design of public sector pensions. They are the same across North America for all levels of government. For example, pensions at age 50 are available in Canada to "emergency workers" and in some cases like the police department in Hamilton some employees start a couple of years before 50.  

Public pensions, fat retirements  

This article shows some of the jumbo pensions. They exist here in Canada too. The only problem is that we have no pension disclosure to illustrate the problem. The Sunshine List in Ontario for example, shows over 53,000 Ontario provincial employees earning over $100,000 per year. When fully qualified these pensions will pay almost twice the average Canadian's working wage.  

Many are jumbo!!!  Take any area from the Sunshine List and you can find some biggies. In my home town the hospitals are generous with your money. One CEO earns $613,187.21 per year. If fully qualified this income will generate a pension of around $420,000 per year.  The cash or fair-value of this pension is in excess of  $ 6.4 million 

Double Dipping  

This is frequently very popular with the pension class. As the Sun -Tines writes:  Retire on Friday, start a new job on Monday -- and we pay for it al. 

The pension disclosure rules were attempting to bring these types pension double-dippers  abuses to light. California has one of the most popular lists. CALPERS pension list   

Mr Drummond is collecting a federal government pension. In addition, probably has a juicy one from TD Bank and when he starts teaching or another government job will have several years qualification towards collecting a third pension. How is that for fun... triple dipping! 

Pension Boosting or Spiking!

This is another very popular game with the pension classes. Pension boosting involves getting a pension higher than just 70% of income, the usual gold-plated pension. Pension boosting is usually done by three methods. Working overtime in the final few years before retirement helps to spike the pension dramatically. An added bonus is the overtime worked is at 1 1/2 times regular salary. The overtime goes towards pension calculations. Finally, accumulated vacation pay as well as sick time payouts. All these bonuses are not available to those outside the pension class.  

The Sun-Times articles featured a similar bonus plan. A year after retiring, Jones to get 51% boost  

Survivor Pensions   

No one can argue with this part of the plan, a survivor pension for widows. What can be done is to prevent two pensions being paid to the same family in the pension class. A teacher widow who married a teacher would get two pensions upon the spouses death. She would get her 70% pension and 60% of her husband's pension.   

On one final note about pension envy. The other day in my neighborhood, a fairly affluent one I saw a nice bright new 4X4. I thought to myself we don't see as many brand new cars around these days.  Then I recognized the driver.

 The driver of the car was a local civil servant who was in his early 50's, ready to retire. It occurred to me that he did not have to worry about saving anything for retirement. He would be getting 70% of his salary, indexed for the rest of his life. Of course, all guaranteed by me. 

The pension classes can enjoy the good life today and rest assured that I have covered their future standard of living as well.   

Shifting Pensions

 

UK Pensions - Same trend as Canada

Well the budget has come and gone and Ottawa has made some very vague comments about pensions. Probably we will have to wait until after more MP's qualify for pensions until Ottawa's MP's take a hard look at the issue. 74 MPs will qualify for pension if election delayed until July 2010

Maybe Ottawa is hoping that the upcoming battle with federal public servants will distract Canadians from the gold-plated pensions of those in the top layer of Canada's two-tier pension system. Public service facing the most cuts

Shifting Pensions
Shifting Pensions is the name of a report from Statscan that shows the trend in pensions in Canada. Shifting pensions - By Philippe Gougeon

The report cites

Registered pension plans comprise defined-benefit (DB), money-purchase or defined-contribution (DC) and hybrid/mixed (H/M) plans. These plans covered 30%, 6% and 1%, respectively, of employees in 2006. Over the last 30 years, a gradual transition away from DB plans has taken place (note: only in the private sector!)

 When we look at the numbers we see that DB plans cover the largest number of  employees they are considered the gold-plated pensions. DB plans are guaranteed, indexed and provide for survivor benefits. Of course these pensions back-stopped by taxpayers are the type our elected officials give themselves and the public sector. The other type of pensions plan DC plans, that a few Canadians have, are much less secure.

Two Tier Pensions 
If we analyze the numbers we see that 30% of Canadians have DB plans. The public sector comprises almost 24% of Canada's employees. Of these about 80% have DB pensions. Labour Force Survey.This means he gold-plated plans are predominantly the domain of the public sector. A few large corporations have these plans, many are "Crown corporations" of the balance sheet of the government but fully backed by taxpayers. 

To restate the numbers; 20% of total Canadian workers are covered in government DB plans and only
24 % of the remaining Canadian workers have pensions. 

Of course Canada has no pension problem. We would have to have pensions for there to be a problem. With over 76 % of private sector employees having no pensions there is no problem.