The RRSP Credit Idea

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

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

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