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.   

Pension Primer - Some of the concepts explained

When I began to study pensions many years ago there were some concepts that I did not initially understand and were confusing but became clearer after I studied them in action.

Pension Types
In Canada there are two types of pensions. There are defined contribution plans and there are defined benefit plans.

The best description for the difference in these is the definitions given by Oxford Dictionary of pensions.
1) a regular payment made by a government to people above a specified age... or to such a person's surviving dependents - Public Sector pensions
2) a regular payment from a fund to which the recipient has contributed - private sector pensions - Private Sector pensions

Pension Income
With the defined contribution plan the retirement income determination of this plan is easy. Whatever you have accumulated in the plan at retirement you can draw down on for income. So as a basic example if, at retirement, you have $250,000 accumulated you could draw down $25,000 per year for 10 year. Of course we have an expectation that the fund will generate investment income and can pay more over our retirement.

Most Canadians have the contributory kind while those in the public sector have the defined benefit pensions. In my opinion defined benefit plans are not really pensions at all but a guaranteed income at retirement.

In the public sector the level of defined benefits or guaranteed retirement income is set at 70% of retirement income. The usual public sector formula is 2% of income per working year. Therefore the usual retirement is set for 35 year producing the 70% replacement income. Some pensions typically for police and firefighters are accelerated to allow for retirement after 30 years.

Currently the Federal government pays an average of over$80,000 per year to it's employees. The average employee therefore will earn a guaranteed income of $56,000 per year in retirement. These plans are "integrated" with CPP (Canada Pension Plan) which is around $10,000 per year. So the pension will pay $46,000 of this income with the CPP covering the rest.

In Ontario a teacher retires in the highest income group at over $90,000. Therefore they will receive a pension in excess of $60,000 per year.

Pension Provisions or Formulas

The public sector defined benefit plan is designed to pay 70% of income during retirement. In addition is offers.

Life time - It funds "income" for the life of the retiree
Indexing - It increases every year for life. Based on "inflation" which is set at some arbitrary number selected by government employees.
Survivor benefits - The surviving spouse of the retiree is guaranteed generally 60% of the income. This is regardless of whether or not they have other sources of income, including a public sector pension.
Trips - Free trips to Florida or Arizona every year (just joking)

Pension Boosting or Pension Spiking
Public sector pensions are a continuation of income into retirement years. The public sector pension attempts to replace 70% of the retirees income. Most formulas for pension income are based on an average of the past few years working income.

We saw recently the release of the Sunshine List in the Province of Ontario. This is the list of the employee who earned over $100,000. There was a fair amount of coverage in the press over those employees who made it to the list from jobs with a base rate much less than $100,000.

Since the retirement income is based on a percentage of working income the higher the final pay rate in the final years the higher the pension. Toronto Star reports on bus drivers in the Sunshine List These employees earning overtime have discovered that 70% of $100,000 is a much better pension than 70% of the $60,000 base rate. This is pension boosting.

Double Dipping
Public sector pensions have a much earlier retirement date than the private sector. Many public sector employees retire in their early 50's. Today the life expectancy has increased to over 80 years of age. Many of these "seniors" are able to continue working and I think should be able to continue working. Take the mayor of Mississauga for example, Hazel is a prime example of a very active, intelligent and capable 80 year old.

Public employees can trigger their pensions and find a new job. When they earn both pension and working income they are "Double Dipping". Report from the Toronto Sun

Taxpayer or Pension Liability
There is a common principle for all defined benefit pensions. Employees may make some contributions but the final liability of funding the pension is with the employer. The employer for public sector pensions is of course governments that are funded by taxpayer money. Ultimately all taxpayers are responsible for public sector pensions.

These numbers are very flexible and are manipulated based on the needs of the pensions at the time.

For example, this came from a Google search America's Intelligence Wire - Mar 21, 2006 - Last week, the Ontario Teachers Pension Plan announced it currently faces a $32-billion funding shortfall. Many factors contribute to the looming crisis . This was at a time when the pension saw an new government coming into power that was beholding to them and they wanted to leverage that IOU into more cash.

A year later the political opposition to large amounts of money being pumped into the plan started to rise. The plan then used it's magic and "The Ontario Teachers' Pension Plan is cutting back on inflation protection for some future retirees to eliminate a $12.7-billion funding shortfall reported" After a large injection of cash from Ontario taxpayers the shortfall estimates were changed.

Then this year after a disastrous year on the markets. It lost $19 Billion on the markets and it lost the return for the year. The expected returns on the $100 Billion plan should have been around 6% or another $6 Billion. The shortfall from previous years $12B, last year's losses $19B and the loss of income from last year $6B turned into.... ta da... are you ready for this....
"London Free Press - ‎Apr 3, 2009‎ - Despite a $2.5-billion shortfall that will likely grow during the next four years, contributors to the Ontario Teachers"


Pension Dumping
Many companies in the private sector have found the burden of pensions unsustainable. In an attempt many companies have used whatever means available to escape from the liabilities of defined benefit pensions.
Many companies have looked for relief from their employees, union and to governments. As a last resort many companies have gone bankrupt.
Unfortunately this is not an option for public sector pensions. They can only dump onto the taxpayer.

Underfunded Pensions
An underfunded pension is one where the commitments to employees for future pension income is not sustainable based on the amount of money currently accumulated in the pension fund.