The end of part one

Over the past several years as part of my business I have watched the problem of public sector pensions. The problem has grown much more serious, painful and acute in just the last year.
In the early days of media and general public recognition of the public sector pension problem very few commentators discussed the issue. There were a few organizations such as CD Howe and the Canadian Federation of Independent Business CFIB who understood the serious implications of what the CFIB called the Pension Predicament.
Today the issue has become a topic of mainstream discussion throughout our society. At every business or charity function I attend the topic is brought up for heated discussion and every day there is a front page article or pension editorial about public sector pensions. It seems that almost everyone understands the issue and has an opinion on it.
This is a good situation to be in because now society can begin the work of changing the pension system to make it fair for all.
Part of the problem with the pension issue is understanding the nature and dynamics of the serious problem we had created. As a professional working in the area as a consultant to small companies, it took me a while to understand how the system worked in relation to the different types of pensions plans. I always saw a huge difference between the different types of pensions some of my clients had. The public sector employees had pensions that far outshone anything a private sector employee would be given.
Today I understand the pension predicament as the fundamental differences in the way the private sector and public sector pensions work. The private sector plan is a traditional pension based on money accumulated over the working career of the employee. However, the public sector pensions is based on a guarantee of continuing income based on retirement income levels.
In Canada the public sector pension norm is that 70% of retirement income will be guaranteed for life. The income is usually structured to include CPP but comes with several additional guarantees as well. It is guaranteed for life, guaranteed to increase every year and guaranteed to a surviving spouse, usually at 60%. The public sector pension is also know as a defined benefit pension. It should be called a guaranteed retirement income stream.
The fundamental problem for the public sector pensions today is that they are not sustainable and unfairly places onto the backs of the taxpayer to finance.
There is no way that given the promises made, public sector pensions can be sustained. Several attempts over the years have been made by the magic of actuarial analysis to figure out how much these plans should accumulate in order to remain solvent. However, most of these actuarial attempts have turned out to be a slight of hand trick used by the public sector unions to deceive the taxpayer into promising higher and higher guaranteed levels of retirement income.
The trend over time has been for higher payouts at retirement and earlier payouts. The formula for calculating the defined pension (guaranteed retirement income) is based on a formula of working years and the income earned in those years. For example, a typical private sector defined benefit plan would be based on the total working career of the employee. The public sector plan is based generally on the average past 5 years of working. Today a Government of Ontario contract is being negotiated based on a past 3 years average retirement income.
The total commitments made to public sector pensions is estimated to be short over $100 Billion dollars in Canada and in the U.S. a recent report shows them to be short $237 billion. This is after about 30 years of pumping hundreds of billions of dollars into these plans by taxpayers.

Pension and Public Sector Reform Gaining Steam

As the financial crisis worsens some public figures are stepping up to reform the system. It may be an impossible task but is essential to economic recovery.

All world citizens are faced with the same challenges in this financial crisis.

The Governor of the State of Rhode Island made a speech that will be instrumental in addressing the problems of the system. Complete Text: State of State Address

"In the midst of all the economic turmoil, tonight Id like to start out with
some uplifting stories.

First, what we need to do to get through this economic downturn. Second, how we better position our state for the future. And third, what we have already done to put in place the building blocks to create a stronger and more competitive.

First, we must strengthen our safety net for our most vulnerable citizens

we must reform our public employee pension and benefit plans so that they are fair and equitable, affordable and sustainable. And third, we must slow the rise of local spending by giving our mayors and town councils the ways and means to control spending and balance their budgets without raising property taxes.

I know that our proposed changes are difficult ones, and I know there are many critics.

But, the only alternative we hear from the special interests and lobbyists is raise taxes, because, they cant get by on less.

We need every department of every city and town to sharpen their pencils, tighten their belts, and be smarter about how they spend the taxpayers money! We need the unions to realize that our cities and towns cannot afford business as usual-they cannot afford the wages, the pensions, the health care, and the work rules that were bargained for. The world has changed dramatically. The cost of defined benefit pension plans and healthcare have spiraled out of control.

These costs are crushing our taxpayers - most of whom dont have such pensions and health benefits. This is not about picking on anyone-rather this is about picking up the burden together, for the sake of our children, our seniors on fixed incomes, and those truly dependent upon us. This is about pulling together to get us through this severe downturn.

Were not alone in this! Connecticut and Massachusetts are facing multi-billion dollar deficits.

California has an unemployment rate of 9+%, and a $45 billion deficit. Governor Schwarzenegger has declared a fiscal state of emergency. They are out of money!

They're postponing tax refunds, college tuition payments and requiring state employees to take 2 unpaid days off each month. We cant let this happen in Rhode Island.

I encourage every public employee union to sit down with the mayors, town managers, the city and town councils, and the school committees to become a part of the solution. Help your communities get through this! Some have already stepped forward and I thank them.

Our immediate challenge in the next few months will be to use the anticipated federal stimulus money wisely and sensibly. We must use the additional funding to bridge the deficit, support tax relief and structural reforms, grow jobs, and grow our economy.

Today, the pressing issue is growing jobs in those sectors of the economy that will bring money and investment to our state.

To illustrate why our state continues to be so vulnerable to economic downturns, I want to share a chart with you! In 1978, Rhode Island had 137,000 jobs in manufacturing which represented 34% of the entire workforce-today we have 46,000 representing under ten percent of the workforce.

I want to repeat that. The state has reduced employment by 25 percent, while the cities and towns have increased employment by 38 percent.

Ladies and gentlemen, thats why your property taxes are so high and keep rising. Thats also why it is so imperative that we find ways to consolidate services, and reduce the burden on our economy and our taxpayers. Government services consume our economy's resources --- they don't create them!

The competition, among states and countries for companies and jobs is intense. There are many factors that go into a company's decision about site selection-available workforce, energy costs, site readiness, over-all business climate, and, yes, taxes. We have been working hard on the first four - but now we need to make significant changes in our tax competitiveness.

Im tired of people writing stories about R.I. being tax hell, or ranked near the bottom in business tax competitiveness. We need to reverse the trend on that chart with bold, business friendly tax reforms.

I am firmly convinced that if we dramatically change our tax structure, our economy will produce jobs! What Rhode Island needs now is more taxpayers; not more taxes. This will only come from a tax policy that says to our business community, stay here and grow your business, and by the way, tell all of your out-of-state business friends that R.I. is a great place to do business. I want to send a loud signal that - R.I. is open for Business!!!!"

It will be a challenge indeed for all political leaders. Many cannot rise to the challenge but my hope is that those who do will be an example for others.

Forbes Article, Gilt-Edged Pensions - How much are they really worth?

Forbes came out with an article last week about the lucky stiff retiring on a public sector pension. The article tells the story of the stiff retiring four years ago at age 42 with a $65,000 per year pension. The pension is indexed for life, that is guaranteed to increase every year. Forbes places the value of that pension at $2,000,000 and most of that will be funded by taxpayers today and into the future.

In the article Forbes notes that America is "creating a nasty social problem as well. America, in case you hadn't noticed, is dividing into two nations. The 22.5-million-strong public sector (that includes retirees) is growing ever larger, and enjoying ever greater wages and benefits often guaranteed by state constitutions." This nasty little problem is not only occurring the the United States but in Canada and most countries around the world.

I have followed the pension world for the past ten years with a focus on the large gap between public sector plans and those of the average Canadian worker. In the UK (England) they have coined the phrase Pension Apartheid for the two nations that are developing.

The compensation levels of the public sector have been designed to compensate public sector workers based on a need to avoid political confrontation. They have powerful unions and whenever there is an upcoming election they make their voices heard.

Originally the union propaganda was that the public sector was underpaid relative to the private sector. However, Forbes points out:
"In public-sector America things just get better and better. The common presumption is that public servants forgo high wages in exchange for safe jobs and benefits. The reality is they get all three. State and local government workers get paid an average of $25.30 an hour, which is 33% higher than the private sector's $19, according to Bureau of Labor Statistics data. Throw in pensions and other benefits and the gap widens to 42%."

This same analysis holds true in Canada and recently was reinforced by the Wage Watch report released by the CFIB - Canadian Federation of Independent Business.

The real bonus to public sector employment is the pension plan. The pension plan is not based on an accumulation of funds like your plan is, it is based on a continued stream of income into retirement. This stream of income is based on 70% of the wage rates at termination of employment. In the Forbes example, the worker had a pension worth about 72% of his final salary. His ending salary was $90,000 per year and he will receive a $65,000 pension indexed for life.

These type of pensions do not exist in the private sector, except for a few companies, most of which were once public sector and are now "Crown Corporations".

Forbes notes that "four in five public-sector workers have lifetime pensions, versus only one in five in the private sector. The difference shifts huge risks from government to private-sector workers." In Canada those numbers are about the same.

Check out the Forbes article it certainly will create much needed debate around this issue over the next few weeks. Gilt-Edged Pensions