The Alabama State Pension System on Way to Collapse

Are Union Pensions Bankrupting America?

 

Read the transcript here. Show transcript

Bill Tufts 

Fair Pensions For All

Unions are Pissed!!!

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?

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

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

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 Statesunderfunded 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?

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

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

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

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

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