The great public-sector pension rip-off

The Economist published an article that reported on public sector pensions.

It is called The great public-sector pension rip-off. It is a short article but highlights the key points about what is wrong with our public sector pensions. Although it is written from the UK it perfectly describes Canadian pensions as well.

JOIN a private-sector company these days and you will be very lucky if you get a pension linked to your final salary. In Britain almost three out of four companies that retain such schemes have closed them to new employees. The cost of paying such benefits, which are partly linked to inflation and offer payouts to surviving spouses, is simply too high now that many retirees are surviving into their 80s.

Yet most new public-sector employees in Britain and America continue to benefit from pensions linked to their salaries. The pension costs facing the public sector are roughly the same as those facing the private sector; their employees are likely to live just as long. But because of the presumed largesse of future taxpayers, governments seem under much less pressure to reduce their pension costs. In 2005 a reform package in Britain raised the retirement age for new state employees, but still left existing employees able to retire at 60.

Note: In Canada the retirement age begins as early as 50 for some public sector workers and most are eligible for retirement beginning at age 55 for full pensions. Many workers in the public sector will spend more time in retirement than they did working. For many the pension income will be far greater than their working income ever was.

Perhaps the real reason why public-sector pension costs have not been tackled is that the full bill has never been revealed to taxpayers. Calculating the cost of a pension scheme depends on two key assumptions. The first is the potential longevity of the employees; the second is the discount rate applied to future benefits. The higher the discount rate, the smaller the liability appears to be. There is a lot of debate about the right discount rate to use, but the conservative approach is to take the cost of government borrowing. Use that rate, and the liability of American state and municipal pension schemes may be $3 trillion—three times the value of all the authorities’ existing debts. In Britain the liability adds up to 85% of GDP.

Even if that figure overstates the problem, there is little doubt that governments are understating their pensions liabilities. When workers in Britain are transferred from the public to the private sector, they are entitled to keep their pension rights; employers who take them on find that their pension costs are around double those estimated by the public sector. The fudge seems likely to continue. A consultation document sent out by the British government suggested that, rather than raising taxes or cutting spending, local authorities should fall short of fully funding their pension liabilities in the short term.

Note: A recent blog of mine called The need for transparency in public sector pensions addressed this issue of the real pension shortfalls that exist.
Public affluence, private penury

There may be an argument for giving some public-sector workers, such as the police or the armed services, higher pay and benefits in the form of pensions. But the cost should be fully accounted for. Today’s opaque pensions system is unfair to private-sector workers, who suffer a triple whammy. First, most are now enrolled in riskier defined contribution (DC) pension schemes, where payouts depend on investment performance. Second, employers make smaller contributions to DC schemes than to final-salary plans, so pensions are likely to be lower. And third, as well as shouldering more of the burden for their own retirement, private-sector workers pay for public-sector pensions via their taxes. There is, in effect, a hidden transfer from private-sector workers to their public-sector peers. In Britain it may amount to as much as 30% of pay.

When the full costs become apparent, taxpayers may demand reform. Cutting costs is not easy: the bulk relate to promises already made. But raising the retirement age for public-sector workers in order to reflect increased life expectancy would be a start. Moving to DC pensions for new entitlements, or to a cheaper version of a defined benefit scheme (such as an average- rather than a final-salary pension) would also help. The greying of the American and British populations will inevitably involve some costs. It would be unfair if the burden was borne disproportionately by private-sector workers.

Here is another excellent article printed earlier this year by the Economist detailing the Pension Predicament. Pension Apartheid

Pension Problems in Nova Scotia

There was an interesting article about the pensions with city unions being renegotiated. Cities want to negotiate pensions

It will be a very tough challenge. Once given these things are hard to take back. They create a large financial burden on taxpayers and are very generous pensions indeed. This pension plan is in serious financial trouble. Lets hope that the cities will be able to negotiate some reasonable concessions for taxpayers.

At last report the pension fund was short $1.65 Billion to cover the cost of the commitments it had made. This is despite the fact that since its inception it had accumulated more than $2.9 Billion of taxpayers and members money. How long will it take to accumulate this extra $1.65Billion.

The government and pension managers have been aware of his problem for many years. In an attempt to cover the shortfall they have doubled annual contributions into the plan from $75Million in 2004 to $140Million last year and it has not made a dent in the plan's funding.

The plan is hemorrhaging cash very quickly now. There are almost as many on pensions (11,646) than paying into the plan (16,629). There are only 1.42 paying members for every pensioner.

Most members are paying only 8.48% of income into the plan. The taxpayer matches this for a total contribution of 16.96% of income. The CD Howe has estimated that the true cost of these types of pensions is 30% of income. This means contributions are short 13.04% every year. It is a ponzi scheme that has to end one day!

Retirees receive pensions based on the 80 rule. This makes an employee who started employment at age 20 eligible for pension at age 50. Many go on to other jobs while collecting pensions (double dipping). Many of these jobs will be with the same government employer.

As well the taxpayer is on the hook for the Teachers Pension Plan that had $1.5Billion of unfunded liabilities at the end of 2008. Even worse they only had 1.23 working teacher for each pensioner. The taxpayer funded $61Million into this plan last year.
These plans can be seen at: Nova Scotia Pension Agency

Last year taxpayers funded over $70Million into the plan. It is still almost $2Billion short.

The plundering of taxpayer dollars has got to stop

Comment from public sector worker about this Blog

After the series of CBC interviews I received a comment post on the blog. It was from a public sector employee who was upset with some of my remarks on the radio interviews. One of those 11 interviews across Canada can be found here from CBC Edmonton. In the rest of Canada that same interview was done by Catherine Swift

Monique did respond with some very legitimate comments. There are some members of our society that new to be protected.

For example, my mother a single mother sacrificed much to raise me and my three brothers. I am very thankful that she has a partial federal government pension.

We know that the group most at risk to poverty is senior women.

Some of the comments were as follows:

It is true that *some* individuals at the highest levels of management in municipal governments receive compensations of 6-figure salaries, along with their pensions and various benefits packages. However, if you would first do, and then share, thorough research with your readers you would find that many, if not all, of those managers are in union-exempt positions. This is certainly true of my own employer.

The vast majority of employees in my workplace do not make enough to even be included on the annual compensation disclosure list (whose cut-off is 50 K, annually). I am one of those employees not on that list.

Yes, if I am lucky enough to not lose my job to cutbacks in the next 20-some years (I am a newer employee) I will retire with a pension that will allow me to not starve, keep a roof over my head and access sound health care in my retirement years. How dare I expect this?!!

Until that time though, I will take my $44, 000 per year (plus - maybe - an annual cost of living increase and, yes, benefits: I'm having my teeth cleaned this Wednesday, and tonight I will file to get maximum - $200 - reimbursement for the $500 prescription eye glass lenses I had to buy last month). I'll take that 44 K and the promise of a dignified retirement and do my darndest to serve the people of my city - putting to use my 6 years of post-secondary education (a graduate degree is the minimum professional qualification for my position - you may be interested to know mine came from a faculty of management) to try to figure out a way to offer my particular type of public service city-wide with a staff of 2.

In my opinion we live in one of the best countries in the world. There are many challenges ahead for us and our society. I think we can all come together and find the solutions that will allow for fairness and dignity for all Canadians.

I hope that we can achieve for all Canadians what Monique outlines in her comments.

Thanks for your comments Monique

Canada's Public Sector Unions at War with Canadian Taxpayers

I was recently asked to do a series of interviews with the CBC Radio. They asked me to be interviewed on public sector pensions in Canada.

The CBC has been sensing a rise in animosity between the private sector and the public sector. They wanted me to discuss this across Canada in several morning call in shows.

It was important to be prepared and I wanted to do some research. The CBC was speaking about the "private sector vs the public sector".

In my blog I was seeing a rising sense of hostility towards the public sector by taxpayers.

Several situations have pushed this issue to the forefront. Strikes in Ontario in the cities of Toronto and Windsor. The release of Sunshine Lists across Canada and the resulting outrage. As well there have been several media articles discussing the gap between public sector and private sector compensation levels.

One media interview I found to be quite interesting. It was an interview on CBC's The Current between Catherine Swift and the President of CUPE. The link to it can be found here Labour Concessions - CUPE

Several articles have come out questioning the intentions and motivations of the public sector unions.
Notable: * Political Garbage in the Ottawa Citizen
* Globe and Mail's - Unions Living in Dreamland
* McParland: The shared greed of fat cats and public sector unions

As I investigated the connection between unions and what is happening I looked to Statscan and the numbers behind unions. Union Membership in Canada — 2007 There is indeed a correlation between the unions and gold-plated pensions. It appears they are symbiotic.

The Statscan union analysis hows that most of the unions in existence today are in the public sector. The public sector ones are monsters indeed, in terms of size and membership.

Check out the CUPE web site. Here are some of the words they use to describe the works they do on behalf of members.

our Strategic Directions 2007 – 2009 policy paper is a multi-million dollar commitment to fight privatization in all of its forms, wherever it arises across the country. Privatization is our biggest threat and we must always fight to protect public sector jobs and services.

we resource all strikes and we fight back against all regressive government attacks on members. This is the history of our union, a history of which we are all proud.

During this time we have waged and won important battles on the picket line. Some of our strikes were large; some were small.

All of this meant we were able to make contract improvements, fight concessions and stand tough against employers and governments

So-so-so-Solidarité Reminiscent of the chant many non-Quebeckers first heard at protests against the Free Trade Area of the Americas in Quebec City

CUPE’s National Defence Fund provides support to locals who are mobilizing to defend members’ jobs, rights and collective agreements and to promote quality public services.

Those challenges include longer, bigger and costlier strikes and many fightback campaigns

“Strikes,” said Genereux, “are about holding out for as long as you can, until you win.”

Convention created a new National Strike Fund, agreeing that six per cent of per capita would be set aside for strike pay and benefits,

Resolutions were also passed to extend the Defence Fund Levy and the Solidarity Levy in order to assure support for an increasing number of longer strikes.

It sounds like a union at war. They have amassed a huge war chest and they are read for battle. Who are they battling with?

Canadian taxpayers.

The need for transparency in public sector pensions

A group of business leaders called British North-American Committee examined public sector pensions in the UK Canada and the US. The fruits of their labour is a report called The need for transparency in public sector pensions

Gold-plated pensions extinct in private sector
They began by recognizing that "private companies have considered the rising costs of existing defined benefit provision and decided that the benefits to their companies are often outweighed by the costs and forward liabilities involved." They then looked at public sector pensions to determine the cost to taxpayers.

Part of the analysis was to provide a baseline for the value of the liabilities that existed within these plans and the future liabilities that need to be funded. Their results discovered that in Canada public sector pensions at all levels of government has liabilities of $513 Billion and the public sector plans have accumulated $323 Billion of assets to offset the cost of these liabilities leaving a shortfall of $190 Billion.

I will have to investigate these numbers they appear short of what is actually in these plans. For example, Ontario Teachers had $110 Billion in it last year. As well in Ontario HOOP (Hospitals) and OMERS (Municipal) had another $60Billion and these are only a couple of the many public employee pension plans in Canada.

"In all three countries, the public sector employs a significant proportion of the workforce. Most of the public sector employers in all three countries offer defined benefit pensions (mostly based on final salary) to their employees, and in most cases these are still open to new employees, and also to new pensions accruals for existing employees. This contrasts with the position in occupational pension provision by the private sector in these countries, where many, if not most, defined benefit pension schemes are now closed to new entrants. Some private defined benefit pensions are also now closed to new accruals by existing employees.
The abandonment of defined benefit pensions by the private sector has occurred rapidly, and largely within the last 10 years."

Lack of disclosure to taxpayers on cost of these plans
One of the challenges the group faced in examining the pension was that "Pension finances are notoriously opaque, and indeed this has made the collection of data on the three countries’ public pensions difficult."

If the assumptions of the report are accurate and the methodology seems comprehensive. They have identified why public sector pensions plans have landed into the crisis that exists today. The government's pension assumptions show that the value of the liability of the plans as it exists today is 12% of GDP. A more accurate estimate based on the analysis of the report shows a true cost at 25% of GDP.

Remember these figures are just for plans covering those working in the public sector. This is for teachers, municipal and provincial workers, fire fighters and police. These pension plans are the ones considered gold-plated. These pension retire substantially earlier that the rest of the workforce and the pensions are a guaranteed income into retirement. Not like most pensions based on a pool of accumulated money which is then drawn down in retirement.

Huge expropriation of taxpayers dollars still fall far short
Although mention was made that Canada has "funded pensions" the funding into these plans has fallen far short of requirements. This was outlined in the report and the analysis shows that contribution into these plans are about half of what they need to be. For example, the federal pension contribution required is estimated by the group to be 45.5% of the income of plan members. However, members are contributing far less than 10% into these plans and the taxpayers is funding the other 35%.

Calculate what your RRSP fund would look like if you contributed 45.5% into every year that you were working. Hence the term gold-plated.

These assumptions have resulted in contributions rates into these plans that are far below what is actually required to fund the full liability that exists today. For example, most provinces estimate a contribution requirement into their pension plans of 14.1% when in reality the real contribution requirement is estimated to be 27.5%. The federal pension contribution required is estimated by the group to be 45.5%.

Public Policy Considerations
"Unfunded public pension liabilities represent a transfer of value (spending power) from a future generation of taxpayers to the current generation of public employees (and by implication, a transfer to the current generation of taxpayers). This decision is made by the current generation, but paid for by future generations.

There is constant electoral pressure to minimize the current tax burden for the electorate, but to make promises of future public expenditure. In the case of public employee pensions, these promises benefit only a small proportion of the electorate, and so it is very important that the promises are known and understood by those who will have to pay for them, and (ideally) paid for at the time of the promise, rather than, say, thirty years’ later, when the promise matures.

The public employee pension schemes in all three countries studies suffer from a strong element of wishful thinking in their choice of discount rate to calculate liabilities"

The report contains some very comprehensive information on public sector pensions in Canada. As well are included some definitions of the concepts that policy makers need to know about.

Billions of Dollars Pouring Into Public Sector Pension Plans

I have been approached with a lot of questions and have had a few radio interviews
as a result of the article last week in the Globe and Mail. In feudal age of pensions, renaissance must come

Some of the questions have been centered on how much money is being poured into pension plans and how badly affected were the public sector pension plans.

It is estimated that last year public sector pension plans in Canada lost $100Billion.

It is hard to grasp how much money is being funneled into these plans. There are a few major plans and lots of little ones spread around the province. We do know that many of your tax dollars over the next few years will be pumped into these plans.

One item on the last Ontario Budget that received no public debate was the commitment of the government to make extra or supplementary payments into the public sector pension plans. In the Ontario Budget 2009/10 additional payments into pension plans amount to $10.6 over the next 4 years. This has already been budgeted and I am sure much more will have to be made available to stop the hemorrhaging. See Table 20 of the budget. These are just "bonus" contributions.

These contributions are in addition to the billions funneled into these plans by all of the government organizations in Ontario.

One example in my back yard is McMaster University. As of the last actuarial report the plan had assets valued at $1.059Billion and a shortfall of about $90Million. Last year the contributions into the plan were by employee $ 12,698,000 and by the university $41,562,000. This was before the market crash which potentially wiped another $200,000,000 from the plan. The details can be found in the Annual Report at Page 38.

In addition the annual report shows future employee liabilities at $222Million. These would be for such things as the sick leave policy the City of Toronto is debating in its strike.

This is typical of most public sector plans. Huge contributions are being pumped into the plan to try and make up previous shortfalls. Then the markets smacked these plans by around 20% last year. Now they are facing huge shortfalls. For example, the estimated pension shortfalls and the future employee benefits liability are close to Half a Billion dollars. This on a budget of revenue coming in at $730Million.

This is only one of many taxpayer funded institutions in my neighborhood. This is a typical picture. The only question is how long can the hemorrhaging last for?

The Inconvenient Truth

The National Union of Public and General Employees recently came out with a letter on policy statement regarding pensions. They were responding to an article by The Globe and Mail called Canada's Growing Pension Puzzle

The letter presented some interesting perspectives about public sector pensions. It also presented some serious misinterpretations about the current system of pensions for public sector employees.

The letter commented that the article played on "a convenient untruth: that public sector workers have a huge advantage over most others because they have cushy pensions provided by, or backed and guaranteed by, the taxpayer." Unfortunately for taxpayers this is a a truth that is substantiated by the public sector pension plans themselves.

The Ontario Teachers Plan states in regards to its almost $20Billion shortfall that "Responsibility for ensuring a defined benefit pension plan remains fully funded lies with the plan sponsor, usually the employer... " This sounds like it is backed by taxpayers.

The comment also points out the "huge advantage" that the public sector has with the pensions and benefits they are paid with taxpayer dollars. This sentiment is part of a report from the Canadian Chamber of Commerce that comments "With public sector jobs offering higher pension benefits, it can be argued that the current pension regime affects not only private sector competitiveness, but also its ability to attract and retain labour."

Another contentious point from the letter was an assertion that public sector employees pay their own pensions. In fact, the subtitle of the letter was "Public sector workers pay 8% to 9% of their income to finance public pension plans". As we saw last week the PSP - Federal Government Employee Pension Fund requires contributions of 4.9% of annual salary up to $46,300 and 8.4% of annual salary above this amount.

So the numbers just don't make sense.

The NUPGE in their PR campaign states that the public servant pays 8% to 9% of their own pension. To be fair in many pensions this is the contribution rate. However, this assumes that the employees are picking up half the cost. The CD Howe Institute in research for a pension paper discovered that the actuary for the Federal Government pension plan calculated that a contribution level of 30% of income is required to fund a gold-plated or defined benefit pension plan. Sorry but 8% comes up way short of the full amount required.

Part of the argument for the gold-plated pension is that "Their benefits were bargained for, and trade-offs were made along the way. For example, public sector workers traded off other benefits and greater wages to finance their pensions." This makes for a good argument if it were true but the CFIB Canadian Federation of Independent Business shattered this fantasy with their report called The Wage Watch. Public sector employees have a large gap between their pay and that of the private sector. Not only do they get gold-plated pensions they get better benefits and higher pay to boot.

As the letter moves onto the next section it asks "Have you ever heard of a Retirement Compensation Arrangement? RCAs are pension plans for business owners and senior executives, allowing companies to pay out exorbitant pensions to retiring executives. With an RCA, business owners and executives have an opportunity to increase their contributions to a retirement program beyond regular RRSPs and pension limits."

Have you ever heard of a Supplementary Pension Arrangement? SRAs are pension plans for government employees, allowing taxpayers to pay out exorbitant pensions to retiring public servants. These are the pensions that pay over an above the current pension limits. In the public sector this is about $135,000 per year but many pension plans have set these up for many city employees and provincial employees.

No most people don't know what a RCA is nor do they know what a Supplementary Pension is.

It appears that indeed pensions are a puzzle and the public sector unions obviously are missing several pieces.

Costs of Public Sector Employee Pensions

The Question?
Simply, are government pensions fair and sustainable? Legacy costs continue to be a major issue for the Canadian economy. Legacy costs are the expense that businesses have as an obligation to fund retirement plans and health benefits of retired workers. These costs have been a major barrier in the recent efforts to keep many Canadian businesses solvent. The problem of legacy costs has been highlighted for Stelco, Air Canada, General Motors and many other Canadian companies.


BACKGROUND
Most Canadians save money in a pension plan or an RRSP to accumulate savings for retirement. Whatever is available in the fund at retirement will produce the retirement income. In contrast, the federal sector pension plan, like other public pensions, is a defined benefit plan that provides an inflation protected salary, based on years of service and.the average of the salary of the worker over the last five years of service. Assuming that a public sector employee works the full 35 years of maximum of pensionable service, a public sector employee is guaranteed an income in retirement of upwards of 70% of their final working salary or wage. This income replacement is guaranteed for life and guaranteed to increase every year.

If legacy costs at businesses are a problem for the Canadian economy, what about public employee pensions?

There is a huge difference in the type of pension plans that the public sector has and those of the private sector. Defined benefit plans are considered to be the gold-plated plan.

In Canada there are a total of 4.5 million defined benefit pension plan members. In the public sector there are about 2.5 million defined benefit pension plan members. This leaves 2 million DB plan members in the private sector. In Canada, 85% of private sector workers do not enjoy defined benefit plans; they are almost exclusively public sector plans. The few remaining gold-plated plans that do exist are causing serious difficulty for Canadian companies.


Public Employee Pensions
Most Canadian have no guaranteed pension at all. In one Ontario public employee pension plan, the average annual pension is $42,000. In addition most pension members are also eligible for full CPP Canada Pension Plan of $10,980 per year. This amount is guaranteed for life, eligible for annual increases and will a major portion pay to a surviving spouse for life

In order to fund these retirement income requirements governments in Canada have created huge pension funds, funded by Canadian taxpayers. For example, one of the largest in Canada the Ontario Teachers Pension Plan has accumulated over $110 Billion in assets. Statscan estimated in Ontario the total value of infrastructure at $90Billion. This includes roads, bridges, power plants, water treatment systems, airports and many other public works. Since 1990 Ontario taxpayers have funded more into this single pension plan than its entire infrastructure. This is only one of several huge pension plans in Ontario.

The National Post recently asked… “Why do these giant public pension plans exist? … They are, essentially, wealth confiscated by governments… using money taxed from all their constituents. The rest of the public pension investment activity is on behalf of unionized monopoly government service providers — hydro workers, police, municipal employees, and teachers. All are set to receive relatively lavish pensions paid for by Canadian taxpayers who have no comparable pension plans.”


Statistics Canada estimates that a pensioner living on $40,000 of pension income has the equivalent income of a “working” Canadian earning $52,000. This is accounted for by the fact there is a dramatic cost of living drop in retirement. The biggets factor is that most Canadians have paid down their mortgages, for many working Canadian this is 30% of income. Also there is a lower tax burden on pension income when compared to working income. For example no CPP contributions are made and there are no contributions for Employment Insurance.

The most recent Statistics Canada figures show the average Canadian earning scarcely $40,000 per year. Since the average salary of government workers are higher than the the average of their private sector counterparts, assuming that these workers work for 30 – 35 years, they can expect to retire with relatively comfortable with pensions higher than the average working Canadian wage.


Contribution Rates
There exists a huge gap between what public sector employees receive for their retirement benefits and what other Canadians receive. Most Canadian businesses feel overtaxed and they along with all Canadians fund most of the public sector pension costs.

A self-employed businessperson pays CPP premiums at 9.9% of his income with the hope of receiving a $10,980 a year CPP pension (this reflects employer and employee contributions, based on a maximum income level of $46,300). Under the current CPP model, the public sector would be expected to match the employer contribution of 4.95 % of income, based on a maximum salary of $46,300. Currently a public sector employee funds into their pension at a rate of 4.9% of annual salary up to $46,300 and 8.4% of annual salary above this amount. The federal actuary has estimated these types of plans cost 33% to fund fully. This means the taxpayers is funding an additional 24% to 26% of public sector incomes into these plans to pay for public sector pensions.

Many small business owners are at extreme risk of under funding their personal retirement plans. Yet, these same business owners are paying taxes to fund government pensions, allowing workers to retire at a luxurious level of income.

“Pension Shortfalls”
Many of Canada’s public employee pension plans are in “pension shortfall”. This means that on top of the billions accumulated in these funds more money is needed to fully fund the income to retired public sector employees.

This is not fair for taxpayers and the system needs to be reformed.

Pension Informercials

Anyone reading this blog will know the difference in value between a public sector and private sector pension plan. The public sector employee generally retires with a pension fund value in excess of $1,000,000. The average private sector employee has about $125,000 saved for retirement.

Pension Infomercials
As I study the public sector plans I am sometimes staggered by the audacity of the public sector pensions reporting on their plans.

Here is a pension plan site that had me chuckling with it's audacity. It is the pension site for the BC Municipal Pension Plan. They have a series of videos explaining the pension plan to members. The video called A Paycheque for Life is a real blast! A blast to taxpayers. Just click on the pictures under the video screen to watch the videos. They are only a few minutes long and well worth watching.

This is just like one of those late might cheesy informercials. Check out some of the phrases:

There are many reason why people work... You work every day knowing your future pension cheque gets bigger and bigger

Every mouse click, every email you answer, every shift you work ... that retirement cheque is growing

You are adding to a guaranteed paycheque for the rest of your life. You stop working but the cheques keep coming GUARANTEED

The video entitled There are Lots of Places Your Money Can Go would be like a comedy except it is such an insult to taxpayers.
It includes such greats as:

You can be like this guy and stuff a pile of cash into a hole in the ground

A plan that will always pay you more than you will ever contribute into it!

Best of all you investment is guaranteed for life. now that is something you can take to the bank!

Do you think the guy golfing at the end of this video was working???

Here is one that I ran across last week. This is the annual report for the Alberta LAPP pension. Check out picture of the rainbow on the cover of the report! the only thing missing is the pot of gold. LAPP Pdf Annual Report

Almost time for pension reform

An article from the UK states MPs must set example on pensions They have the same type of pension as our MP's.

Lets hope that once the current batch of MP's trigger their pensions they will consider the inevitable task of pension reform. Most of our current MP's are just a short time away from their gold-plated pensions. Election unlikely until Bloc gets its pensions

Pensions are sure to be a major issue in the next upcoming election. This from the The CEO of the Ontario Teachers' Pension Plan

Puzzling Pensions

As I compile information for my blog I am seeing a very big trend towards pension reform. Many organizations are calling for a government run Supplemental Retirement Plan. This is an idea put forth by Canada's leading pension expert in a report from CD Howe Institute. Available in this PDF file.

There are some merits to the plan but I think out weighed by the inability of the government to run these types of plans efficiently.

I think the debate takes away from the real crisis that Canada's pension system is facing. That is the huge disparity between the public sector gold-plated pension and the average Canadian's pension. We have funneled billions into pension plans as Canadians but most has gone into the public employee plans.

Part of the problem is the huge contributions required to fund pensions to the level of the public sector plans. About 30% of payroll is needed. For example, employee contributions into the PSP pension plan, the federal employees plan, are set at a rate of 4.9% of annual salary up to $46,300 and 8.4% of annual salary above this amount. This guarantees the employee 70% of the final 5 years of salary in pension income.

The Ontario teachers average pension income is en excess of $40,000 per year.

In contrast, a self employed person pays 9.9% into CPP to get a $10,800 pension. A private citizen pays into CPP a higher rate but gets pension that is 75% lower than the typical public employee pension. For employees the contribution is 4.95% for employer and the same for employees.

How can private citizens and companies afford any more in contributions when combined they fund 9.9% to get a measly $10,000. There is no justification for additional contributions into these type of plans. This is what a supplementary plan would be. Just like the CPP but only voluntary.

It comes down to a cost benefit comparison. However, from the public employees point of view a 4.9% contribution guarantees 70% of final salary. Which would you prefer?

The need to fund these public sector plans is why we have seen a huge torrent of taxpayers money into them. The PSP plan in 2002 had $5.6Billion in assets but by 2009 taxpayers had upped the value of the plan to $38Billion . Thats about $4.5 B a year of your money. The total budget of the RCMP is only$4B per year.

Even these enormous contributions are inadequate. This year for example Canadian public sector plans are suffering shortfalls in excess of $100 Billion.

The plan trustees themselves estimated a total contribution requirement of 30% was required into the plan. The employee pays 4.9%. Where do you think the other 25% comes from.

Now if all Canadians were getting 25% pumped into their pension plans and they had to fund 4.95% I would say, bring on the supplementary plans!

It may be naive but if we did not have to fund tens of billions into these public servant pension plans every year, maybe our taxes would come down. This would leave us a little extra to save.

A solution need to be found. It might be in some form of supplementary pension plan but lets investigate all of the options first. See Superfunds

Let's fund both the private and public sector employee plans at the same rates. The public sector plans need to be converted into the type of plans most Canadians have that is; contributory. This way we will all be in the same boat together.

Why should the taxpayer have to pick up the tab for the gold-plated public employee pension plan?

Talk of Pension Reform in Canada

Today there was coverage about the BC Supplementary Pension Plan in the Globe. Pensions at Meech
More Pensions for All

This will be another issue that has the potential to divert the media and politicians away from the issue of the public sector gold-plated pensions. While I hold some hope in the new supplementary plans, they will be only good if they fund at the same levels for private sector workers as they fund for public sector employees.

Part of the problem is the huge contributions required to fund pensions to the level of the public sector plans. About 30% of payroll is needed. For example, the BC teachers pay about 9% into the plan to get a $41,000 pension. A self employed person pays 9.9% into CPP to get a $10,800 pension. It is the taxpayer who picks up the rest in the public employee plan.

Let's fund both the private and public sector employee plans at the same rates. Why should the taxpayer have to pick up the tab for the gold-plated public employee pension plan?

In the CD Howe report Supplementary Pensions the design of the plan is presented by Ambachtsheer. He is one of the world's foremost pension experts. Another CD Howe report
A Pension in Every Pot discusses the problem of inadequate pensions for most Canadians. This is part of the BC supplementary plan issue.

These supplementary plans will not solve the issue of taxpayer funded public sector plans.

It may be too late to do anything about these public sector pension plans. Statscan estimates the value of BC's infrastructure at $40.9 billion. We have seen the value of the public sector plans in BC Pension Plans well in excess of this amount. This means that in the past 30 years. BC taxpayers have funded more into the gold-plated pension plans that into all of BC's infrastructure. Value of BC's Infrastructure

So part of the problem now becomes where do these pension plans invest their money? As you know they purchase stocks and bonds. The latest bandwagon is Private Public Partnerships PPP's. This becomes dangerous when public employee pension plans own the country's infrastructure. They love to invest best into areas where they have a monopoly and where they can get a high rate of return.

Check out the Ontario Teachers holdings.

They love monopoly investments. For example, the 407 toll road in Ontario. The most expensive in the world. Who pays the costs of traveling on the road? Is it a monopoly? Is the road beneficial for Ontario taxpayers or just the public pension plans that own the highway?

They recently updated their web site but had advertised the beauty of Private Capital is that they can get a 20% to 25% return. Bell Canada was a good example of the type of investments they like.

OTPP Holdings:

* Port facilities - OTPP owns the ports of Vanterm and Deltaport in Vancouver.
* A major portion of Chile's water and sewage systems
* UK airports

It may be worth the cost of the supplementary pans if we can stop funding into public employee pension funds. For example, at Y/E 2007 the OTPP had $110B and the value of Ontario's infrastructure was $ 90B. The OTPP is just one of several Ontario public sector pensions, much like BC.

These pension plans are already larger than the infrastructure of their provinces. They will soon own the infrastructure in most provinces. The plans are controlled by public sector employees. Whose interests will they protect? Those of their pension plan members or those of the taxpayers? The public sector used to be called the public service, but now the servants have become the masters (sounds like the Sting concert I was at last week).

The way I see it these things cannot avoid being a disaster whatever happens. They will by their very nature have to own most of the economic resources of the country. Peter Drucker had been talking about the socialism of pensions since the 1970's. It looks like these prophesies are bound to come true.

Trouble with BC's Teachers

I recently had a look at pensions in BC. They are all included in a website at BC Pension Corp

They must be scrambling to decide what the message will be on the release of this year's information. They are behind on releasing their annual update as they were released in early April for the past couple of years.

The pension report is fairly comprehensive analysis of the plan and for a public sector pension the 2007 annual report is quite detailed and analytical.
BC Teachers Pension

Here are a few notes from it:

* Taxpayers contributions into the plan were $212M in 1998 and increased to $306M by 2007. A 44% hike
* The number of teachers covered by the plan has been flat since 2003. No new teachers hired. But of course the number of pensioners is rising every year, up 7% last year. In 2003 there were 2.3 working for every retiree and now the number is 1.83
* 34% of the active members are in the ages of 50 to 65. Last year 54% of new retirees were aged 56-59. This means 34% of current active members are likely to be eligible for retirement in the next 5 years.
* In 1999 the plan paid out $335M to 15,800 pensioners for an average value of $21,253. last year they paid out $689M to 25,859 for an average of $26,652.
* In 2007 the eligible retirees at 35 years of service had an average salary of $73,000. The pension they would be eligible for would be $41,000 and the value that was required to fund this pension was $683,000 or 16.6 times the annual pension.
* In addition to the $41,000 pension retirees are eligible at age 60 for CPP. If triggered at age 65 this is another $10,896.
* Total pension income at age 65 would be $41,000+$10,896 or $51,896
* In April 2009 the average working wage in B.C. averaged $ 22.31. This would be an income of roughly $46,400 per year.
Statscan
* It appears that teachers in B.C retire up to 10 years younger than the private sector and earn more in retirement than the average working person makes.

In 2005 the last valuation showed the pension fund was short $904M. Based on $16.5B in the fund at year end of 2007 it is safe to assume 20% was lost in the plan or $$3.3B. Also they anticipated making a positive 6% return which would have produced another $1B into the plan. This leaves the plan at least $5B short.

The valuation was due at the end of 2008 and the pension plan administrators knows what the results are. Also they are late in filing their annual report. I suspect it is not a pretty story and they want to be very careful how it is sent out to the media.

When the story is released there will be all sorts of spin and manipulation of the numbers. The game this year is to minimize the shortfalls in the plan. They have created a method for averaging the losses over the next 5 years. So a $5B shortfall now becomes a $1B shortfall when "smoothed" over the next 5 years.

In 2008 the Ontario Teachers plan was going hard after extra money from taxpayers. They wanted to show how large the shortfall was to come up with extra funding. So at that time they showed a $12B shortfall. 2008 Shortfall at Ontario Teachers. Then last year they lost $21.5B on the markets. You would suspect that the $12B and $21.5B would be a shortfall of $33.5B. However, spread out over 4 years the loss becomes $2.5B. 2009 loss at Teachers .

The spin doctors can turn this thing any way they want. Part of the problem is that pensions are a complicated issue. The spin doctors have a large personal vested interest along with politicians and other public sector workers in BC.

Double Dipping

Double dipping is a term referring to the practice of earning a wage at the same time as receiving a pension. New Haven Video

Double Dip Pensions
In order to get a double dip pension it is received at an age younger than the normal retirement of age 65. It must also be from a defined benefit pension. In other words, usually only public sector employees are eligible for the Double Dip. Police and fire fighters are eligible as early as age 50 for pensions and the rest of the public sector at age 55.
Politics plus pensions equals big bucks

Double dipping has come into the news recently as the media and politicians examine the fairness and cost to taxpayers of our public sector pensions. It occurs at all levels of government. Starting at the top, most of us know a retired Member of Parliament who is know holding down another job at the same time collecting their $70,000 a year pension.

An acquaintance of mine recently retired with about a $55,000 a year pension from the RCMP and is now working as a city by-law enforcement officer. He retired and got a 50% raise in salary.

Currently in the Florida legislature there is a bill that would ban double dipping. The bill in Florida focuses on employees who leave their position for 30 days to trigger the pension and then return to the same or a similar job at full pay.

Florida ban on double dipping
End of Double Dipping in Florida
Another example in Florida

In Canada the same thing is happening in the public sector with employees who arrange a leave in order to trigger their CPP (Canada Pension Plan) and then return to the very same position at regular pay.

Other Examples
It always has been popular for teachers in Canada.
Teaching the Double Dip

In a surprise comment by unions in New Brunswick, they cited double dipping as part of the high cost of public sector pensions there. Double Dipping in New Brunswick

Recently a the unfortunate Police Commissioner of Buffalo was in hot water because he did not process his double dipping paperwork properly. Buffalo Police Commissioner

Call for end of double dipping in New Jersey
End it in New York as well
Connecticut?
Boston
San Diego
Detroit

This is starting to sound like a Johhny Cash song!

St John City Pension

Please see the complete collection of newslinks about the ST John Pension on the main Blog

See the other blog posts as well.
St John First City in Canada to Make Pension Changes
St John Pension Problems

The precedent fight in the city of St John heated up again this week. It is important because it is the first one in the country to attempt to control the rising cost of public sector employee pensions.

In St John the case is being watched by public sector unions and taxpayers alike. Updates on the current events in the case are covered in the St John Telegraph.

I have included links of interest to the case in the sidebar of the blog.

Here is a classic from my favorite newspaper in Canada the St. John Telegraph.


All taxpayers are suffering the same fate as those in St John. There is a constant demand for our tax dollars to go to fund the compensation packages of public sector employees.

As this cartoon shows the highest expense for any city in Canada is the cost of it's compensation package. This compensation package includes the wages, benefits and pension costs of city employees.

I have done a quick analysis of the local government organizations in my community and their labour costs.
University - 50%
Local School Board - 75%
Local Hospital Estimate - 70%

These numbers include the total compensation package. The recent Ontario Sunshine List reported the employees who earned over $100,000 per year in the Province of Ontario. It did not include the cost of the non-taxable benefits for these employees. Health and fringe benefits are usually worth an additional 10% and the public sector pension is worth another 30%.

The employees on the list actually earned and additional 40% in compensation that was not reported.

So I am amused when for example, in Hamilton the city is debating whether they should fund service upgrades for handicap buses that cost $1.2 million. Last year the city budget for the compensation package was almost $500 million on a total budget of $1 billion. This was an increase of $30 million from the year before. If these salaries were brought back to the same level as those in the private sector the city would save almost $100 million.

Thanks again Telegraph for an excellent cartoon.

Regina's Pensions

Heated discussions are flaring up over Regina's pension predicament.

There is concern and alarm over the huge shortfalls that taxpayers will have to fund. Taxpayers not only have the burden of covering the cost of their personal retirement shortfalls but in addition must pick up the cost of pensions for public sector employees.

Last year public sector employee pensions in Saskatchewan lost hundreds of millions of dollars.

A quick analysis at one of the smaller pension plans in Saskatchewan highlights some of the challenges ahead.
Saskatchewan Pension Page 32, 33

The Municipal Employees Pension Plan (in Millions)
2007 ........ $ 1,379 assets at year end
2008 est........ 260 lost in market collapse
2008 est........ 19 collected in Employee Contributions
2008 est........ 19 collected in Employer Contributions
2008 est ........64 in withdraws and transfers
Assets end of 2008 est. $ 1,093

2007 pension liabilities $ $1,223,958,000

My estimate leaves the plan short $141,000,000 at the end of 2008.

Lets look at some of the numbers to see just how bad the situation is for this plan and the implications for its ability to pay future pension liabilities.

Employee and taxpayers contributions were $38 million. However, net withdraws from the plan were $64 million. This leaves the plan short $26 million. It is reasonable to expect that this can be made up by future investment earnings. ie. on the $1 Billion fund a return of only 2.6% is needed.

It becomes a little more challenging when we look at how to make up the existing shortfall of $141 million and also the fact that the plan's shortfall will likely continue each year at the same level or increase over the $26 million per year.

Now we need to make up an annual shortfall of at least $26 million, which over the next 5 years to $130 million, and the accumulated shortfall of $141,000,000.

Lets hope the markets take off!

Possible Solutions
Increase Contributions
We can see from this article that increased contributions are to be expected. However, these will come far short of what is needed. Several reports show that the current public sector needs annual contributions of 30% in order to be properly funded. The "high contribution rates" listed in the article of 18.8% (9.42% by the employee and employer) leave the pension still short almost 12%.

As taxpayers we need to ask why when we are already putting 9.42% of employee's salary into the public sector employee pension, do we need to also make up the shortfall?

Of course the usual argument for pensions bailouts by taxpayers, is that they are used as employee retention tools to attract workers. However this myth has been proven incorrect by the CFIB in their Wage Watch report that shows the huge gap in wages and benefits between the public sector and the private sector.

The Wage Watch shows Regina city workers ahead by 25% and Saskatchewan provincial workers ahead by 22.9% of workers in the private sector.

Other Pension Issues
Retirees get big pay day!
Not only are the pensions paid to the public sector unfair to taxpayers, many games are played to make them more valuable.

This article cites the huge vacation payouts made to retiring employees. The bonus comes from sick days not taken but paid out at retirement. They are accumulated each year. What is not fair is that the are accumulated in early years of employment at lower wages but paid out at the end at the terminating wage level.

In The City of Hamilton financial report the sick leave benefit payout is described as "Under the sick leave benefit plan of the City, unused sick leave can accumulate and employees may become entitled to a cash payment when they leave the City’s employment."

In Regina we saw one payout worth $429,406. Many public sector pension plans have built provisions to allow this to be used as part of the pension calculation.
How Spiking Works

As the Canadian Federation of Taxpayers says... Taxpayers are in deep doo-dooo

What are these Pensions Worth?
Here are links to information about the City of Regina pension
Regina Civic employees Plan
Regina's Defined Benefit Plan

Page 23 - Section 15
a) The annual pension payable shall be computed using, where applicable, the employee's average salary, his average base salary and his average excess salary. The employee's average salary shall be the average highest salary during any five (5) consecutive years of service completed prior to his retirement date.

Note:
The pensions is based on the best 5 years of service income.
It looks like those vacation payouts might be included as for pension purposes. Those vacation pay entitlements would add tens of thousands onto the annual pension income. Many would have pensions higher than their base pay. ie. those $400,000 payouts.

Page 25:
iii - (b) For service on and after July 1, 1958, two percent (2%) of his average salary for each year of service and any fraction thereof;

(c) Subject to subsection (vii)(g) herein the annual pension otherwise payable under this subsection shall not exceed the sum of seventy percent (70%) of the employee's average salary

Note: This bring the pension up to 70% of income or 2% per yer. Based on 35 years at 2% this is 70% of income.

Some jurisdictions in the states are coming out with pension disclosure like the Sunshine Act in Ontario.
Boston Pensioners List

What does this mean?

Many Canadians will never be able to save enough to afford a comfortable retirement yet are forced to contribute into the pensions of the public sector. Most public sector employees will retire at a young age with gold-plated pensions far in excess of most Canadians' retirement savings. We cannot let this pension apartheid continue. CFIB states .... The unfairness has gone on long enough

As Pierlot has stated and also included in his report for the CD Howe Institute, A Pension in Every Pot, the public sector workers retires with a pension in excess of $1 million. All this of course is funded by you.

Thanks you very much and get back to work, we need you to pay your taxes!!!

The Heavyweights Step In!

Today CARP, The Canadian Association of Retired Persons released a series of advocacy articles aimed at creating major pension reform in Canada.

At initial glance there are certianly some very intersting proposals and ideas originating from the articles in this month's CARP on-line forum. As Zoomers

Pension Reform: the status quo is not an option
This article has brought attention to the clamour across the country for pension reform. It notes some of the pension reform commisions that have been struck across the country to review pension issues.
One intersting note about this article is the call for universal access by all Canadians to a form of defined benefit plan. These type of plans have been the ones that have created the pension crisis we are in and would only be a intergenerational burden with the next generation picking up the tab.
The most positive call to action for this article is a Pension Summit of the First Ministers and Finance Ministers. Included is a list of the emails for all of Canada's Finance Ministers who will hear the message loud and clear over the next few days.

Need to expand the Canada Pension Plan
CARP calls for a complete overhaul of the CPP program. This is an attempt to ensure that all Canadians will have a reasonable retirement income.
One of the ambitious objectives of this article is for a replacement income of 70% for all retired Canadians. This is a great objective but would call for a doubling of contributions from 9.9% to almost 20% of income.

Pension Reform – It Starts with You
Pierot makes the case for increasing the contribution limits for higher income Canadians to allow for more accumulation into retirement plans.
Pierot makes his case by starting off by pointing out the large disparity between private and public sector pensions. This article classifies public sector plans as first class and the average Canadian's retirement plan as economy class.

"About 2.7 million public sector workers (more than 80% of the public sector) travel first-class as members of defined-benefit (DB) pension plans. After a 30-year career, a worker earning $80,000 will have an indexed pension integrated with the Canada Pension Plan that pays $48,000 per year for life and is worth about $1 million.

The 23% of private sector workers with pension plans are mostly travelling coach. Many belong to defined-contribution (DC) pension plans that don’t promise a guaranteed pension.

With no pension plans, the remaining 77% of private sector workers (10.6 million) are travelling standby."

Whatever the outcome of these articles they are sure to create a ripple throughout Canada. Let's hope for the best.

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.

Pension Battle Continues in St John

From the St John Telegraph

The pension battle continues in St John, New Brunswick. It is one of the first of it's kind in Canada and may be the precedent case for public sector pensions across Country.
These plans are broke but no one wants to admit it, least of all those who are expecting a gold-plated pension plan paid for by the taxpayer.
As you can see in the editorial above the hope is that "A stock market rebound will restore some value to the pension fund's portfolio. It won't reduce the city's pension obligations or protect taxpayers from future deficits."
I am amazed by the insight of the Telegraph as they continue to report on this issue. They understand the problem, the unfairness of the situation and the huge cost to taxpayers and our society if the problem is not dealt with.
It is ironic that this situation is occurring in St John where the size of the problem is minuscule compared to pension problems lurking elsewhere in Canada. The Telegraph reports "Saint John's municipal pension plan has a going-concern deficit estimated at $146 million. Deficit payments could reach $9.7 million next year." This compares to the situation in Ontario for example with pension funds short an estimated $100 billion... yes billion.
The Ontario government in their recent budget announcement committed $10billion in pension payments (taxpayers money) to Ontario public sector plans over the next 4 years. The Ontario Teachers plan has accumulated over $110 billion of taxpayers money and is estimated to be short in excess of $30 billion. This is only one of several jumbo pension plans in Ontario with many more across the rest of Canada.
I thank the Telegraph very much for their coverage and the editorial cartoon. You can see the Blood Sucking Parasite cartoon on the side bar of the blog. Keep up the good work.

Pension Reform in Canada

It is apparent that the current pension system that we have in North America does not work and needs to be rebuilt.

In the United States many Governors and business organizations have taken on the task of examining what went wrong with our public sector pensions and what needs to be done to reform the system.

Gold-plated Pensions
The problem is that the taxpayer is funding gold-plated pension plans for public sector employees. At the same time taxpayers will never come close to having an adequate pension or retirement savings plan.

In Canada it is estimated that the retirement system currently has $800 billion of assets held for public sector pension employees. In the private sector the amount is only $300 billion held in pension accounts. Despite this accumulation into the public sector pension plans, they are still estimated to be $100 billion short of the funds needed to properly fund them.

The public sector employees make up 20% of the workforce yet has accumulated the largest share of total pension assets. The 80/20 rule applied here; 20% of the workers have accumulated 80% of the pension assets. You can click here to see the list of the largest pension funds in Canada, careful it is a PDF file. Top pension funds in Canada

As the St John Telegraph reports the public sector plans "are considered the best because they promise a certain level of income, regardless of market conditions, and are usually based on the worker's salary and years of service...
Defined-contribution plans, which are used by many private entities, are determined by the accumulated contributions to a retirement savings plan, plus earned interest."

Throughout North America government are having to deal with the problem of these public sector pension plans. Reforms have begun in many States including Rhode Island, New York, Michigan and many more. In Canada however, governments are slow to discuss reforms. The problem is too many politicians, senior government officials and academic experts who need to initiate a public discussion about reform are counting on a gold-plated plan for their retirement.

Reform will be forced upon the system.

One of the first governments to address pension reform appears to be the Province of New Brunswick. As a result of a huge projected deficit, partly caused by required pension contributions, the issue of pension reform is being discussed. It will be a discussion that will be forced to other provinces as well.

Some of the reform issues being examined include:
* Eliminate the rule that allows employees to retire without penalty when they have 85 combined years of service and age, the so-called Rule of 85.

* Remove disability benefits from the pension plan.

* Change the way the city calculates pension payments to retired employees; instead of an average of earnings over three years, payments would be an average of earnings over 10 years.

* Change the annual increase of pension payments retirees receive to one per cent from two per cent.

Although these are admirable changes to the system, nothing more than a move to defined contribution plans will save the system. We will have to watch how this progresses.

The True Value of Pensions

Today I was at the Farmer's Market in Hamilton for my usual weekly shopping. Outside the Federal Building I came a cross a large protest by the local USW union protesting for protection for pensions.
They have a right to be concerned about their pensions and the security of these pensions. I am not sure who they were protesting to but hopefully it gave them a sense of confidence that their pension would be dealt with fairly. They have worked long and hard for these pensions and trusted the companies they work for to save for their retirement. In hind-sight it was foolish to trust their unions and employers but that is what happened.
The people in the federal building where they were protesting are not very sympathetic as they themselves have fully guaranteed gold-plated pensions guaranteed by the taxpayers.

Accumulated Public Sector Pensions
As I have mentioned before the problem with the pension system is the cost of those gold-plated pensions that are given to the public sector. In Canada it is estimated that Canadian taxpayers have funded into these public sector plans which cover 20% of the workforce, in excess of $800 Billion, yes billion. Still the taxpayer will have to fund hundreds of billions more to fulfill the guarantees made on these pensions.
At the same time the private sector in Canada as accumulated almost $300 billion of pensions. We have funded more into the public sector than we have funded into our own pensions. And only 20% of all workers are in the public sector.
The public sector pension is not truly a pension but a guaranteed retirement income for life. It is based on a 70% of final working income, paid for life, guaranteed to go up each and every year and guaranteed to continue to spouses.

Value of these pensions
Let's look at the value of these guaranteed stream of income. A teacher currently in Ontario retires with over $90,000 of income. The retirement income (pension) value for this teacher is in excess of $60,000.
As a pensioner it has been estimated that the tax burden is 15% lower than a working Canadian. A working Canadian pays for CPP and EI as well as other related payroll taxes. For example, a self employed individual funds almost 10% of salary into CPP. The value of this 15% savings is $9,000 to the teacher's pension.
The OECD has estimated that a pensioner generally has a 30% lower cost of living. Part of the calculation is based on the fact that in Canada 80% of pensioners have no mortgage on their home. Most public sector workers are in the top 20% of income in Canada so probably most have paid off their mortgages. Also there are lower costs associated with not working such as transportation, clothing, telephones and lunches. This 30% adds another $18,000 to the retirement income.
We start with the $60,000 in guaranteed retirement income add another $9,000 for lower taxes and add another $18,000 for lower cost of living and we are now at $86,000. This is the equivalent of a $86,000 working income for the retired teacher.
The average working Canadian earns a little over $38,000 each year.

Time for Reform
These guaranteed retirement incomes need to be reformed.
In this example we have a retired government worker living on a taxpayer funded standard of living at $86,000 per year. Many families have two guaranteed retirement incomes.
Considering most of these retirement incomes are triggered around age 55, many are free to work other jobs. Most of these jobs are in other government departments or the same ones. This is where their connections are and where they feel comfortable working. Worse yet are those double dippers brought to my attention from J. Meyer - Teaching the Double Dip

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.