The ballooning pension liabilities at Canada Post and the scandal over rich pensions at Ontario Power Generation highlight a looming issue for Canadian politicians – the growing cost of public sector pensions.
The Harper government has given Canada Post a four-year break from making special payments to its employee pension plan, which has a deficit of $6.5 billion.
'We’re starting to see a bit of blowback from young employees who are sitting there looking at 15% of their salary going into the pension plan.' - Bill Tufts, author of Pension Ponzi
At OPG, Auditor General Bonnie Lysyk found OPG’s pension deficit is $555 million and its top five executives will be eligible for pensions ranging from $180,000 to $760,000 a year.
OPG contributes "disproportionately more" to its pension plan than its employees, with a funding ratio of 4:1 or 5:1, significantly higher than the 1:1 ratio in the rest of the public service, she added.
And those are just a fraction of the public sector pension liabilities across the country at the federal, provincial and municipal level.
Bill Tufts, author of the 2011 book Pension Ponzi, is concerned about the growing burden on the taxpayer of public sector pensions and the gap between public and private sector plans.
He estimates that the taxpayer contribution to public sector pensions doubled in the past 10 years to close to $34 billion a year, counting both the employer and employee contributions of public sector pensions.
Excesses in public pensions
Tufts points to some of the excesses of the public sector pension schemes, including pensions that guarantee 70 per cent of working income and provisions to top up pensions to those who retire before age 65.
“If someone is going to work for 35 years and retire on $100,000 pension and be retired on that for 35 years when the [average] working wage is $50,000 a year, there is no way the math works,” he said.
Tufts also sees resentment among younger public sector employees who are being asked to contribute an increasing share of their income to pension plans to support retiring baby boomers.
“We’re starting to see a bit of blowback from young employees who are sitting there looking at 15 per cent of their salary going into the pension plan...and they’re saying would I be better off with a defined contribution plan,” he added.
Young workers worried
Tufts writes the blog Fair Pensions for All which comments on pension issues and has called for defined contribution plans – in which a worker’s post retirement benefits would depend on how much is saved during their career – for all public sector workers.
But any changes to public sector pensions will lead to thorny negotiations with public sector unions. New Brunswick Premier David Alward faced protests last year when he announced changes to public sector pensions that included hiking employee premiums, raising the age of retirement and creating a new investment plan.
While public sector pension liabilities grow, private sector pension schemes are falling behind, Tufts said.
“I think we should equalize the pension system so we don’t have large cohorts of employees retiring on $50,000, $60,000, $70,000 a year pension,” he said.
Most Canadians have no pension
About two-thirds of working Canadians don’t have a company pension and only one third of Canadians contribute to Registered Retirement Savings Plans, the mechanism set in place 50 years ago to encourage Canadians to save, according to findings from a pension conference earlier this week.
Two decades ago, Canadians saved about 20 per cent of their income every year. The current rate is closer to 5.5 per cent, indicating many Canadians are not saving enough outside pension plans to support them in retirement.
But the current CPP benefit is $12,516 annually and even with OAS, pension income is just over $16,000, which can mean a huge adjustment for those with no savings.
Jim Leech, the outgoing CEO of the Ontario Teachers Pension Plan, said pensions are a hot button issue and politicians have been too willing to kick the problem down the road, rather than dealing with unfunded pension liabilities.
“We are debating the wrong things,” he said in an interview with CBC News.
“We are debating things like pension envy. You have a pension, I don’t. I’ll tear yours down and we’ll all be happy. Or this discussion between defined benefit and defined contribution.”
Leech is author of The Third Rail, which argues that many public sector pensions must be redesigned to be sustainable. The book also points to the need for reforms to the universal Canada Pension Plan and RRSPs.
The solution may have to be a hybrid in which current plans change and there is more appropriate risk-sharing in defined benefit plans, he said.
Good plans make money
But good pension plans, such as the teachers’ fund are not costing the taxpayer a lot of money, Leech argued.
“The facts are, for every $1 that a retiree gets from the Ontario Teachers Pension plan, 11 cents comes from the taxpayer, 11 cents came from the teachers themselves and 78 cents came from the investment returns from the plan. It’s a very effective vehicle and by far the most efficient way to provide for the financial future.”
Leech is concerned about the retirement of the baby boomers – seven million workers to leave the workforce over the next 20 years. At the same time, they will live longer than any previous generation.
The danger is that they will live those years in poverty, because they haven't saved and they are facing retirement with debt.
“The real issue is – are people saving enough and how can we encourage them to save enough for the future at a time when we’re all living longer and we have low returns,” he said.
Leech calls pensions “the third rail” because politicians are afraid to touch them.
CPP reform stalled
Federal and provincial finance ministers will again try to reach consensus on CPP reform at a meeting this fall. Finance Minister Jim Flaherty has said he doesn’t want to raise CPP premiums when the economy is fragile.
Meanwhile, some provinces, including Ontario, are threatening to go ahead on their own. Saskatchewan has already created a Pooled Registered Pension Plans strategy to help individuals save for retirement.
Leech argues the RRSP system is just as broken as private plans and the public system.
“The pensions people do have aren't sustainable ... they're going more and more into the stock market, and they are underfunded,” he said.
“Older retirees and workers need to understand the effect their benefits will have on younger workers because they will be paying the price, and will not get involved because they know those pensions will never be there for them.”