Pensions in Crisis – Update

Pension plans make promises now about retirement payments to be made later. The cost of those promises is higher if the plan allows retirement with unreduced benefits at younger ages. It is also higher if the plan provides annual increases in benefit to match inflation. The biggest pension plans in Nova Scotia are the Public Service Superannuation Plan for civil servants and the Nova Scotia Teachers Pension Plan.

Our civil servants put almost 10 % of payroll into the pension plan every year. This is matched by taxpayers. But the benefit promises are so generous that the value of those promises at the end of 2009 exceeded the assets by more than $1,500,000,000.

The Minister deserves credit for labeling the issue and taking steps to address it by increasing the retirement date for future employees and by reducing the amount of inflation indexing in existing pensions. But he did not go far enough, and he has caved in on a crucial point.

He should have gone farther on benefits by extending the early retirement date for some existing employees ( say those at least ten years from retirement ) and by providing for smaller inflationary increases to benefits. With these changes this plan could be brought to an adequate funding status without the need for additional contributions, and the plan’s benefits would still be far richer than those available to almost all other taxpayers.

He caved in on funding. The problem with the government’s proposed solution is that Nova Scotia taxpayers will now borrow an additional $536 million to close this gap. Furthermore, the government employees who will benefit from this pension plan aren’t being asked to contribute a single additional dollar. Previously, government employees were asked to match dollar for dollar contributions from the taxpayer. Is it any wonder Joan Jessome, the president of the Nova Scotia Government and General Employees Union (NSGEU), is so pleased about these pension plan changes? The government delivered more than a half a billion in new money, borrowed on behalf of Nova Scotia taxpayers, to her member pension plans without requiring any employee matching.

The authors of this plan will argue that the employees have given up more than taxpayers because the value of benefit reductions is about $1 billion. Taxpayers will argue that , at 10% of civil servants’ payroll ,they are already putting a lot of money into the plan—much more than goes into their own retirement savings.

It is hard to get perspective on a number as large as $536 million. It is:

  1. More than half the amount of money ($880 million) that the province received from the offshore accord.
  2. Equal to two and a half years worth of the increase in HST
  3. About $30,000 for every active member of the plan.

And there is no guarantee that this is a one time payment. Instead a bad precedent has been set. If future investment performance is less than assumed (possible) or pensioners live longer than expected (probable) will the taxpayers be asked to write another huge cheque?

Questions for the Minister:

  1. Will he undertake that any future surpluses in the plan will be used to repay taxpayers before any benefit improvements are made?
  2. Will he promise that there will be no more bailouts, that from now on the benefits will be made to fit what can be purchased with the regular employee and taxpayer contributions ?
  3. Will he avoid writing another huge cheque when sorting out the Teacher’s plan ?
  4. Will he ensure that universities , school boards, municipalities , and health care organizations are liable only for the regular annual pension funding (ie no big additional payments) so that taxpayers do not take another major hit on those plans?

Nova Scotians are being asked to accept the difficult measures necessary to return to balanced budgets. They cannot accept those measures if government is going to continue exposing taxpayers to huge risks that are not necessary in order to provide excellent pension plans to public sector workers.


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Reference Material

Pensions in Crisis

Voters trying to understand the various positions being advocated for the Canada Pension Plan have every reason to be confused.

The initial incarnation of CPP required only 3.6% of pensionable earnings as contributions, and provided benefits to people well before they had been earned. This was eventually repaired in the nineties; otherwise, the plan would have gone broke.

Today’s CPP provides a pension at 65 of up to $12,780, for which employees and employers annually contribute a combined 9.9% of pensionable earnings. It is simple and cost-effective, but even when combined with Old Age Security (OAS) it does not provide an adequate pension.

After fruitless discussions with the federal government, Ontario proposes to go it alone. Details are not yet finalized and the scheduled start is not until 2017, no doubt reflecting a hope that federal policy will change and save them the trouble. Ontario’s plan, mandatory only for those not already in a pension plan, would require a worker to contribute for 40 years in order to receive an unreduced benefit. The only examples provided on the Ontario website are for employees who work the full 40 eligible years.

The Canadian Labour Congress (CLC) has one of the many proposals to increase the existing CPP. The CLC loves to quote a 2014 Nanos survey in which 88% of Canadians support “increasing the benefits Canadians receive through the Canadian Pension Plan.” Of course the survey does not mention the corresponding need for a substantial increase in contributions, nor the 40 year wait for unreduced benefits. (The same survey makes the shocking discovery that most Canadians would like lower taxes.)

The strongest support for improving benefits was from the oldest respondents, who would get only small benefit from the CLC proposal. There is one group who should actively oppose it. Low income workers are typically able to receive the Guaranteed Income Supplement when they retire, in addition to OAS and a small pension from the present CPP program. An increase in CPP will be largely offset by reductions in GIS. This needy group will be paying something for nothing.

As a result, some proposals for reform, otherwise similar to that of the CLC, do not require contributions or provide benefits on earnings below $25,200. These proposals have considerable merit as a cost-effective and comprehensive improvement to retirement savings for Canadians. 

But that virtue will be much clearer to actuaries and economists than to voters. Most Canadians, given a clear and detailed understanding of proposed changes, would be much more tepid in their enthusiasm for a program that takes so long to mature.

Hence, the rather vague communications from the three political parties. One can search their websites in vain for any indication of what they have in mind.

The Conservatives have argued, incorrectly, that CPP contributions are just another tax. Unlike unemployment insurance, the CPP funds have for five decades been operated entirely outside of government accounts and are only used to pay CPP beneficiaries. Having been opposed to any change, the Conservatives now say that they are willing to consult Canadians about a possible optional program.

How that might work is anyone’s guess. It appears to be just creating a different RRSP opportunity. Are there limits on how much can be contributed? Is it optional for employers too? Are contributions locked in until retirement as is the case for the base plan? This “plan” does not offer much.

The Liberals favour a mandatory program. Liberal Critic for Seniors John McCallum points out that changes would require the agreement of two thirds of provinces with two thirds of the population, so an agreement would have to be negotiated. Their position would tilt toward a large amount of excluded earnings to protect low income earners. Good.

More troubling is that they are not committed to adequate funding, which suggests that they might , as happened with the original CPP, cheat young contributors by paying older ones more benefits than their contributions have earned.

The NDP, which might be expected to follow the CLC recommendation, is so far silent about what exactly they have in mind—although it will clearly be a mandatory program. Caucus Press Secretary Greta Levy promises that “The exact figures on CPP will be announced before the election as part of an NDP government’s approach to retirement security.”

So voters actually trying to understand this complex issue don’t have much to work with.

The Conservatives are trying to fog the issue by musing about a no-hoper voluntary plan.

The Liberals appear to prefer a mandatory plan, but have not drawn any lines in the sand about how it must look. They may be willing to consider an irresponsible funding choice, or to be pushed that way by the provinces.

The NDP say they have advocated a CPP expansion for years—as well as strengthening GIS and reverting the age of OAS to 65. This adds to a growing list of expensive promises with no indication of how they are to be paid for.

Today’s CPP plan is appropriately funded and provides a cost-effective but modest portion of retirement funding. A long term reform is possible that would allow that portion to become more substantial.

The Conservatives have no real intention of making any changes. The Liberals and NDP say they do, but if they choose a wrong model they could do more harm than good.

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