Pension Crisis Continued
Posted February 8, 2011
There has been considerable public discussion and media attention on all three fronts: Teacher’s Pension Plan, MLA pensions, and Public Service Superannuation Plan. The Feb 1 Herald editorial captures an emerging consensus:
“The debate isn’t ideological. The problem is a simple affordability issue …. Pensions will have to compete for public funds with other demographic time bombs, like health care. It would be foolish to expect voters to give priority to public-sector pensions that are much better than their own.”
It is worth emphasizing that this is not a campaign against public sector workers. Rather at a time when provincial resources are stretched to the breaking point and most Nova Scotians face doubtful retirement prospects it is an effort to bring a reasonable balance between the interests of public sector workers and their neighbours.
At present this is the biggest problem. As discussed in earlier postings, there was a $1.276 billion deficit at the end of 2009. The present structure will cause ongoing volatility and the bias will be for further deterioration.
It is encouraging to hear the Minister clearly acknowledge the problem as reported in the January 31 Chronicle Herald although it would be nice to see a firmer commitment to resolution.
“Finance Minister Graham Steele said the government is talking to the teachers union about its pension plan, but those discussions are separate from ongoing contract bargaining. And while he agrees the teachers plan is in financial difficulty, he is vague about solutions.
“An unfunded pension plan is not good for anyone,” said Steele. ‘There are discussions ongoing . . . but no one should assume that there is a particular timetable, or indeed that anything is going to be done at all.”
Steele said the teachers plan appears to have ‘no reasonable prospect’ of returning to full funding based solely on returns from market investments.
“If nothing is done they (unfunded plans) get worse, but they get gradually worse and then they accelerate,” said Steele.”
It is not just taxpayers who will suffer if nothing is done. Under present arrangements those who retired before August 2006 are making no contribution to reducing the deficit. So those who retire after, especially the younger teachers, will in dwindling numbers be left to deal with their half of the large and growing problem.
There appear to be very few supporters of the current regime beyond its immediate beneficiaries. The new Speaker has announced a review, which is good. But how the question is framed will be crucial.
If the direction is to create a plan that is within the range of what other Nova Scotians experience, an acceptable result will emerge. But if the principal point of reference is the plan for elected officials in other provinces and the federal government, the result will be most unsatisfactory.
The suggestion by the speaker that special consideration be made for transitions back to public life does not stand up to scrutiny. Almost all MLA’s are earning more in those roles than they did in their previous jobs. The majority that come from the public sector (see Who Represents You?) are typically able by union contract to pick up where they left off. If transition support is to be provided, it should be for those not already protected. Expensive pension entitlements that apply to everyone are the wrong instrument for the job.
Public Sector Superannuation Plan
The Minister has taken great exception to the characterization of his actions as a bailout.
His letter and my reply (as they appeared in AllNovaScotia.com) appear below.
Re: Bill Black Blasts $500-million Pension Bail-Out
January 14, 2011
“I was disappointed to read that Bill Black is, again, spreading misinformation about the Public Service Superannuation Plan.As the sole trustee of the PSSP, I have an obligation to ensure that my public comments about the Plan are measured and accurate. Bill does not operate under the same constraints.
Before the reforms, the PSSP was facing an unfunded liability at $1.5 billion and growing. This unfunded liability represented permanent insecurity for pensioners and members, as well as a significant cost to taxpayers.
The PSSP was reformed as part of the April 2010 budget. A section of the Budget Speech described what we are doing, and why. The reforms were in the Financial Measures Act that was introduced, debated, and passed in the House of Assembly.
The FMA was on the floor for debate from April 13, 2010 to May 20, 2010. There is a verbatim transcript of the debate on the FMA. Any member of the public was entitled to appear before the Law Amendments Committee to speak to the bill. It is difficult to image a more transparent or public process.
The Major reform was to make indexing dependent on the health of the plan, rather than guaranteeing it regardless of the overall health of the plan. These, and a few other smaller changes, were worth close to $1 billion. This effectively represents the members’ contribution to the unfunded liability and to suggest there has not been a misunderstanding of the issues involved.
In addition, $536 million of the liability was re-financed at a lower interest rate, producing annual savings to taxpayers of between $160 million and $200 million per year. Bill chooses to characterize these reforms differently, and he is wrong. No matter how times he repeats his analysis, he is still wrong.
As a result of the reforms, the PSSP is healthier and more secure than it was been for many years. In addition, taxpayers will see a significant reduction in public-service pension expense.”
Minister of Finance
January 31, 2011
My response to Minister Steele’s letter published on January 14.
As the Minister knows both my written and spoken comments on the topic of public sector pensions have congratulated him for addressing a difficult topic too often ignored by his predecessors. The decision to amend PSSP benefits in order to reduce the deficit was bold and necessary.
I work hard to make my comments on public policy accurate and would invite the Minister to indicate if any of the following statements are incorrect:
1. The province has put $536 million into the PSSP plan with no matching dollars from employees. This eliminated the remaining funding deficit in the plan but he was not legally obliged to do so. This was the first time that taxpayers have put in money that was not matched by employees.
2. His benefit changes addressed about $1 billion of the problem. He could have made further benefit changes—for example, gradually phasing in later retirement for existing employees or further reducing inflation indexing—to address the remaining deficit, in which case the $536 million injection would not have been needed to bring the plan into balance.
3. After such changes, the PSSP members would still have pensions far better than almost all other Nova Scotians, 60% of whom have no pension plan at all.
4. The legislation makes no provision for taxpayers to get their money back. In fact it provides that any future surpluses will be used to enhance benefits.
5. These arrangements were discussed with union leaders prior to being announced to the public.
6. The Minister’s predecessors have topped up the Teacher’s Pension Plan by more than $400 million over the years. Nevertheless it had a deficit of $1.274 billion at the end of 2009. Under present arrangements, taxpayers will be responsible for half of that, and historical experience suggests that additional deficits can be expected in future years. The Minister’s intentions for addressing this are not known at present.
7. The Minister has not yet revealed any plans to bring transparency to the MLA pension plan.
The above are questions of fact. There are other matters on which reasonable people can differ:
1. The Minister and union leaders describe the arrangement as “sharing” the pain– employees have benefit expectations reduced while taxpayers put in more money. I prefer to characterize it as a “bailout”. The benefits have been chronically under funded by both employer and employees. What should happen is a reduction in benefits to whatever those payments would provide.
2. The Minister describes the $536 million injection as “refinancing”. I find this description puzzling. If so, when do taxpayers get their money back? Why don’t future surpluses go back to taxpayers? Had the Minister instead made additional benefit changes that $536 million would be available for other public purposes. Hence I prefer the word “bailout”.
The Minister’s stated intention is to bring the province’s books back into balance. The postings on newstartns.ca are in support of that worthy goal. If any of the facts above are in error I will be glad to correct them. On matters of opinion, let’s agree to respectfully disagree.”
At time of writing, the Minister has not contested the statements of fact.
Photo credit: Dave Dugdale on Flickr
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