Teacher Pensions
More than a year ago, Finance Minster Steele correctly observed that investment returns would not by themselves fix the problem in the Teachers Pension Plan. In fact, the Plan’s position is more than $500 million worse than it was a year ago.
The deficit is $1.655 billion (more than $125,000 per teacher) even though governments have over the years made almost as much in extra payments to the Teachers Plan as the $536 million gratuitous bailout provided two years ago to the Public Service Superannuation Plan. The Teachers Plan is only 71% funded and there is now even less chance of this problem being fixed by investment results.
Further delay will only add to the burden in the future. This will ultimately be heaped on future taxpayers and younger teachers who will find themselves paying much larger contributions for smaller benefits. A teacher retiring this year may have had a salary of only $10,000 when she started and may have as many future retirement years as past working years. A plan where teachers can expect to receive more dollars in retirement than during their working career is simply not sustainable.
Government’s effective response to the PSSP challenge points the way forward for the Teachers Plan. A new governance model is needed under which:
1)The only funding responsibility of government is to match member contributions up to the Canada Revenue Agency maximum, and
2)The jointly appointed trustees are required to bring the plan into a break even position by a combination of funding and benefit adjustments.
This model is not something that will be achieved by negotiation. It must be implemented by legislation, as has been done for the PSSP.
Getting to balance will not be easy. It will require some combination of restrictions on inflation adjustment, gradual increases to the minimum age to retire with unreduced pension, and increased contributions.
The trustees need to be given time to consider alternatives. If they cannot reach agreement the initial choice may need to be made by binding arbitration (currently in vogue), but always within the constraint of the two conditions listed above.
If investment results exceed expectations and interest rates rise the trustees will have the enjoyable experience of providing improvements to members.
As with the civil servants this will still leave the teachers with one of the very best pension plans in the province.
The government should have dealt with this as part of the 2010 contract negotiations. As has been shown further delay just makes things worse. The government should follow its own lead as well as those of Ontario and Canada. The time to act is now.
Revisions
- Update: April 30, 2012
- Update: April 18, 2012
- Update: November 17, 2011
- Update: November 7, 2011
- Update: August 8, 2011
- Update: February 8, 2011
- Update: June 7, 2010
- Update: May 2, 2010
- Original Post
Reference Material
The Nova Scotia Pension Agency is the administrator for all three plans mentioned here. The agency has an excellent website (novascotiapension.ca) that provides good information on both benefits and funding status. The information taken from there for this report has been simplified to improve readability, which means some of the characterizations are approximate. Readers interested in further details will find the website a worthwhile visit.
This document from the CD Howe Institute shows the comparable status of the federal government’s plans–an even uglier picture.
What happens when you don’t deal with the problem:
For additional reading, have a look at these articles “California’s $500-billion pension time bomb” by David Crane and “Going for Broke in L.A.?” by Tim Rutten as they examine the current affairs and potential damages regarding California’s unfunded pension payouts.
Most Recent Comments
-
-
-
View all commentsI cant figure out while the politicians have their head in the sand on this issue. The funding gap for Pensions is further aggravated by the wishful thinking that Market returns will come to the rescue.
Public sector pensions are being run like Ponzi schemes that have put some in jail. There is a fine line between corrupt fund mangers who take the money of new investors to pay the returns for earlier investors versus a pension plan that does the exact same.
Jonathan | May 2, 2012
I think we have to look at Union Pensions period as it seems many make terrible investment choices for some reason. I believe public servants should not have pensions exceeding what is in the general population. The wages of public servants in a majority of cases exceed the per capita GDP by two three and sometimes four times. Considering not only the teachers but public service pension funds were topped up it is hard to believe fishermen or forestry workers in this province would have an sympathy for a 1.65 billion dollar short fall. WE are headed for Greece here folks. The Civil Service rode the population with Pensions, Wages and retirements at 55 years of age. The people outside the civil resented paying taxes and the underground economy because the rule of thumb. We have the same conditions here in Nova Scotia. Ask the younger generation why they would stick around after graduation in the 2020s. The exodus is not going to be about higher wages in Western Canada but rather how badly future generations will be taxed for the sins of the selfish in this province.
peter | May 1, 2012
Few people appear to understand the effect of low interest rates on pension deficits. An assumption that low investment returns are the major cause of such deficits misses the role of interest rates in deficit test calculations. How much will the deficit decrease for each 1% increase in the interest rate used?
The no-penalty early retirement after age 55 benefit in the Teachers Plan seems a potential one to examine given its cost, and the trend to defer retirements and pensions due to increased life expectancy and later start to employment. The effect on the Plan’s deficit of making that benefit actuarially neutral to age 65 should be instructive for all concerned.
rb | May 1, 2012