New Brunswick Pension Progress

The biggest challenge facing newly minted Minister of Finance Maureen MacDonald is the $1.65 billion deficit in the Teachers Pension Plan. It is also a challenge for new NSTU president Shelley Morse because none of her active members are likely to receive indexation of benefits unless changes are made.

Last week the Government of New Brunswick unveiled a new approach to pensions both public and private. Directionally it is like the needed changes announced by the Governments of Ontario and Canada and by Nova Scotia for civil servants.

But in scope, substance, and breadth of support it is several steps ahead. The concept  is built around a defined benefit core which keeps expenses low and allows retirees to pool the longevity risk. Benefit levels are adjustable, but the funding mechanism is cautious enough that the basic benefit targets are highly likely to be met and enhancements are much more likely than reductions. Funding levels are adjustable within a narrow range for both employees and employers. All funds are there to provide benefits so any future good experience will be used to improve benefits. No taxpayer bailouts are called for.

The new regime will be available to public and private sector plans and four unions representing various health care workers and pipe trades (plumbers, pipefitters, etc.) have already signed on.

This is to the great credit of those union leaders who understand that pension costs are not just a tug-of- war between employers and employees, but also represent conflicts between the interests of present and future retirees.

The Premier and Minister MacDonald have stressed that she will be staying the course to fiscal responsibility. In pursuit of that goal she inherits several difficult files of which the most important is the Teachers Pension Plan and its deficit, which is over $120,000 per active member.

Teachers who retired before Aug 1, 2006 continue to receive unreduced indexation. But those who  have retired since then , or will retire in future , will only receive indexing if the plan is adequately funded. Given the $1.65 billion deficit it is unlikely that they will ever see any benefit indexation.

In fact the longer action is postponed the greater the reduction in basic benefits that younger teachers will receive because so much of their contributions are being used to subsidize past retirees. Shelley Morse, the newly elected president  of the Nova Scotia Teacher’s Union, must be open with her members about their prospects.

Decisive action (not including another taxpayer-funded bailout ) is urgently required to right this injustice. This will likely include some combination of conditional indexing for all retirees, a very gradual increase in retirement age, and increased annual contributions by teachers, matched by taxpayers.

A satisfactory resolution of the Teachers Pension Plan is critical for its own sake, and will pave the way for responsible management of other public, quasi-public, and private sector plans. The New Brunswick model emerged from an extensive consultation process and a study of best practices from around the world. It represents the way that fiscally responsible jurisdictions will manage their affairs.

Minister MacDonald, it is your time to lead.


The New Brunswick Plan

Nova Scotia Teachers Pension Plan Annual Report 2011


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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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