Teachers’ Pension Plan Not Getting Better

In 2012, the Teachers’ Pension Plan earned 11.31% on its assets, an excellent performance. But the deficit still got worse.

Chart - Teachers' Pension Plan Not Getting Better
Had the rate of return just matched the long term assumption (and assumptions remained unchanged), the deficit would have worsened by $130 million.

The just-released 2012 report represents a substantial improvement on previous years. It is more attractive, easier to read, and provides improved disclosure. But none of that makes the enormous problem go away.

There are two immediate consequences of the unfunded liability. First, teachers who have retired since August 1, 2006 again received no indexing. Second, the province had to make additional cash contribution of $13.8 million, up from $7.4 million in 2012. Unless the problem is satisfactorily addressed, it is likely that neither the recent retirees nor today’s active teachers will ever receive inflation indexing. And those extra contributions from the province will grow at an alarming rate.

Former Finance Minister Steele clearly recognized the problem as long as two years ago. The 2010 report told us that, “Actions to improve the long term health of the Plan are being evaluated by the Plan Sponsors with input from the Trustee.” It appears that nothing came of that evaluation.

The right time to address this question was in the recent renewal of the Teachers contract, but the only substantial topic appears to have been wages, which will increase by 7.5% over three years.

Once again, in the 2012 report, we have acknowledgement that there is a serious issue:

“Throughout 2012, we researched and considered various options that will improve the long-term sustainability of the Plan. In 2013, we will provide the Plan Sponsors with comprehensive recommendations that will include what we believe are necessary Plan amendments. We will continue to work with the Plan Sponsors with the goal of retirement security for all generations of Plan members.”

To put the deficit of $1,678.7 in perspective, it is more than the total support provided to universities over the last five years. This is as disappointing for today’s teachers as it is for other taxpayers. The teachers are paying for an indexing benefit that they will never receive. To be taken seriously, any commitment to balancing the books and eventually reducing taxes must address this issue.

Any resolution will require some combination of increased contributions from both teachers and the province, a very gradual increase in retirement age, and participation of all retirees in conditional indexing. Teachers will still have among the very best pension plans in the province. Most taxpayers do not have any plan at all.

The government’s recent efforts on the Public Sector Superannuation Plan have shown what needs to be done, but they failed to act as part of the collective bargaining round with Teachers just completed.

The current collective agreement runs until July 31, 2015, hopefully long before the subsequent election. Door-knocking for this year’s vote has already begun.

Readers are urged to use the opportunity to talk about this to candidates.  Do they understand the size of the issue and urgency of a response? Is their party committed to achieving a satisfactory resolution as part of the next collective agreement?

Today’s teachers may also want to ask their union leadership why they are supporting a two-tier system for indexing, and whether the union is committed to treating all retirees the same.


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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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