Fix the Teacher’s Pension Plan Now
Posted May 16, 2014
Finance minister Whalen’s response to the latest reports on the Teachers’ Pension Plan is far too relaxed. Here are the salient facts.
- The plan’s assets are $1.52 billion less than the present value of pension promises. That is almost $120,000 per active teacher.
- An agreement between the province and the Nova Scotia Teachers Union (NSTU) in 2005 stated that any deficits would be shared equally by the teachers and the province, so each active teacher is responsible for almost $60,000 of the deficit.
- The calculations assume a net investment return of 6.4% in future years. The last two years have been quite a bit better than that but 6.4% is in line with long term averages and with assumptions used on other large pension plans.
- At that interest rate the contributions of members, matched by government, are actually $25 million more than needed for the new benefits being earned this year
- The plan has $1.52 billion less assets than needed, so it does not make the expected return on those missing assets. As a result the plan can expect to be $97 million short of investment income this year.
- The net result of items (4) and (5) is that, on average, the deficit is projected to increase by $72 million this year and growing amounts thereafter. Of course it will be volatile but over the long term there is a strong bias for the $1.52 billion hole to get deeper.
- In the 2005 agreement the minister and the union agreed to amend benefits and contributions as needed to improve the funding level to 95% by 2015 and 100% by 2025. In fact no steps have been taken to fulfill that agreement and today the funds are only 75% of what is required.
- In 2014, for the first time, the number of retirees and survivors receiving benefits exceeds the number of active teachers. This trend will accelerate in future.
What we can therefore expect over the long haul is that a dwindling number of teachers will be responsible for an increasing shortfall in funding. The longer that action is delayed the worse will be the inequity between generations of teachers.
There is already a two-tier system. Retirees before Aug 1, 2006 receive indexing for inflation less 1%, while those retiring since then only get it if the plan is funded to 100%, which will never happen as things stand.
But even that two tier system is not sustainable in the long term. The longer action is delayed, the worse the inequity will be for today’s younger teachers.
Of course taxpayers should be equally concerned since they are responsible for half the deficit. But minister Whalen seems to feel no sense of urgency: “There’s no short-term risk at this time,” she is quoted as saying. “What we’re looking at really is a duty to consider the long-term health and where it’s going. I don’t think anybody should be alarmed at the moment.”
Actually lots of people should be quite alarmed. Younger teachers are already paying more than their fair share for benefits that the plan cannot afford. The longer action is delayed the worse off they will be. Taxpayers, most of whom have no pension plan at all while paying among the highest taxes in Canada, face an enormous and growing bill.
It is exceedingly unlikely that the problem will take care of itself. Investment returns would have to be twice the historic average for at least five consecutive years to eliminate the deficit. If the needed changes are made, and subsequent investment results are better than forecast, taxpayers should be delighted to share the benefits of that with teachers.
The funding shortfall is neither new nor hidden. Publicly available reports showed the shortfall to exceed $1 billion in each of the last six years.
Minister Whalen did not create this problem, she inherited it. So for that matter did NSTU president Shelley Morse who only began her role in August of 2012. Their predecessors failed to fulfill the 2005 commitment to address the problem. But Whalen and Morse now own any further delays in taking the needed steps. They have had for at least four months recommendations from the plans Trustee on how to address the problem.
Ideally they will work together to agree on a response. But if not minister Whalen must force the issue. In fact the 2005 agreement provides for this:
“In the event that the Parties are unable to reach such agreement… the Parties hereby agree to amend the Plan pursuant to the Trustee’s recommendation, and, if the recommendation is to deal with an Actuarial Deficit, to raise contributions in accordance with the recommendations of the Actuary and approved by the Trustee.”
Politicians across the country are addressing public sector pension problems. Prince Edward Island and New Brunswick have taken bold steps to make the costs of their public sector pensions stable and affordable. Newfoundland and Labrador is embarking on a similar path and the federal government has quoted New Brunswick’s words in announcing its initiative.
This takes political courage, but as one of the provincial finance ministers observed “The longer you put it off the more painful it gets.”
Nova Scotia took important steps to eliminate the deficit in the civil service pension plan and reduce future cost uncertainty for taxpayers. The time to do so for teachers is past due. Minister Whalen needs to show determination and a sense of urgency.
Related ArticlesPensions in Crisis
- CPP Changes: Don’t Pop The Champagne July 8, 2016
- A Weak Response to the Teachers’ Pensions Plan Deficit June 20, 2014
- Flaherty: Wait Till Next Year February 14, 2014
Voters trying to understand the various positions being advocated for the Canada Pension Plan have every reason to be confused.