Fix the Teacher’s Pension Plan Now

Finance minister Whalen’s response to the latest reports on the Teachers’ Pension Plan is far too relaxed. Here are the salient facts.

  1. The plan’s assets are $1.52 billion less than the present value of pension promises. That is almost $120,000 per active teacher.
  2. 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.
  3. 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.
  4. 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
  5. 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.
  6. 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.
  7. 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.
  8. 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.


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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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