The Teachers’ Plan Deficit Needs to be Addressed
Posted May 18, 2018
The government and the Nova Scotia Teachers Union are doing a disservice to taxpayers and today’s teachers, who are paying for the inadequacy of past contributions by and for the teachers that retired long ago.
In contrast, the public-sector pension plans for civil service and health care workers are well-funded and can be expected to keep their promises to pensioners over the long term.
There are three times as many active members as pensioners in the plan for health care workers. Their plan has a substantial surplus. Benefit improvements are cautiously implemented.
The public service plan has slightly more workers than retirees and has a small surplus. The plan structure allows for benefits to be constrained in the event of poor investment returns, so the risk of costs spiraling out of control is minimized.
It is an attractive arrangement for employers and employees, so much so that other plan sponsors are choosing to join, some of them changing back from defined contribution to defined benefit.
The list includes Acadia University, Cape Breton University, two smaller universities, several municipalities, and other public sector organizations.
The status of the Teachers’ Pension Plan is dramatically different. No organization would voluntarily join it.
In the two decades ending in 2014, teachers, matched by taxpayers, contributed 8.3% of pay up to the Canada Pension plan maximum and 9.9% on the excess. At the end of that period the plan had built up a deficit of $1.4 billion, which has remained more or less level since then.
Retirees already outnumber active teachers, a ratio which will increase relentlessly in future years. That means that the financial burden of the plan deficit is falling entirely on today’s taxpayers and teachers.
They have seen their contributions go up by 3% of salary, taking $170 per month of income away from a teacher making $70,000 per year. This happens while the value of benefits those teachers are collectively earning is $77 million less than the combined teacher and taxpayer contributions.
The interest on the $1.4 billion deficit in 2017 was $87 million, more than the amount of excess contributions. The problem is going to get worse.
The plan’s governance agreement called for the union and the government to address the deficit in 2013. What they chose was both inadequate and unfair.
Those who retired before August 1st, 2006 have been receiving increases equal to inflation (as measured by CPI) less 1%, regardless of the plan’s health. Those retiring after that date, and all future retirees, will only receive increases if the plan’s finances become much healthier. As things presently stand that probably means never.
There is nothing secret about the problem. It was highlighted by the Auditor General last fall. In the recently released 2017 annual report, the chair of the Board of Teachers’ Pension Plan Trustee said, “While there is no immediate risk that the Plan will be unable to meet its ongoing pension obligations, it is important to note that the Plan’s financial position could deteriorate going forward unless the Nova Scotia Teachers’ Union and the Province together take very significant steps.”
The Trustee has been constantly warning the government and the union about the problem and has, in private, made recommendations about what a solution might look like.
An adequate response might look something like:
- For those who retired before Aug 1, 2006, change the indexing provision to be the same as that for the subsequent retirees. In the short term this would be to their disadvantage but might ultimately result in bigger increases once the plan becomes sound.
- At the moment a teacher who is 55 with 30 years’ service can retire with unreduced pension benefit. This is called the rule of 85. That teacher is likely to receive that pension for more than the 30 years she or he worked. This is a very expensive benefit. Increase the “rule” by 1 each calendar year until it reaches 90.
- The province must make a contribution to the plan equal in value to the two measures described above. That will be a substantial sum, but is only a reflection of a liability that is already there. Taxpayers are going to have to pay their share sooner or later.
The province and the union have done a disservice by not dealing with this issue before now. It’s time.
Meanwhile, other public-sector organizations with smaller pension plans will be able to achieve efficiencies and improved cost certainty by joining the public sector plan, as have a growing list of municipalities and universities.
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
- Fix the Teacher’s Pension Plan Now May 16, 2014
Voters trying to understand the various positions being advocated for the Canada Pension Plan have every reason to be confused.