Another Pension Bailout?

Reporters and other keen observers know that a news release late on Friday usually means that the government hopes it will not get much attention.

Thus on April 30 there was a little reported story that the Teachers Pension Plan is to receive a modest extra payment of $1.5 million from the province because it is in deficit. This looks very small compared to the $536 million payment into the Public Service Superannuation Plan (PSSP) announced a few weeks earlier. The associated financial reports were only released in May and a much darker picture becomes evident.

Unlike the PSSP, the Teacher’s plan has received a number of prior extra payments, totaling over $400 million. So the accumulated total extra payments for the two plans is closing in on one billion dollars, or more than four years worth of the HST increase just imposed.

The financial statements for the Teacher’s Plan reveals a deficit at the end of 2009 of $1.274 billion. The April 30 letter from the trustee contained this optimistic statement:

“It will definitely take some time to recover from the effects of recent market conditions and restore the funded status of the plan, but it is moving in a positive direction.”

Most readers would conclude from this that it will only be a matter of time until investment returns solve the problem. In fact the most likely outcome is that it will get worse. The deficit calculation assumes that future investment returns will be consistent with historical averages. So it is equally likely that actual returns on invested assets will be better or worse. But because the plan is under funded, there will be no investment return on the $1.274 billion of assets that are not available to be invested.

So who owns this very large problem? As things stand taxpayers are responsible for half of it. Under an agreement between the teachers and the province, the pensions starting on or after Aug 1 2006 only receive indexing if the plan meets certain funding criteria. In a year (such as 2009) when funding is inadequate the taxpayer makes extra payments into the fund equal to half the value of the indexing that those pensions did not receive. Of course most of the pensions being paid started before Aug 1 2006 so the current year’s down payment was small—only $1.5 million. But it will grow very rapidly as more and more of the pensions are affected by the provision. If investment returns are consistent with historical averages taxpayers will end up with extra payments into the plan equal to half of the current deficit—$637 million—plus interest.

This is outrageously unfair to taxpayers, most of whom have no pension plan at all.

The current collective bargaining agreement between the teachers and the province expires on July 31, 2010. The next agreement must put the province in a position that restricts taxpayer liability to regular payments into the pension plan—which amount to almost 10% of salary, matched by the teachers. Provisions for early retirement and inflation indexing will need to be adjusted to bring the plan to a sound financial position. The resulting plan would still be among the most generous in the province.

Taxpayers have already made extra contributions to these two public sector pension plans of almost a billion dollars. It is time for taxpayers to get some relief.


Related Articles

Pensions in Crisis + Show all articles

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.

+ Show all reference material