Pension Progress

The provincial government has taken a major step towards bringing the cost of civil servant pensions under control. It must do the same for teachers and MLAs.

Finance Minister Steele’s vague reference to the public sector pension issue in his budget address was much too modest. Following on the Federal and Ontario examples the proposed legislation represents extraordinary progress.

The draft legislation establishes a new jointly sponsored governance model for the Public Service Superannuation Plan (PSSP) with trustees split evenly between the employers and employees, including representation from non-unionized employees and retirees. Employee contributions will be matched by employer contributions with no requirement for extra lump sum funding from taxpayers if problems arise.

Benefit improvements will be allowed if actuarial valuations show favourable results, but only after extra provisions for future adversity have been set aside. If valuations are adverse the trustees will have to either increase contributions (equally between employers and employees) or adjust benefits or eligibility provisions so that the plan’s valuation is restored to a satisfactory level.

Employee and employer contributions will be capped at the level allowed by the Canadian Revenue Agency. As a practical matter the cap is likely to be lower because employee trustees will be hesitant to ask members for more contributions.

This is the right formula. Employees will continue to have one of the very best pension plans in the province and will be intimately involved in the challenges and opportunities to make the plan work well. Taxpayers will have something very close to cost certainty. The need for enormous “pension adjustment” costs in the public accounts will greatly diminish. (For excruciatingly complex reasons they may not go away entirely, but should average at zero in years after 2017).

The above comments assume that there will be no more ad hoc contributions on behalf of taxpayers (which the Minister calls “refinancing” while most others call it “bailout”) before the new regime comes into effect. And it would be better if future surpluses, which could arise if interest rates revert to historically normal levels, were first applied to repay taxpayers for the $536 million extra payment that the Minister chose to make two years ago. But in total this puts the plan on a sound footing for the future.

The same thinking must be applied to the Teachers Pension Plan for which the most recent valuation shows a deficit of $1.14 billion. The present governance regime leaves this very large and growing problem to be solved in the distant future by taxpayers and younger teachers.

The government has correctly identified the issue. Taxpayers look forward to an equally effective solution.


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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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