Teacher Pensions

More than a year ago, Finance Minster Steele correctly observed that investment returns would not by themselves fix the problem in the Teachers Pension Plan. In fact, the Plan’s position is more than $500 million worse than it was a year ago.

The deficit is $1.655 billion (more than $125,000 per teacher) even though governments have over the years made almost as much in extra payments to the Teachers Plan as the $536 million gratuitous bailout provided two years ago to the Public Service Superannuation Plan. The Teachers Plan is only 71% funded and there is now even less chance of this problem being fixed by investment results.

Further delay will only add to the burden in the future. This will ultimately be heaped on future taxpayers and younger teachers who will find themselves paying much larger contributions for smaller benefits. A teacher retiring this year may have had a salary of only $10,000 when she started and may have as many future retirement years as past working years. A plan where teachers can expect to receive more dollars in retirement than during their working career is simply not sustainable.

Government’s effective response to the PSSP challenge points the way forward for the Teachers Plan. A new governance model is needed under which:

1)The only funding responsibility of government is to match member contributions up to the Canada Revenue Agency maximum, and

2)The jointly appointed trustees are required to bring the plan into a break even position by a combination of funding and benefit adjustments.

This model is not something that will be achieved by negotiation. It must be implemented by legislation, as has been done for the PSSP.

Getting to balance will not be easy. It will require some combination of restrictions on inflation adjustment, gradual increases to the minimum age to retire with unreduced pension, and increased contributions.

The trustees need to be given time to consider alternatives. If they cannot reach agreement the initial choice may need to be made by binding arbitration (currently in vogue), but always within the constraint of the two conditions listed above.

If investment results exceed expectations and interest rates rise the trustees will have the enjoyable experience of  providing improvements to members.

As with the civil servants this will still leave the teachers with one of the very best pension plans in the province.

The government should have dealt with this as part of the 2010 contract negotiations. As has been shown further delay just makes things worse. The government should follow its own lead as well as those of Ontario and Canada. The time to act is now.


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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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