P.E.I. Pension Reform Shows the Way

Newly minted Finance Minister Diana Whalen has a golden opportunity, but it must be seized immediately.

On October 15th, Prince Edward Island joined a growing crowd. The Federal government and the governments of Alberta and New Brunswick have begun moving toward a more sustainable model for public sector pensions. Others are looking at options and can be expected to follow.

Most importantly, the NDP government in Nova Scotia showed the way with its reforms to the Public Sector Superannuation Plan (PSSP) for civil servants. As a result, taxpayers have a much better prospect for cost stability, while members of the plan still have pension benefits among the very best in the province.

In PEI’s case, the reform was comprehensive, encompassing civil servants, teachers, and health care workers. Benefits being paid today are not reduced. Neither are the benefits accrued to date by active members. But future accruals will occur more slowly, and the age for unreduced retirement benefits increases to at least 62. Indexing will only occur if the plan is in surplus.

Union leaders acknowledged the need for change, although they were not happy with the particulars. Nevertheless, they seem resigned to the outcome.

Nova Scotia has a lot left to do, most particularly with the Teachers’ Pension Plan. That plan’s 2012 report advised that the assets on hand were less than 72% of what is required to properly fund the benefits. By comparison, PEI’s pre-reform 83% funding looks quite well off. Of course it isn’t.

Beyond that, there is an enormous inequity in the Teachers’ Plan. Those who retired prior to August 1, 2006 receive inflation indexing regardless of the plan’s financial status. Those who retired after that date, and all active teachers, will only receive indexing if the plan’s finances are sound. Without reform, they are unlikely to ever receive it.

The consequence of this underfunding shows up in the province’s budgets as the “Pension Adjustment.” This is forecast to increase from $104 million in 2012-2013 to  $171 million in 2016-2017 and to continue increasing thereafter. The five year cost totals an enormous $668 million of which the Teachers’ plan is by far the largest source.

Reform is required to bring the plan into a healthy state, and to redress the imbalance between pre-August 2006 retirees and other participants.

In PEI and elsewhere, these reforms have typically included: No reduction in retiree benefits or benefits earned to date for active employees; indexing in future, conditional on the plan being in surplus; additional benefit accruals in future years will be a little slower. After such changes, the Teachers’ plan would still be among the most generous in Nova Scotia.

In due course, the same thinking is required of other public sector plans. Top on the list is the MLA plan which continues to be absurdly generous. The problem is both the size of the pensions and the lack of transparency. Premier Dexter’s pension exceeds $130,000 after less than sixteen years of service, which has been a surprise to many Nova Scotians. That is worth perhaps $2 million. Premier McNeil is well on his way to a similar package.

Politicians need to be showing leadership. Benefits earned from the beginning of the current legislature should be similar to those earned by civil servants, still a very attractive package.

There will never be a better time to make the necessary changes. The Official Opposition Progressive Conservatives campaigned on a commitment to reform the MLA plan which would set the stage for changes to the larger plans. They can hardly criticize this needed change while holding to their claim of fiscal prudence.

Former NDP Finance Ministers Graham Steele and Maureen MacDonald both acknowledged the need for the Teachers’ Plan to be reformed. They established the template with their reforms of the PSSP.

There is a remarkable opportunity for a non-partisan consensus. The next election is four years away, and there will be plenty of time for opposition parties to find more worthy reasons to differ from the government.

In its 2012 annual report, the Teachers’ Plan Trustee said: “Throughout 2012, we researched and considered various options that will improve the long-term sustainability of the Plan. In 2013, we will provide the Plan Sponsors with comprehensive recommendations that will include what we believe are necessary Plan amendments.”

That report will soon arrive on the new Minister’s desk, if it is not already there. Eliminating the Pension Adjustment will provide enormous savings that can be used to balance the budget, reduce taxes, improve health care, or save schools.

In addressing this problem the government will be following a cross-Canada trend.

It is hard to imagine a more opportune time for Minister Whalen to deal with this issue.


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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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