A Weak Response to the Teachers’ Pensions Plan Deficit

Posted June 20, 2014

Finance Minister Whalen has announced changes to address the $1.52 billion deficit in the Teachers’ Pension plan. They represent some progress but do not go nearly far enough. Even worse, they have enlarged the inequities between generations of teachers.

A 2005 agreement between government and the Nova Scotia Teachers Union (NSTU) requires the cost of any deficit reduction actions to be shared equally by taxpayers and plan beneficiaries, through either contribution increases or benefit amendments.

The agreement specifies a goal of achieving funding levels of 95% by the end of 2015 (about $1.2 billion better than today) and the trustee will have provided a recommendation on how to get there. It is clear that the trustee’s recommendation was not followed. The new target is to reach a 90% funding status in 10 years.

Prior to the changes the deficit was projected to grow by $72 million this year and gradually increasing amounts after that. This occurred even though the contributions of today’s teachers, matched by the province, were already $24 million more than the expected cost of their future benefits.

The deficit arose because contributions for today’s retirees were much less than the value of their benefits. This is especially true for those who retired prior to Aug 1, 2006 (“early retirees”) who receive indexing at 1% less than the annual increase in Consumer Price Index, whether or not the plan is healthy. Those who retire after (“later retirees”) only receive indexing if the plan is much healthier than it is today.

The plan thus has a two-tier benefit structure with those whose contributions were inadequate receiving better benefits than today’s teachers who are already over-paying.

One might reasonably have guessed that the first item on the action list would be the inflation indexing of the early retirees. Making this conditional on plan health, as happens with everyone else in the plan, would be worth $350 million and would allow the plan to reach a 90% funding status much more quickly. That would improve future inflation indexing prospects for everyone.

That is not the plan that has been presented. Rather the intention is to further increase the contributions of today’s teachers by 3% of salary over three years. In addition the disability benefit will be moved to the insurance program from the pension plan, adding further to teacher costs. The total of about $25 million together with matching amounts from taxpayers will reduce the annual shortfall by about $50 million.

This is still not enough to eliminate it. Yet the government projects the deficit to reduce to 10% of liabilities over the next ten years. The improvement occurs because taxpayers will be making further contributions. Each year that the later retirees fail to receive indexing an amount is paid into the fund by taxpayers. This will cost taxpayers about $150 million over ten years.

The same train of thought resulted in several prior extra payments by taxpayers, most recently $144 million in 2005.

This arrangement is falsely described as “sharing”. To understand how sharing should work we need only look at the format now in effect for civil servants. There the employees and employers match annual contributions, with a ceiling on how high they can go. If the contributions are inadequate the benefits are adjusted. This still leaves civil servants with a pension plan among the very best in Nova Scotia.

Changes to this type of plan have been implemented in PEI and New Brunswick and are now before the legislature in Quebec.

In Nova Scotia the pain is being distributed unequally. Best off are the early retirees whose inadequate contributions contributed most to the problem. This of course is not their fault, but the vast majority of Nova Scotians who do not have a government defined benefit plan are forced to deal with similar problems on their own.

Next best are the later retirees. They have no near term prospect of inflationary increases but there is no threat to their basic benefit.

Today’s active teachers, particularly the younger ones, are faced with paying even more for inflation indexing benefits that they may never receive. Although they represent 30% of the plan’s liability they are absorbing 100% of the member’s cost.

Worse off of all are the taxpayers who are not beneficiaries of these plans. Over the next ten years they will make extra contributions to provide teachers a plan even better than the civil servants. Meanwhile many taxpayers will work well past age 65 and still struggle to have a secure retirement.

The new funding does not meet the goals agreed to by the union and government in 2005. Instead of fixing the problem as promised they have decided to weaken the goals, targeting a lower funding level at a much later date. The plan will be have no cushion to cover future adverse markets.

The announced changes are better than the negligent inaction of the past decade, but they are a disservice to taxpayers and to today’s teachers.

NSTU president was asked why she agreed to the arrangement. Here is: her reply:

“This is a complex subject, and decisions are made jointly, in partnership with Government. Our goal was to have a workable solution acceptable to all. We believe this was the best option for our active members while providing a mechanism that will help to ensure the long-term viability of the pension plan.”

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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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  • All very valid observations but I cannot shed many tears over the Teachers’ pension situation because as far as I’m concerned,apart from Elected Politicians,they have one of the sweetest pension arrangements around.

    bob mackenzie | June 20, 2014

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