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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