The Teachers’ Plan Deficit Needs to be Addressed

The government and the Nova Scotia Teachers Union are doing a disservice to taxpayers and today’s teachers, who are paying for the inadequacy of past contributions by and for the teachers that retired long ago.

In contrast, the public-sector pension plans for civil service and health care workers are well-funded and can be expected to keep their promises to pensioners over the long term.

There are three times as many active members as pensioners in the plan for health care workers. Their plan has a substantial surplus. Benefit improvements are cautiously implemented.

The public service plan has slightly more workers than retirees and has a small surplus. The plan structure allows for benefits to be constrained in the event of poor investment returns, so the risk of costs spiraling out of control is minimized.

It is an attractive arrangement for employers and employees, so much so that other plan sponsors are choosing to join, some of them changing back from defined contribution to defined benefit.

The list includes Acadia University, Cape Breton University, two smaller universities, several municipalities, and other public sector organizations.

The status of the Teachers’ Pension Plan is dramatically different. No organization would voluntarily join it.

In the two decades ending in 2014, teachers, matched by taxpayers, contributed 8.3% of pay up to the Canada Pension plan maximum and 9.9% on the excess. At the end of that period the plan had built up a deficit of $1.4 billion, which has remained more or less level since then.

Retirees already outnumber active teachers, a ratio which will increase relentlessly in future years. That means that the financial burden of the plan deficit is falling entirely on today’s taxpayers and teachers.

They have seen their contributions go up by 3% of salary, taking $170 per month of income away from a teacher making $70,000 per year. This happens while the value of benefits those teachers are collectively earning is $77 million less than the combined teacher and taxpayer contributions.

The interest on the $1.4 billion deficit in 2017 was $87 million, more than the amount of excess contributions. The problem is going to get worse.

The plan’s governance agreement called for the union and the government to address the deficit in 2013. What they chose was both inadequate and unfair.

Those who retired before August 1st, 2006 have been receiving increases equal to inflation (as measured by CPI) less 1%, regardless of the plan’s health. Those retiring after that date, and all future retirees, will only receive increases if the plan’s finances become much healthier. As things presently stand that probably means never.

There is nothing secret about the problem. It was highlighted by the Auditor General last fall. In the recently released 2017 annual report, the chair of the Board of Teachers’ Pension Plan Trustee said, “While there is no immediate risk that the Plan will be unable to meet its ongoing pension obligations, it is important to note that the Plan’s financial position could deteriorate going forward unless the Nova Scotia Teachers’ Union and the Province together take very significant steps.”

The Trustee has been constantly warning the government and the union about the problem and has, in private, made recommendations about what a solution might look like.

An adequate response might look something like:

  1. For those who retired before Aug 1, 2006, change the indexing provision to be the same as that for the subsequent retirees. In the short term this would be to their disadvantage but might ultimately result in bigger increases once the plan becomes sound.
  2. At the moment a teacher who is 55 with 30 years’ service can retire with unreduced pension benefit. This is called the rule of 85. That teacher is likely to receive that pension for more than the 30 years she or he worked. This is a very expensive benefit. Increase the “rule” by 1 each calendar year until it reaches 90.
  3. The province must make a contribution to the plan equal in value to the two measures described above. That will be a substantial sum, but is only a reflection of a liability that is already there. Taxpayers are going to have to pay their share sooner or later.

The province and the union have done a disservice by not dealing with this issue before now. It’s time.

Meanwhile, other public-sector organizations with smaller pension plans will be able to achieve efficiencies and improved cost certainty by joining the public sector plan, as have a growing list of municipalities and universities.


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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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