Pensions have become to expensive - We all knew it. We all know that changes had to come.
Canadian public pensions a fat target for Conservative government | Full Comment | National Post
The Harper government is said to be considering a restructuring of federal civil service pensions in the upcoming budget — reforms that could save taxpayers hundreds of millions of dollars a year.
Specifics are thin, and any reforms would face legal and legislative barriers. But sources say there are ways around these obstacles and there is a feeling in the senior ranks of the Conservative government that the time is right to target relatively lucrative public sector pensions, where the average pension amounts to $25,000 a year and the average age of retirement is 58, compared to 62 in the general labour force.
Ian Lee, assistant professor at Sprott Business School at Carelton University, advised Finance Minister Jim Flaherty at his strategic retreat last summer to raise the minimum pensionable age for public servants to 65 and move to equal employee/employer contribution rates (public servants currently contribute 35%, a rate that is set to rise to 40% next year. The norm in the private sector is for employers to match the retirement contributions of employees).
Other advocates of reform, such as William Tufts and Lee Fairbanks at the Fair Pensions for All organization, have called for the government to base pensions on an average of career earnings, rather than the current practice in the public sector of the highest three to five years’ income. Mr. Tufts and Mr. Fairbanks estimate the move to a career-average in the federal pension plan would save $290,000 over 30 years for year for each of the 317,088 active employees. They also calculated that a move to equal employee/employer contribution rates would have saved taxpayers $645-million in 2010.
National Post editorial board: Paying pensions to a greying nation
Lorne Gunter: Civil service pensions too rich to sustain
Hugh MacIntyre: Increasing public pensions only works in a world of fantasy
The arguments for reform are convincing. The federal plan is $227-billion in deficit, according to a recent CD Howe report, or a mere $150-billion, if you believe the government’s numbers, thanks to the erosion of asset values during the recession.
In addition, there are around 9 million Canadians who work in small businesses who have no pension plans. “It is highly unjust they pay taxes to, inter alia, provide very generous pension plans to federal public servants,” said Mr. Lee.
The case for the defence from the unions is that public sector employees generally accept lower salaries than their private sector counterparts, in exchange for better retirement security. This line is undermined by a Canadian Union of Public Employees analysis last month that showed that average pay in the public sector is comparable to similar jobs in the private sector.
But Jack Mintz, director of the School of Public Policy at University of Calgary, pointed out that the unions have a strong case, if the government amends existing contracts unilaterally. “Certainly if the government changes the rules of the game in the middle of contracts, even if there are no legal barriers, it will raise some issues and could cost more in wage compensation down the road because it will be less attractive [to work in the public service] if the pension benefits are lower,” he said.
The solution in the private sector has been to phase out lucrative defined benefit pensions, which specify the payout retirees enjoy, in favour of defined contribution plans, which specify the amount employers must pitch in but not the final payout, for all new employees. Royal Bank of Canada was the latest large corporation to move to a defined contribution plan for new hires this month.
Tony Clement, the Treasury Board President, has been silent on the issue of pensions to the 561,000 members covered by the public sector pension plan but unions have been bracing for cuts to wages and benefits for the past two budgets. Mr. Clement’s predecessor, Stockwell Day, signalled the government’s intent when he said Canadians expect the public service to make “considerable sacrifices” in the fight against the deficit.
The most simple move would be to up employee contribution levels, which are governed by regulation and would not require a vote of Parliament. Moves to change the retirement age or move to a career average pensions would likely require new legislation.
Whatever Ottawa does to reduce the $2.8-billion it contributes toward the public service pension plan, it can expect to face concerted opposition from unions that have proven their tenacity on the issue by sustaining a court action to recover $30-billion in pension surplus they claim was illegally snatched by the Liberal government and used to pay down the national debt in 1999.
The government’s calculation is likely to be: is there any sympathy for the union’s position among the two-thirds of workers without a workplace pension? If handled skillfully — for example, by simultaneously raising the minimum age at which MPs can collect their pension — the answer will surely be no.