Public-sector pensions a Canada-wide problem

November 12, 2011

Montreal Gazette, Moncton News,

March 4, 2011

Montreal not alone; ‘Taxpayers are starting to demand changes’

By DAVID JOHNSTON, The Gazette March 4, 2011

The pension-plan problems of Montreal Island municipalities reflect Canada-wide affordability issues with such public-sector plans that need urgent fixing, a Canadian pension reform advocate says.

Taxpayers can’t afford current pension entitlements for public-sector workers, and governments need to pass special laws to reduce future accruals, says Bill Tufts, a Toronto human-resources consultant.

But to be fair to public-sector workers, says Tufts, who is writing a book on the public-sector pension challenge, Canadians must respect the vested entitlements that the workers have accrued to date.

Tufts is the founder and curator of a national blog titled Fair Pensions for All that is one of North America’s leading aggregators of public-sector pension news in the developed world.

Among other things, he has been following recent political developments in the state of Wisconsin, where the legislature has been the target of demonstrations by public sector workers fighting proposed remuneration rollbacks.

Tufts says the recent revelation by Westmount Mayor Peter Trent that he and Montreal Mayor Gérald Tremblay plan to go to Quebec City next month to ask Quebec for help to curtail municipal pension benefits is a sign that the issue is percolating north of the border, too.

“Taxpayers are starting to demand changes,” Tufts said yesterday. “They see the injustice.”

Two-thirds of Canadians don’t have private pension plans of their own and resent paying high taxes to support rich public-sector pension plans that are damaging government balance sheets, he says.

Last week, Trent told The Gazette that he and Tremblay want Quebec to pass a special law to cut future pension costs. Trent said current municipal pensioners would not be affected, nor would current municipal employees see any retroactive cuts; however, Trent said current and future employees would see some sort of rollback from what current entitlements provide.

Tufts said the simplest way to proceed would be to introduce special laws that would impose lower future accrual rates on public-sector pensions. Generally, accrual rates in the public sector are about two per cent per annum. That is to say, workers accrue future pension earnings at a rate of two per cent of salary times number of years worked. These so called defined-benefit pensions are guaranteed by governments, no matter their deficits or debts.

“We see a proposal whereby the accrual rates would be cut in half, so that rather than having a two-percent accrual rate, the public sector would see a one-per-cent accrual rate,” Tufts said.

“Governments would continue to make the same contributions – and any excess over and above that one-per-cent accrual would go into a defined-contribution plan” – a plan where taxpayers and workers should share the risk of future shortfalls.

Next week, Los Angeles will vote on a ballot measure to trim pensions of police officers and firefighters. But public-sector workers are fighting back, too, and not just in Wisconsin. In Toronto, senior executives of Toronto Hydro are suing the OMERS pension fund, saying their bonuses should treated like salary to calculate their annual accruals.

Tufts said wages in the public sector have been rising two to three times faster than the inflation rate over the past decade, and this is creating new pension inflation for taxpayers – since accruals are based mainly on the average of one’s last three years of earnings. In the 1980s, he said, pensions were calculated more on the basis of lifetime average earnings.

In 2007, before the economic downturn, U.S. investment guru Warren Buffett warned: “Whatever pension-cost surprises are in store for shareholders down the road, these jolts will be surpassed many times over by those experienced by taxpayers. Public-pension promises are huge and, in many cases, funding is woefully inadequate. Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that problems will only become apparent long after these officials have departed.”



Leave a Reply