Op-ed – Cities must dig deeper for effective pension reforms

November 20, 2011
By

St John, Telegraph Journal

November 17th, 2011

It is disappointing that Saint John is presenting pension options to city taxpayers that seem so inadequate. In my opinion, the pension fiasco has not been properly addressed by this and numerous previous councils.

The city has been spending a lot of time on this issue and it appears to take up most of the work day of many employees at City Hall. Taxpayers should not be misled that anything substantial has been proposed with the new pension options put forth. Much of what has been brought forth is merely tinkering around the edges; it looks pretty but does nothing to reduce costs. The truly important reform measures available were glossed over, minimized and excluded. The only significant cost savings measure so far has been de-indexing of retiree pensions, and this is a tenuous move that may end up costing the city millions in legal expenses.

The first question I would ask is, how many representatives are on the pension board who do not have a conflict of interest or who represent taxpayer interests? I have not seen the make-up of the board in Saint John, but this is a problem that recently was recognized and addressed in California pension reform.

Some facts are coming out as a result of the pension discussions. The more that comes out ,the more it appears that real changes urgently need to be made to the plan. One problem for the plan has been disability claims. This process needs to be eliminated and handed over to a claims management organization and disability claims eliminated from the pension plan.

Another frightening discovery is that the pension is a stacked CPP plan. This is a rarity and adds a huge bonus and cost onto pensions. The plan should be integrated with CPP. The median pension currently is about $30,000, and with CPP added on top, the pension value rises to $42,000. A retiree who retires at age 55 at this level will receive more than $1.2 million in retirement; indexed, it goes to $1.7 million, including CPP. There are more than 36 retirees earning in excess of $55,000, and when you add in CPP, this rises to $67,000 a year, for many starting as early as age 55 – almost a $2 million pension lottery.

StatsCan reports that a single-parent family in Saint John has a median income of $31,720. Some estimates report that one third of all Saint John residents live in poverty. The average Canadian retires with a $60,000 RRSP at age 65, an amount gone in a few short years.

It is no wonder that politicians from the provincial level are reluctant to wade into this situation. The city fathers are laying the blame on the province (Superintendent of Pensions) because she would not accept their earlier proposed fix. The fact she has allowed an anticipated rate of return of 6.5 per cent for this year baffles me, as that is not realistic. Pensioners are lucky to get a five-year fixed rate investment at 3.9 per cent from financial institutions that work on very little spread. Where do they think 6 or 6.5 per cent returns are going to come from? We all wish we could be guaranteed 6 per cent on our RRSP, like the city taxpayers guarantee for city workers.

The city is getting a big bonus from the province by being able to include an investment rate at 6 per cent. It is estimated that moving from 6.5 per cent will increase the deficit by $32 million. The city says it is considering a new investment strategy to move to safer investments. CD Howe Institute reports that a rate of 3.15 per cent is accurate for estimating these liabilities. Adopting this rate would increase the shortfall by another $160 million, putting the total shortfall for the pension in excess of $300 million.

The options available for the pension plan have been discussed many times. The most relevant changes include moving the plan to a defined contribution pension, raising the retirement age for all employees to 65 and increasing employee contributions to at least half of the true cost.

Past Governor Schwarzenegger of California pointed out that government workers are a protected class. He complained that governments have become of the employees, by the employees and for the employees. Don’t expect serious pension changes when the people benefiting so generously from the current system are making the changes.

One point I think the city taxpayers are missing is that pension reform is dangerous to the protected class. You might think that this is a simple situation to deal with in Saint John, but forget that it would set a dangerous precedent for the other 3.2 million government employees who are part of the protected class. Unions across the country are watching very closely and will guard against any rot that may creep into the system. This is a giant poker game, and the cards are stacked against Saint John taxpayers.

At this point, it will take a miracle or real changes to save the plan.

Bill Tufts is founder of Fair Pensions For All and the co-author with Lee Fairbanks of a new book called Pension Ponzi.

 

One Response to Op-ed – Cities must dig deeper for effective pension reforms

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