The harm inflicted by public-sector unions

December 11, 2011
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Larry MacDonald  | November 22, 2011  – Canadian Business

The programs and policies of the welfare state begin with good intentions but ultimately prove naïve. What happens in the real world is that organized groups end up bending the sovereign power of government toward transferring resources to themselves, away from the less organized. One case I’ve written about is the “supply management” boards in certain farming sectors.

A new book, Pension Ponzi: How Public-sector Unions are Bankrupting Canada’s Health Care, Education and Your Retirement, highlights another instance. As you can guess from the title, the culprit in this instance is public-sector unions.

The authors, Bill Tufts (a pension consultant who blogs at Fair Pensions for All) and Lee Fairbanks (a journalist and author), believe Canadians are suffering from a bad case of fiscal illusion. They seem to be “blissfully” unaware of the huge and growing financial liability implied by public-sector debt loads.

At the moment, the burden of paying it back is not felt much in Canada because fiscal needs can be met by borrowing more. But bond markets aren’t bottomless. Shove too much debt down their throats and they choke (as in Europe currently).

The bill will come due for Candians in the form of substantially higher taxes, reduced benefits and eroded purchasing power (due to higher inflation). How many Canadians are factoring this risk into their retirement plans? Not many, by the looks of it: virtually all the financial plans I’ve seen project current tax rates and government benefits well into the future (plus currently low inflation rates). And too few people seem to be fully cognizant of how their children will be affected.

Tufts and Fairbanks put the blame squarely on the politicians who caved in to the powerful public-sector unions. The 20% of Canadians belonging to them have won “bulletproof job security,” salaries better than the private sector, and “gold-plated” defined-benefit pensions that are inflation indexed. The cost of all those civil servants, politicians, teachers, firefighters, police officers and armed forces explains much of the overspending and indebtedness of the government sector, in the authors’ view.

The other 80% of Canadians—most with modest wages, little job security and no true pension—get to foot the bill. Even worse, the cost of carrying these well organized groups is very much understated: nearly all the public-sector pension plans are underfunded by hundreds of billions of dollars and taxpayers are on the hook for the difference. The highly organized groups in this context have indeed engineered a massive transfer from the less fortunate to themselves. It’s a Ponzi-like scheme that can’t last, declare Tufts and Fairbanks.

This is a book that needs to be read and discussed, and the sooner the better. Because it’s issues like these that must become central to elections if rational solutions are to be adopted before economic and financial crises compel hasty, inequitable and severely traumatic ones.

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