Courage is needed to tackle far-too-generous pensions

January 10, 2012
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Montreal Gazette – By BILL TUFTS and LEE FAIRBANKS,

January 7, 2012

The Gazette has told its readers that one of the biggest fiscal challenges facing Quebec in the new year is the high cost of municipal employees’ pensions (“It’s time to take action on municipal pensions,” Editorial, Dec. 30). The cost of Montreal’s pension fund is eating the city alive. It is driving up taxes, increasing debt levels and causing drastic cuts in the services that are paid for by tax dollars.

This situation cannot continue, and Mayor Gérald Tremblay and other local mayors are taking bold action by putting the issue front and centre. But will they have the courage to do what is necessary to fix the problem?

The annual pension-fund contribution by Montreal has ballooned from $130 million in 2005 to $609 million in 2012. To date much of this 450-per-cent increase has been financed by borrowing. With 28 cents of every dollar now paying for debt and pensions at the city, Montreal has hit the wall.

There are many reasons for the seriousness of the pension problem. Pensions offered to employees are too generous; the wages they are based on are skyrocketing; and the pension funds are counting on stock markets and interest rates that cannot produce the returns needed to keep them solvent.

Pensions were created for a noble reason: to provide employees a reasonable level of income in their golden years. But they have morphed into something much more generous. They are creating extraordinary wealth for the people who are the employees of the city’s taxpayers. Based on standard investment definitions, most employees with fully qualified pensions retire as millionaires. The average taxpayers paying for these windfalls will see nothing close to the wealth these pensions generate.

Police officers receive a pension at age 53 valued at $59,000 a year. A private-sector taxpayer would need a lump sum in excess of $1 million to buy such a guaranteed income stream from an annuity. But the average Canadian taxpayer only has $60,000 socked away in RRSPs by age 65. This will be gone in a few years.

The challenge for the mayor and other city officials is to figure out what represents a fair pension for city employees.

Currently the pensions are designed to replace 70 per cent of the employee’s average salary in the final few years of his or her employment. This means most city employees will have more disposable income in retirement than they had over the majority of their working career.

An analysis by one of Canada’s leading pension experts, Fred Vettese of Morneau Sobeco, found that a pension of 50 per cent of salary would provide an employee a replacement income at the same level as his or her working income. This is because expenses fall for retirees. They pay less in income tax; because they are no longer working, costs such as transportation and clothing are less. But the most dramatic expense reduction is housing: almost 85 per cent of retirees have paid off the mortgage on their home.

As a reminder of what the future might bring, Montrealarea mayors need only look to the many U.S. cities that are on the edge of insolvency. Cities in California have had to lay off up to half their police and fire departments. Cities turn streetlights off at midnight because they can’t afford the electricity bill.

Mayor Tremblay has taken the diplomatic stand that existing benefits will not be clawed back. The city of Saint John, N.B., did just that. By ending the indexing of its employees’ pensions, it saved taxpayers $75 million.

Montreal politicians need to have courage and proceed with long-term solutions to the pension crisis. As Stephen Chase, the deputy mayor of Saint John, said: “Without changes, it will be pretty nasty. You’ll either have a tax rate that people just won’t be able to afford, or it’s going to come out of services. You’ll have an appalling level of police and fire services. It’ll be beyond the notion that you can always pare down services and make some more efficient. It will go well beyond that.”

Co-authors of Pension Ponzi: How Public Sector Unions are Bankrupting Canada’s Health Care, Education and Your Retirement (Wiley & Sons Publishing) and they operate Fair Pensions For All Bill Lee (fairpensionsforall.net).

 

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