In our work we have uncovered that it is essential to explain the unfairness in the current pension system in order for people to get the message and activate the sense of urgency required for pension reform. This unfairness exists at a variety of levels and it is manifested in a variety of ways.
There are three levels of unfairness that best describe the current system.
- Private Sector / Public Sector – Unfairness between the public sector employee with a DB (defined benefit) pension and the private sector employee with a DC (defined contribution) pension or an RRSP. Many public sector employees retire up to a decade earlier than the private sector workforce.
- Generational Unfairness between the current generation of retirees and the next generations. Many of today’s employees are paying large pension contributions to go to fund the pensions of those already retired who did not make sufficient contributions.
- Unfairness Within the System - There is also unfairness in the system between workers in the public sector system. Why should a police officer retire at age 53 and the rest of the workforce at age 58?
Let me highlight a few of the examples of unfairness:
- The average public sector employee is retiring at age 58 on a guaranteed paycheque for life. Many will receive a million dollar payout over the course of their retirement. The average Canadian retires at age 65 with a $60,000 RRSP.
- The average police or fire officer retires at age 53 while the rest of the public sector retires at age 58. Recently the federal government raised the age of eligibility for Old Age Security to 67.
- The federal government increased the penalties for Canadians to receive their Canada Pension Plan (CPP) before age 65 while public sector employees access a Bridge Benefit from the first day of retirement. The Bridge Benefit is the equivalent to a full CPP
- Some pension contributions for government employees in the province (OMERS) are now up to 15.9%. It is estimated that up to 2/3 of this contribution is going to pay for the existing shortfalls in their plans. These shortfalls were accumulated by current retirees who had substantially lower lifetime contributions levels and at times took contributions holidays.
- There are abuses in the system as well. For example, “double dipping”. Many employees enter back into the public sector workforce after retirement receiving both their pensions and pay cheques. There are also pension buy backs and pension portability between different levels of government.
- It is estimated that there are some 11,000 retirees at the provincial level getting a pension in excess of $100,000 a year. Some are going to receive lifetime pensions in excess of 4, 5 or 6 million dollars.
- The Premier of the province recently retired and got a $313,000 severance cheque. There are hundreds of provincial employees who will receive this amount from an indexed pension.
- Canadians and their employers currently pay for 9.9% of income to get the CPP benefit which is 25% of income. Many public sector employees pay less than 10% into their pension to get a 70% pension for life at retirement. The math does not work; how can an employee pay say 10% of income for 30 years into their pension and then expect to collect 70% of income for 30 years?
- A teacher, 20 years ago, received a pension of $20,000 a year. A teacher today gets a pension averaging $50,000 or $60,000. What makes a teacher retiring today so much more valuable to society than a teacher 20 years ago?
- It is important to understand the correlation between the pension crisis and the skyrocketing compensation levels in the public sector. Today in Canada we have the highest paid teachers, police officers and university professors in the world. Many retirees from these positions will get more in pension income than other working professionals in the OECD. It should be no surprise that when we also offer them a 70% pension, the system cannot afford it.
We have identified in our work only three ways to provide an equitable solution.
1. Ensure that employees pay the full cost of the pension promise. We see that the contributions into the plans today are far less than what they actually cost. One example is OMERS where last year employees contributed $2.4 billion into the plan but the plan deficit increased by another $2.8 billion. This happened despite the fact contributions are well over 10% of income.
2. Allow employees to take responsibility for their own pensions. Many unions tell us that the pensions system is “fine” and that there is no problem, yet the taxpayer is on the hook for substantial shortfalls. The fairest way to deal with this situation is to give the employees their annual contributions and allow them to decide how to spend the money.
3. It is clear that the current promise made to active employees today is not sustainable. Changes need to be made even for current employees. Some of the other less effective options include:
a. Career average calculations for benefits rather than final three of five year final salary
b. Reduce the replacement income levels from 70% to 50%
c. Start retirement at a later age