Opinion: Fundamental changes are needed to municipal pensions
By Bill Tufts, Special to The Montreal Gazette
August 19, 2014
MONTREAL â€” Bill 3 hearings begin Wednesday (Aug. 20), and the municipal-pension protests can be expected to continue.
However, an analysis of the pension situation shows that the current system just is not feasible.
Police are concerned that as a result of Bill 3, they would be will be forced to pay $6,000 a year into the pensions, more than double what they pay now, based on an average salary of $75,000. Thatâ€™s because police officers contribute 24 per cent of annual contributions to their plan (the city the other 76 per cent), and Bill 3 would require a 50-50 split across the board for municipal workers.
Over a 30-year career, a $6,000 annual contribution adds up to $180,000. But in return, upon retirement, these officers would be due for an average pension of $59,000 â€” or for an average 30 years of drawing benefits, a total of almost $1.8 million.
True, promises have been made to employees up until now â€” and they must be respected.
That being said, isnâ€™t it more than reasonable that an employee should contribute $6,000 a year for 30 years to collect $59,000 for 30 years?
In fact, the changes that are being proposed under Bill 3 are woefully inadequate. Only a move to a defined-contribution plan will save Quebec municipalities from financial hardship.
People who live in cities rely on the municipal services they get; however, taxpayers have seen and will continue to see a decline in the quality of their services as pension obligations have grown and will grow. Montreal is no exception.
As more money is diverted from services into pensions, to prevent overall tax increases, there is less money to fund pothole repairs and repair aging infrastructure. Sooner or later, this prompts corporations to move elsewhere, to avoid inevitable deterioration and/or higher taxes.
It is ironic that part of the argument by city unions â€” not just in Quebec, but elsewhere in Canada, too â€” in support of the pension status quo are claims that rich pensions are needed to attract quality employees. Letâ€™s call a spade a spade. This has nothing to do with attracting future employees, and has everything to do with padding the pockets of current ones.
The current pension system will not attract quality employees; in fact, it will do the opposite and push good young employees away, ones who see that they will be picking up a substantial portion of unfunded pension costs.
These smart young workers will see older retirees from a given cityâ€™s workforce, in some cases, living on pensions worth more than what they are making while working, after payroll deductions.
The cost of these plans are skyrocketing. In Ontario, where I live, the pension plans for police and firefighters now cost 31 per cent of payroll. Despite these high contributions, the plans remain significantly underfunded. The current generation of workers cannot afford to properly fund their own pensions and pick up the additional burden of those who have gone before and are retired already.
And so rather than defined-benefit plans, which is what most cities have (plans that spell out and promise to pay out a defined set amount upon retirement), a much better option would be defined-contribution plans. Under a defined-contribution plan, the employees and employer agree to spell out a defined annual contribution into a pension plan; benefits later paid out are a function of how well that plan performs in terms of investment returns. For taxpayers, this would mean they would not be forever on the hook for more shortfalls.
Taxpayers have something else to look out for: Politicians have a conflict of interest when it comes to finding proper solutions to the pension crisis. Politicians have a vested interest in younger employees and taxpayers keeping the current plans afloat, as they are depending themselves on a significant portion of their retirement wealth coming from these very same pensions. They try to create an illusion that the minor evolutionary changes they are making are significant; yet in reality, the changes suggested so far, as in Bill 3, are woefully insufficient. A permanent fix requires major revolutionary changes.
In the context of the coming demographic tsunami that will be hitting Quebec, pensions are the first of many waves to come. Unions like to talk about fairness, and that they are fighting for the little guy. And politicians will claim to be protecting taxpayers, and in many instances this is not the case.
It is time for taxpayers to speak out, and demand fairness in the system.
Bill Tufts is founder of Fair Pensions for All, a group devoted to reform of public-service employee pensions (fairpensionsforall.net). He is an employee-benefits consultant who lives in Hamilton, Ont.