Canada s Retirement Security Crisis. National Union of Public and General Employees (NUPGE) Ottawa, Canada: January 2012

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2 Canada s Retirement Security Crisis National Union of Public and General Employees (NUPGE) Ottawa, Canada: January 2012

3 MYTH1 Most public sector employees have a gold-plated pension. No, in fact the far greater majority of workers joining public sector pension plans are paid nowhere near the full pension of 70% of their salary. For example, in order for most public sector workers to retire with full pension, they need to have been working in the public service for 35 years or more and paying into their pension plan for the same length of time. In fact, the current average rate of recruitment in the public sector is around 34 years of age, which means they will not have enough years of service to collect a full pension when they retire at age 65. For example, the average pension income of a retired government employee in Ontario is just over $20,000. And for those who are age 65 and over, this also includes the amount they receive from the Canada Pension Plan. This is not what one thinks of when you re talking about a gold-plated pension. The attack on public sector pensions may be wrapped in rhetoric about fat-cat public servants, but it is really an attack on the lowerpaid workers in the public sector. [ 1 ]

4 MYTH2 Taxpayers pay for the pensions of public sector workers. It s not quite accurate to say that public sector pension plans are funded solely by tax dollars. Pension benefits paid to retired employees, regardless of whether they work in the public or private sector, are really deferred salary that employees earned over their working careers. The fact is all contributions made to public service pension funds represent part of the employee s overall compensation package. Public sector employees directly contribute anywhere from 40% to 50% to the costs of their pension plan. Each payday, they contribute anywhere from 6% to 15% of their salary. This is in addition to the 4.95% contribution they also make to the Canada Pension Plan. Almost all public sector pension plans have increased the contribution levels employees must pay in recent years. The rest of the employee s contribution (between 50% and 60%) is paid by the employer. The employer s contribution to the plan is a component of the employee s total compensation package. It s not a gift from the taxpayers or a hand-out from the employer it s a part of the employee s pay, which is really salary to be used as retirement income. MYTH3 Yes, but the contributions paid by public sector employers are subsidized by taxpayers since they are paid out of government revenues. The fact is that Canadian taxpayers help subsidize retirement savings of all workers, whether they work in the private or public sector. [ 2 ]

5 Contributions made to all registered pension plans are tax deductible for both the employee and the employer and cost Canadian taxpayers around $10 billion a year. If we truly ended taxpayer underwriting of retirement income in this country, RRSPs would go down the tubes. The RRSP program will cost the federal government over $12 billion this fiscal year in foregone tax revenues even after collecting $2.6 billion in deferred taxes on RRSP withdrawals. The program costs provincial governments more than $5 billion, for a total bill of at least $17 billion per year. Keep in mind, RRSPs benefit higher income Canadians disproportionately. Roughly one in four Canadians contributing to an RRSP makes over $100,000 a year, although they account for just 2.7% of all tax filers. Ironically, these high-income investors are subsidized at a higher rate than are average Canadians. This small elite snapped up about 30% of the roughly $17 billion in tax deductions that Canadian taxpayers pay each year to subsidize this private investment. MYTH4 Taxpayers are on the hook to cover public sector pension fund deficits when the markets decline. Some right-wing think tanks, like the Fraser Institute and C.D. Howe Institute, would have us believe that public sector pension plans are badly underfunded and that such plans will become a crushing burden on taxpayers as the bulk of baby boomers retire. The huge deficit amounts they come up with, however, are based on paper-thin analysis and creative accounting techniques not used by the pension industry. This provides very fertile ground for half-truths and distortions. The fact is that defined benefit structure of most public sector pension plans are designed to withstand economic downturns because they pool everyone s risk. It s fairly certain that, over the very long time horizon these pension plans operate, there will be pension fund deficits and there will be pension fund surpluses. In fact, through- [ 3 ]

6 out the 1990s, public sector pension plans across the country ran up some fairly huge surpluses. The recession has had negative consequences for all pension plans including those DB plans in the public sector. However, pension portfolios are diversified so that when returns are down in the stock market they may be up in another market (e.g. real estate). These plans, however, are still more able to provide stable income to participants during a down cycle than other retirement income vehicles. The key point to remember is that public sector pension liabilities go a long way into the future. If you estimate the costs of all public sector pensions for decades into the future and then present it as a bill that has to be paid immediately, you end up with a frighteningly big number. But these figures do not mean very much. Because pensions are not paid out all at once they re paid out over decades as more money comes into the plan. Also keep in mind that the large public sector pension plans in British Columbia and Ontario are managed through joint trust arrangements that require plan members and employers to share equally in contribution rate increases that may occur because of funding shortfalls. MYTH5 It s not fair for public sector workers to have good pensions when most private sector workers do not. Everyone deserves a decent pension, including workers in private companies. Inequality isn t solved by dragging everyone down to the lowest common level. Isn t a far better solution to ensure all working people have access to an adequate pension plan rather than weaken and reduce quality pension plans? And the more decent pension plans there are, the easier it will be to obtain pension plans for those workers who currently do not have one. [ 4 ]

7 Providing adequate pensions means that fewer people will be receiving the guaranteed income supplement from the federal government in their retirement years, which will save taxpayer money in the long run. It s just not right that three quarters of all private sector employers do not pay into a pension plan for their employees, effectively condemning them to poverty in retirement and having to rely solely on inadequate public pension benefits to finance their retirement. MYTH6 We should be switching to Defined Contribution (DC) plans because they are cheaper. DC pension plans are not cheaper; they are actually more expensive since management fees for DC plans are generally higher, which result in significantly lower investment returns. DC plans do not provide a pension but, instead, a sum of money that upon retirement must be re-invested to provide a monthly income. And their value on retirement may be compromised if, for example, the markets are down that day. All the risk rests with the individual worker. DC plans also do not have an economy of scale; most DB plans have the cyclical advantage of paying out benefits from a long-term replenishing source of new members as well as a large pool of investment income. This is why it is unlikely that most workers can actually save enough in a DC plan to sustain themselves through to their nineties. Most of all, we end up with a country where our retired workers do not have a decent living wage and can therefore no longer contribute to their communities. The social costs of supporting a substantially larger elderly population will increase. [ 5 ]

8 MYTH7 The pension promise of a Defined Benefit (DB) plan is out-of-date: the money isn t there. DB pension plans have been the preferred plan design for over one hundred years, particularly in large government and corporate workforces. DB plans are most successful where there are economies of scale, i.e. a large workforce and a large investment pool. So, the more small workplaces there are, the more difficult it is to negotiate DB pension plans. In the last couple of years, several Pension Commissions across the country have recommended that the large public sector plans offer pension services to small pension plans to save administrative costs and high investment management fees. Rather than say pensions are not possible anymore, these Commissions argued that we should use the expertise of our large public sector pension plans to provide contributory pension plans for workers in smaller workplaces in the public and private sectors. Only possible conclusion Defined Benefit (DB) pension plans are both affordable and sustainable. [ 6 ]