Two rather contentious reports on public sector pensions were published recently—one by the Canadian Taxpayers Federation (CTF) and one by the Canadian Federation of Independent Business (CFIB) . While they obviously constitute an attack on public sector pensions, they also bring attention to an apparently untenable position held by the federal government.
The CTF just released data that highlights the large gap between the pensions being provided to government workers versus the paltry amounts given to almost everyone else. The CTF called for an immediate freeze on these public sector plans and a conversion to defined contribution arrangements. A week earlier, the CFIB released a report in which they likened public sector pensions to a runaway train. The CFIB also suggested a conversion to DC for public sector plans.
I can see the public sector unions responding by claiming that the CTF and the CFIB have missed the mark and that the answer to inadequate private pensions is not the dismantling of public sector plans but rather improve private sector pensions. The unions would further argue that the public sector pensions are appropriate and only seem generous relative to the inadequate private sector pensions.
Even if I was keen to enter the fray, and I’m not, this is too large and complex a topic to address in one article. It does raise an issue, however, that should be addressed.
The double standard
Six months earlier, the federal budget announced that by 2029 the commencement age for OAS and GIS benefits would be pushed back to 67. The main reason cited for this change was an expected decline in the ratio of workers to seniors from the present 4:1 to about 2:1 by 2030.
It is time to connect a few dots. The federal government feels strongly that we cannot afford to allow Canadian citizens to retire at 65 anymore. The government would contend that we need them to keep working to shore up the coming shortfall in the labour force. They would further argue that the fact people are living longer makes working until age 67 quite a reasonable proposition in any event.
Fair enough. If all this is true, then how does the federal government justify sponsoring pension plans in which workers can retire as early as age 55 and 30 years of service with an unreduced pension? How can the arguments for later retirement for Canadian citizens at large coexist with generous early retirement incentives for public sector employees?
Early retirement: What’s the big deal?
One might wonder if early retirement benefits are a big deal. They are. Statistics Canada indicates that the assets in all public sector pension plans combined total $840 billion. If these plans were fully funded (and they are not), then the liabilities would also total $840 billion. A back of the envelope calculation shows that 25% of the pension liability for a typical active member in a typical public sector plan relates to early retirement subsidies. If there were no early retirement subsidies, a simplistic calculation suggests the public sector pension liabilities would be reduced by $210 billion. Of course, not all the plans have the same early retirement subsidies and not all plans are equally funded. I can readily concede the $210 billion estimate would need some fine-tuning but it is almost certainly in the right order of magnitude.
Maybe the public sector plans do provide an appropriate, albeit expensive level of retirement benefit. Or maybe not. The question can be (and is) debated by others. Let’s further acknowledge that the unions will argue strenuously that early retirement subsidies are necessary because their jobs are stressful. With public sector pensions plans under attack, the position of the unions (i.e in defending the status quo) is at least consistent. What is not consistent is the federal government’s move to raise the retirement age for OAS and GIS but to leave the early retirement incentives in the public sector plans untouched.
Will this be the next shoe to drop?