January 3, 2013
TORONTO, ON, Jan. 3, 2013/ Troy Media/ – If all Canadians, had a defined pension plan that was guaranteed to pay out a generous amount during retirement, we would all be happier.
But the big question is, how are these guaranteed benefits going to be funded?
Let’s take a look at our workplaces today. The average employer is a small business and, in growing numbers, workers are self-employed. Many business owners simply don’t have additional resources to offer defined benefit pension benefits to their employees. In fact, many have a difficult time putting away additional savings for themselves. To suggest that they are simply refusing to offer these benefits because they are greedy or selfish is an insult to the many hardworking business owners who are fighting to stay afloat.
So where would the money come from to offer everyone a guaranteed defined benefit pension?
Currently, the way pensions are designed, the employer’s contributions come from business profits. In order to offer a defined or “guaranteed” pension benefit, companies need to be in a position to know that their profits are going to be consistent, that the stock market will always be strong and the combined savings that they and their employee have accumulated will be sufficient to cover the entire period of the employee’s retirement. Today many Canadians are retired for 30 years or more.
All Canadians experienced the financial crisis of 2008 and those invested in the stock market saw a big dip in their retirement savings. Many have recovered the greater part of their losses but that is because they didn’t remove any of the savings. Their plans, however, are still short the expected growth. A return of capital is not an exciting long term proposition.
Now let’s take a look at the Public Sector.
The majority of workers in the public sector have defined benefit pensions that “guarantee” retirement income. The employee contributes a percentage of income into his plan. The employer matches the employee’s contribution, often by a larger per cent. Those who argue on behalf of public sector defined benefit pensions like to stress that the employee’s contributions are matched by “the employer’, or taxpayers. The original source of income that public sector “employers” have is from tax revenue.
Most public sector pensions in Canada are in shortfall and running deficits, estimated by the Canadian Federation of Business to be $300 billion short.
A common myth for the shortfall was the financial crisis of 2008. The truth is that, while the crisis may have made the shortfalls that already existed worse, it was not the root cause of today’s problems. The real reasons that defined benefit pensions are in trouble aren’t very complicated or difficult to understand. Employees are outliving their contributions for three reasons . . . longer lifespans, earlier retirements and increased benefits, as salaries rise, which have been won through collective bargaining.
Their plans simply aren’t sufficiently funded and taxpayers are being left to pick up the tab. Poor stock market returns and very low rates on bonds were simply the final death blow for defined benefit pension funding formulas because they exposed the deficiencies.
Comparisons between private sector workers who retire on their savings vs. public sector workers who are guaranteed a retirement income by taxpayers are often in the news these days. Public sector unions claim that the criticisms are envy or jealousy. They argue that a move away from defined pension benefits will destroy the middle class and is unfair to new workers, creating a two-tier system. Others say it’s a “race to the bottom”.
In reality, the two tier system already exists and has existed for decades.
Private sector workers who are not on the receiving end of retirement benefits that are funded by others aren’t envious or jealous. They are angry that they are being forced to fund benefits for others at the expense of their own retirement security. Those who are at the bottom of the retirement income ladder haven’t raced there, they have been forced there.
The concept of increasing and greatly improving taxpayer-funded pension benefits to all Canadians would be optimal but impossible to achieve without first addressing the current and future unfunded liabilities that taxpayers are burdened with in the public sector pension plans. When a government does something as basic as trying to reduce a plan’s unfunded liabilities by temporarily freezing compensation for public sector employees or asking for increased pension contributions we have strikes and protests. Exceptional benefits, whether affordable or not, aren’t easily taken away.
Change can only happen when the many thousands of public sector workers who feel “entitled to their entitlements” finally face the truth. It’s obvious that their younger workers cannot be promised the same benefits and, as a result, we are starting to see a shift in their perspective. They, too, are questioning why they must make larger contributions into plans to cover shortfalls that existed before they even began their careers. They are also concerned that the money they contribute today will not be there to cover their own retirement needs in the future.
It is unfair that the younger workers in the public sector are now being asked to support a superior pension for others, at the expense of their own. It’s time to get real about pensions.
Bill Tufts is Founder of Fair Pensions For All (FPFA) an organization advocating for pension reform in Canada.
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