There is a growing pension divide in Canada. On one side of the divide are those who enjoy a generous pension. On the other side are those who pay for them. Closing this gap is an important project that government needs to undertake.

A recent Canadian Federation of Independent Business compensation survey found public-sector employees at the federal level receive 42 per cent more than their private-sector equivalents, 25 per cent more at the provincial level and 36 per cent in municipalities. Lavish public sector employee pension and benefits programs drive this giant discrepancy.

James Pierlot wrote in an article for the CD Howe Institute that the median retirement age for a public sector work is 58, while it is 62 for a private sector worker. The annual retirement pension income for the same public sector worker will be five to seven times larger than that for the private sector worker.

It is no surprise, therefore, that there is a growing frustration felt by private sector workers who must work longer and pay high taxes longer to provide for public sector workers who work shorter careers and receive significantly better benefits in retirement.

In 2008 the Expert Commission on Pensions in Ontario stated that the ultimate safeguard for public sector retirees is the virtual certainty that taxpayers will stand behind their pension plan. Could the Expert Commission be more wrong?

There is a total Canadian unfunded public sector pension liability of more than $200 billion. Bill Robson of the CD Howe Institute estimates the federal liability would add another $58 billion if federal public sector pensions were costed properly. According to an estimate by the British North American Committee a similar costing problem for provincial public sector employee retirement plans would add another $150 billion to the collective provincial debt.

Two thirds of Canadians (67 per cent) don’t have any pension plan all, except for whatever they have stashed in the bank or under their mattresses. 22 per cent have a defined contribution plan. 6 per cent of Canadians enjoy a defined benefit pension plan in the private sector. This leaves 5 per cent of working Canadians enjoying the lucrative benefits of a defined benefit taxpayer-funded pension plan as public sector employees.

Defined contribution plans have employees and employers each contributing to an employee’s fund that grows over time and is drawn on in retirement. This type of plan does not create a liability for either the employee or employer since it is limited to what each fund earns over time.

A defined-benefit plan on the other hand guarantees annual payments in retirement upwards of 60 to 70 per cent of previous salary, paid for life, and indexed to inflation. It’s easy to see how shortfalls are created in this situation: any difference between the income generated by pension contributions and the required payments, the company or government is responsible for the difference.

Recently taxpayers also have had to pick up the tab for unfunded liabilities of private sector plans as well. Billions of dollars have gone to GM and Nortel pensions.

Presently the Federal Finance Committee led by Finance Minister Flaherty is undertaking a national consultation with the aim of reforming Canada’s retirement system. Reforms should include ending the gold-plated MP pension plan, replacing it with a defined contribution plan like those in place for politicians in Alberta and Ontario.

While they are at it the committee should end Old Age Security and Guaranteed Income Supplement benefits for incarcerated prisoners like Clifford Olson. The heavy lifting though will come through reducing the size and cost of retirement benefits for public sector employees.

Government must wean the public sector off of guaranteed pensions and move towards defined contribution plans. Contributions rates will have to climb, retirement entitlements will have to fall. Some changes will have to be grandfathered. The longer they wait the more expensive it will get.

By: Kevin Gaudet
Posted: April 09, 2010
Topic: Federal

Contact the regional director Kevin Gaudet for further information.

Type: Commentary

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