John Gordon, president of the Public Service Alliance of Canada, said Flaherty promised him that if public servants committed to paying 40 per cent of the yearly contribution rates for their pensions by 2013, the government wouldn’t be looking for more savings from the plan.
The government is phasing in an increase in employees’ share of contribution rates — which dipped to a low of 25 per cent — to 40 per cent by 2013. Last fall, it looked like that 2013 target was off course, so unions agreed to an unexpected rate increase, effective Jan. 1, to ensure it was reached.
That’s why Gordon says he was surprised when Flaherty recently said pensions are under review. He feels public servants kept their end of the bargain by footing a bigger share of the contribution costs. Add to that, the surrender of voluntary severance pay, caps on wages and the sweeping job cuts expected in the upcoming budget and Gordon thinks public servants are doing their part.
“We came to an agreement on that (contribution rates) and Flaherty said that as far as he was concerned he was glad about that and wasn’t going to do anything else,” said Gordon. “I expected him to keep his word. Now with all this talk again, I wonder where he is coming from. Has he changed his position?”
In a televised interview Monday night, Prime Minister Stephen Harper said while the government has not made any decisions about pension reform for public servants, the issue is being examined.
“The pension plans of public servants have to be fair to taxpayers. At the same time, as an employer, we have to have a pension plan that is reasonable and attractive to get people into the public sector, but it should not be significantly more generous than what would be available in the private sector,” he told CTV.
Gordon said Flaherty’s promise came during a meeting with the executive of the Canadian Labour Congress in 2010. That was the last time speculation was rife that pensions were in the government’s crosshairs — and before the Conservatives had a majority.
But many say the easiest move is for Flaherty to continue on this course and further boost employee contribution rates to 50 per cent — as some provinces and other big pension plans have — while signalling his intention in a future budget to address pension reform as part of a comprehensive rethink of total compensation in the public service.
James Lahey, a former senior bureaucrat who conducted the most comprehensive study of pay and benefits in government, said the 40 per cent contribution rate is “responsible, but doesn’t go far enough.” Lahey recently updated his landmark 2006 study in an article published in How Ottawa Spends.
“There seems no credible reason why the federal plan would limit employee contributions to 40 per cent. Moving to 50 per cent at the federal level would be controversial … and would need to be phased in over several years, but it could be done,” said Lahey.
The big draw is that many public servants would rather pay more to keep what pensions and benefits they have.
“If there’s one thing public servants would go to war over, it’s their pensions,” said one senior bureaucrat.
A 50-50 cost sharing would have to be legislated and raises the thorny question of whether the government would give employees joint management of their plan, as some provinces have. The government has statutory control of the plan and has resisted joint management with unions. This will become a hot issue if employees are paying half the contributions.
Pensions are also a critical piece of public servants’ compensation. The government relies on pensions to recruit and retain talent. Tinkering with pensions could cost more in wages down the road to lure people to the public service.
Lahey has long argued that the $25-billion compensation bill for Canada’s public service is costlier than necessary because of loose controls and uneven management. No one takes overall responsibility or even tracks it. Such loose management allowed the size and cost of the public service to see-saw between boom and bust over the years.
He insists the system would work better if all the pieces of compensation were managed together rather than separately. Costs would be better controlled if collective bargaining was expanded beyond wages, if pay and benefits were kept in line with the private sector and if there was more openness in the process.
A major review of compensation would also buy unions time to figure out what they really want, said Ian Lee, a professor at Carleton University’s Sprott School of Business.
“Public servants cannot have it all — defined benefit plan, early retirement and lower than normal contribution rates,” said Lee. “Public service unions should decide what they really want and are willing to lie down on the railroad tracks for. That means unions figuring out, ‘What are we willing to give up as a quid pro quo to save what we really, really want.’”
The private sector is phasing out defined-benefit pensions in favour of defined-contribution plans, which shifts the risk to employees. Defined benefit specifies the payouts employees will receive, based on a formula of years of service and salary, regardless of what happens to the economy. With defined contribution, employers match their workers’ contributions, but their pension payments are based on how their investments perform.
Career public servants consider their defined-benefit pensions the most valuable asset they have. They pay more into their pensions than most Canadians. In return, they can collect pensions worth up to 70 per cent of the average salary of their best five years. Every year of service gives them two per cent of their salaries to the maximum of 35 years.
The magic formula to qualify for early retirement is the combination of 30 years of service and age 55. Those who retire before meeting that threshold are penalized and their pensions reduced. At 60, one can retire without penalty regardless of the years of service.
But Lee said public servants can’t expect taxpayers to pay for their freedom-55 retirements when many Canadians are working until 65 or 70 years old. Increasing the retirement age would have the double benefit of saving costs and encouraging public servants to work longer in the face of looming labour shortages.
“The sooner you are out the door with a defined-benefit plan, the greater the cost to the employer, who is on the hook from the day you went out the door until the day you die, so increasing the minimum pensionable age will reduce the cost of the plan,” said Lee.
The retirement age, however, is increasing naturally and will continue to rise. Today’s public servants are retiring at an average age of 59.8. Most new recruits join in their early 30s and won’t be able to take advantage of early retirement provisions.
For the hundreds of thousands of people getting federal pensions, the average payout is $25,127. The average pension of today’s retirees is about $40,000.
In time of restraint, Lahey argued, the government could increase the retirement age and employee contributions rates because “both have solid policy rationales” and “useful symbolic value” for Canadians.
The government would face labour unrest if it tried to increase the retirement age for those nearing retirement. Such a move would probably be grandfathered and phased in for all new recruits into the public service.
Other options that could reduce long-term costs of the plan include:
• reduce indexing now pegged to inflation;
• trim the two per cent public servants earn with each year of service; or
• base pensions on an average career of earnings rather than the best five years of salary.
Lee argues that the time is politically ripe for the government to target pensions and he sees no sign that pressure will let up.
The Canadian Federation of Independent Business (CFIB) and Canadian Taxpayers Federation relentlessly attack public servants as overpaid and that their pensions are unaffordable. A report from the C.D. Howe Institute disagrees with the government’s accounting and says the pension plans have a $227-billion deficit. That includes RCMP, military, judges, MPs and public servants.
The chief actuary showed the public service plan had a surplus in its last report, but that is expected to shrink in the next report.
“Small business is an important part of the base of the Conservative party … and this issue is not going away,” said Lee.
Meanwhile, other OECD countries are wrestling with unaffordable public pensions and some have taken steps to increase the age of retirement. An aging population, with people living into their 80s and 90s, coupled with the “new normal” of low growth, has pension payouts bursting at a time when investment returns are decreasing, said Lee.
“Social justice demands all public pensions paid by taxpayers must be on the same foundation,” said Lee. “It is unfair that MPs and public servants are retiring at 55 and the rest of us at 70. We should all be on the same set of rules. … You can’t have MPs in first class, public servants in second and Canadians in a third class.’’
Original Article
Source: Ottawa Citizen
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