The Fraser Institute
Now that Alberta has reaffirmed its intent to lightly modify government employee pension plans, government unions will again try to divert the public from the facts.
For example, after my recent column on the ever-increasing cost to taxpayers of public sector pension plans, Guy Smith, president of the Alberta Union of Provincial Employees and Marle Roberts, president of the Canadian Union of Public Employees (Alberta), cried foul.
Here is a summary of their complaints: Government unions are willing to do “their part;” the province refuses to enter into joint trusteeship with unions; new actuarial assumptions from government union reports (and plans themselves) will pan out; the 2008 market crash is responsible for current shortfalls, and liabilities in public sector plans will be “paid off” over the next decade. In other words, reform is unnecessary and taxpayers need not worry.
Joint control of government employee pension plans is no panacea. Shortly before the NDP government in British Columbia was ejected from office in 2001, it gave employers and unions joint control over four government employee pension plans. The result? Successive contribution hikes ever since – not modified benefits.
In fact, as a 2011 actuarial report for the (B.C.) Public Sector Service Pension Plan made clear, benefit security of the plan was a “primary objective,” with stability of contribution rates secondary. In other words, government unions prefer contribution hikes over pared pension benefits every time – no matter the increasing cost to taxpayers.
In Alberta, government employee pension plans were in trouble and costing taxpayers increasing cash long before the 2008 recession. In the case of the Public Service Pension Plan, increases in employee/employer contribution rates occurred in 2003 and 2007 (in addition to 2010 and 2012) because previous actuarial assumptions did not pan out.
Other plans have also been hit with pre-and post-recession contribution increases and/or special contributions to make up for pension shortfalls. That doesn’t mean taxpayers are out the woods. Past contribution hikes left taxpayers with permanently higher bills for government pensions. Regardless, the recession angle is a bit of ruse. We can expect more recessions.
When prior actuarial assumptions turn out to be incorrect, taxpayers always pay – including ultimately even for employee pension contributions. After all, government paycheques originate in the provincial treasury funded by the general tax base.
As for the claim government unions are willing to “do their part,” the evidence is scant. The AUPE and CUPE opposed a previous proposal by the province to reduce pension payouts for those who take early retirement. And the unions still want early retirement with full benefits. They also oppose attempts to cap contribution rates, an action that would force reform on the benefits side as opposed to tapping taxpayers again.
All this points to a core problem: Current pension payouts were designed with assumed higher invested returns and when people lived shorter lives. For instance, life expectancy after age 65 has increased by two years since 1992 (never mind using comparisons from decades earlier). Which means government employee pensions have been – and will be – more costly.
But for government union leaders, none of this matters. When actuarial assumptions are off, or another recession softens investment returns, taxpayers can be shanghaied (again) into guaranteeing retirement benefits. That is the union leaders’ preferred course of action. They demand it even though just 9 per cent of workers in the private sector have guaranteed retirement benefits (i.e., a defined benefit plan). In contrast, 79 per cent of Alberta’s public sector has such plans.
In response, government unions say that everyone should have a defined benefit plan. But then we’re back to magical assumptions. The only realistic promise on retirement benefits is what results from money saved plus investment returns, including even in government programs such as the Canada Pension Plan. Anyone who promises more is either running a Ponzi scheme or relying on taxpayers or future contributors to fund pension shortfalls.
The government sector/private sector disparity is one reason why a 1970s-era Saskatchewan NDP government moved the entire public sector into defined contribution plans.
In Saskatchewan, government employees, and those in the broader public sector, still receive good retirement pensions but such plans protect Saskatchewan taxpayers from unrealistic political and union promises.
Government employees are a critical part of a civilized society and pensions are one part of their total compensation package. But their pensions must be reworked to bear some resemblance to the private sector and real-world investment returns.
Mark Milke is a senior fellow at the Fraser Institute and co-author of Public Sector Pensions: Options for Reform from the Saskatchewan NDP.