More significant reforms needed
Troy Media – by Mark Milke
The recent federal and Ontario budgets produced a plethora of headlines about how the public sector should brace for changes to its costly pension deals. The dramatic language was in part provoked by lines like this from the Ontario budget: “Pension costs are one of the fastest-growing line items” and “the status quo is not an option.”
A reminder of how true that is came with the announcement this week of another unfunded liability in the Ontario Teachers’ Pension Plan, $9.6 billion this time. That’s in addition to the previous $17.2 billion unfunded liability which, as of just last year, was to be “solved” with three years’ worth of contribution hikes for teachers and taxpayers alike. As a “teaching moment” on unsustainable public sector pensions, it doesn’t come much clearer than that.
A 50/50 split
But the supposed reforms in Ontario and announced by Ottawa may be less than advertised. For example, the Ontario budget announced that contributions to public sector pension plans will soon need to be split 50-50 (between employees and taxpayers) where that doesn’t already occur.
That’s laudable, except that Ontario’s taxpayers already have a 50-50 split with employees on the three major public sector pension plans for which the provincial government is either solely or jointly responsible: the Public Service Pension Plan; the Ontario Public Service Employees Union Pension Plan; the Ontario Teachers’ Pension Plan.
There is another major plan which the government is not statutorily responsible for, but to which taxpayers contribute through health care tax dollars and which could be reformed. That’s the Healthcare of Ontario Pension Plan, for which employers (mostly funded by taxpayers) pay 126 per cent of what employees contribute to their own pension plan. So some cost-savings for taxpayers might occur there if the 50/50 rule was applied.
In general, and problematically though, while the Ontario government made a surface promise in its budget that forthcoming measures will “ not to add to employer and taxpayer expense,” it then added this caveat – “beyond what has already been agreed to.”
That qualification matters. Significant contribution increases and special payments from taxpayers have already occurred or are in the pipeline for all three pension plans. So taxpayers and existing employees will still see their costs increase while pension eligibility rules and benefits remain unreformed.
The Ontario Public Service Employees Union plan already raised rates this year for employees and employers; as noted above, the Ontario Teachers’ Plan has scheduled three annual increases for teachers and taxpayers.
Most dramatically, the Public Service Pension Plan, of which the province is the sole sponsor, is scheduled to receive “special payments” of $142 million per year – for 15 years. Given that’s “already been agreed to,” taxpayers are out of luck if they think Ontario pension reforms will address the generous benefit side of public sector pensions any time soon.
Addressing the benefit side is long overdue. Even the Ontario Teachers’ tacitly admits that when it describes how “A typical teacher retiring today can expect to collect a pension for 30 years, about four years longer than she contributes to the pension plan.”
Missing from both Ontario and federal promises are better cost-saving ideas that would bring the public sector closer to private sector norms.
For example, in 2010, the Saskatchewan Teachers’ Pension Plan announced that, as of 2015, pension payouts would be calculated on career-average earnings. This is a change from the common public sector practice of calculating pension benefits based on an employee’s highest earning years, usually an average of the last five years of service. As one potential reform, Ontario, and the other provinces (and Ottawa) should imitate that reform from the Saskatchewan teacher’s union (which runs the pension).
Move away from defined benefit plans
Another option is to move away from defined benefit plans (which always have the risk of unfunded liabilities) and towards defined contribution plans (which by design, do not). That’s exactly where the private sector has gone over the past few decades. Nationally, in the private sector, only 56 per cent of those in a registered pension plan have a defined benefit plan (down from 88 per cent in 1974); the rest are in defined contribution or hybrid plans. In the public sector, 94 per cent are in defined benefit plans (down marginally from 99 per cent in 1974).
Given that taxpayers are most often called upon to fund public sector pension shortfalls, it is reasonable for them to also expect the benefits and the design of public sector plans to more closely follow private sector norms and to be affordable. That will require provincial and federal governments to enact more significant reforms than they have hinted at thus far.
Mark Milke is a Senior Fellow with the Fraser Institute.