Dear Editor: Budget 2014 provided a stark revelation. It was startling to learn the unfunded pension liability will be 85 per cent of the provincial net debt by 2016-2017.
In 2012, the Auditor General reported the pension plans are going to run out of money beginning in 2021. Further, government is required by legislation to use general revenues to cover any funding shortages in the plans.
That’s right. If the plans are underfunded, taxpayers, including small business owners, are on the hook.
Unless there is substantial future growth in natural resource revenues, the guarantee to fund pension plans will crowd out future spending initiatives. Government will have two choices in the coming years if it wishes to ensure it is able to cover any pension plan shortages: (i) identify which services and the related public sector jobs to reduce or eliminate or (ii) increase taxes.
Proponents of maintaining the defined benefit pension plan don’t see this as a problem. The Canadian Federation of Independent Business could not disagree more.
The first step to fixing a problem is to accept there is one. The next step is to identify solutions and there are a number of things that can be done.
First, all new hires in the public sector should be enrolled in defined contribution plans and current public sector employees should be allowed to opt out of defined benefit plans. In 1977, the government of Saskatchewan, led by New Democratic Party Premier Allan Blakeney, possessed the foresight and pragmatism to implement defined contribution plans for new employees and to grandfather existing employees. That gave employees a choice to keep their defined benefit plans or adopt defined contribution plans.
Secondly, phase out early retirement for all government employees. There are structural problems with the public sector pension plans. There are simply not enough contributions being made to cover the benefits of those who are retiring earlier and living longer. If demographic projections come through, there will be fewer workers supporting more retirees. Pension fund sustainability is increasingly dependent on market growth, which inherently means both public sector pensioners and taxpayers are bearing significant risk.
Another initiative is to eliminate the bridge benefit. Every now and then, some people will make comments that when they turned 65 their benefits were clawed back. They are not losing any benefits because they received a pension benefit “top-up” known as a bridge benefit. CFIB research shows that most public sector pensioners in our province each receive a bridge benefit of nearly $7,000 annually until they reach age 65, when they are eligible for the Canada Pension Plan benefit.
Additionally, we believe government should adopt “career-averaging” to calculate pension benefits as the government of Prince Edward Island did in 2013. The salaries of public sector employees have risen substantially in recent years.
This means higher pension benefits for new retirees, which will add to the future unfunded pension liability. Calculating pension benefits using “career-averaging”, rather than using the best three- or five-years of salary, would help address this.
Further, members of the House of Assembly have an important role to play in pension reform. Though any change to their pension plan is unlikely to have a significant financial impact, MHAs can show leadership by converting to a defined contribution or “shared risk” plan before the next provincial election.
The former St. John’s city council adopted reform of the councillors’ pension plans in 2013 and members of the legislative assembly in New Brunswick approved a “shared-risk” plan for their pensions in March 2014.
Finally, many small businesses find it difficult to offer pension plans to their employees because the plans are too complicated and expensive to administer.
A Pooled Registered Retirement Plan (PRPP) meets the realities of small business owners as it provides a low-cost, accessible and voluntary retirement savings option for them and their employees. Government should pass legislation in the current session of the House of Assembly allowing for the implementation of PRPPs. There is no reason to delay this.
These recommendations are reasonable and practical solutions to create a fair and sustainable pension system in the province. Otherwise, there will be some very difficult decisions ahead.
Vaughn Hammond is Newfoundland and Labrador director of provincial affairs for the Canadian Federation of Independent Business.