In Brief: The economic crisis is wrecking havoc with most pension plans, including those for government employees. In this news story AIMS Executive Vice President Charles Cirtwill encourages governments to review their generous pension plans and the practice of using tax dollars to cover any shortfall.
FREDERICTON – New Brunswickers approaching retirement have likely opened their latest RRSP statements with feelings of anxiety and dread.
But when they hear that their tax dollars will be spent to cover the pension shortfall of government employees, New Brunswickers can be forgiven if their anxiety turns to anger, says Charles Cirtwill of the Atlantic Institute for Market Studies.
News that roughly a third of the projected $800-million deficit for next year is due to a shortfall in the government’s pension plans should prompt the provincial government to question whether it’s time to change the generous pensions paid to employees, he said.
“We need to have a serious conversation whether defined benefits pension plans are the way governments should go,” said Cirtwill.
Under defined benefits plans, an employee is guaranteed a set amount of money based on the number of years they worked. The money is invested as a group and the profits pay the pension benefits. However, if the investments lose money, government is required to cover the shortfall of money owed in pension benefits.
Under defined contribution plans, employers contribute a certain amount of money, typically based on income, towards RRSPs for employees. If the markets drop, the employer doesn’t have any obligation to pay additional money.
The New Brunswick Investment Management Corporation oversees the pensions of 46,000 public sector employees, including civil servants, teachers and judges. The assets it manages were worth $8.7 billion as of March 31, 2008.
Although most private companies have moved towards RRSPs, governments have been hesitant to suggest changing their own plans, said Cirtwill. That’s because of the unions, he added.
“They have basically been able to keep politicians from asking these kinds of tough questions.”
Kevin Gaudet of the Canadian Taxpayers’ Federation said government plans are “just very, very expensive.” The aging population means fewer taxpayers paying for more retirees, he added.
But Pierre-Marcel Desjardins, an economist at l’Université de Moncton, stressed that all pension plans are suffering because of the markets. He likened revamping government pensions to changing the rules half-way through a game.
For example, telling new employees that they have fewer benefits than long-time workers is essentially saying they’re not as valued, said Desjardins.
A recent paper by the CD Howe Institute illustrates how a public sector pension is more lavish than those in the private sector.
The institute uses an example of two imaginary couples, one working in the private sector and the other in the public sector.
The public sector couple earned retirement savings worth $1.2 million or $602,786 each.
The private sector couple worked four more years but their retirement savings were valued at $244,800 or $122,400 each.
Tom Mann, executive director of the New Brunswick Union, said instead of changing public sector pensions, private companies should be improving their benefits.
Mann warned against the idea of what he called the “tall poppy syndrome, where poppies are to grow at a universal height. If one grows higher than the others, then the response is to cut that poppy off.”
The plan makes a lot of money when markets are good, he added. “When you think of the value of a pension and retirement income, doesn’t everybody deserve that?”