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Negotiations with public sector unions: the government must take the generosity of retirement plans into account

Montreal, March 2, 2010 – A month before collective agreements in the public sector are set to expire, the Montreal Economic Institute (MEI) is publishing a study prepared by actuary Pierre Girardin, with the collaboration of MEI’s president and CEO, Michel Kelly-Gagnon. The study evaluates the generosity of retirement plans provided to public sector employees and concludes that their post-retirement benefits far exceed what the great majority of private sector workers receive. The government needs to take this into account before determining the size of the salary increases granted to its employees.

“First of all,” Mr. Girardin noted, “there is a flagrant imbalance in the availability of retirement plans in Quebec, with 99% of public sector employees covered while only 25% of private sector employees have access to a supplemental retirement plan, according to figures of the Régie des rentes du Québec. In addition, even among the luckiest private sector workers – those covered by defined-benefit retirement plans – the advantage is less than in the public sector because of the absence of job security.”

An actuarial comparison was conducted between two hypothetical workers, one in the public sector and one in the private sector, each at the same salary level and with identical retirements plans. The only difference involves the number of employers in the course of their respective careers: one for the public sector worker and three for the private sector worker (a conservative estimate considering realities in the job market).

Although the hypothesis of identical retirement plans is useful for comparisons, it really is very optimist to say the least. It is rare to find private sector workers who have the privilege of being covered by a plan similar to the Government and Public Employees’ Retirement Plan. This plan provides benefits equal to 70% of the average salary in the five best years (after 35 years’ service) and is indexed to half of inflation.

The results of the comparison are striking: even if the private sector worker is offered retirement plans equivalent to the government plan by each of his three employers, which, once again, is true only for a minority, the value of the public sector worker’s plan will still be 41% higher at the time of retirement.

In short, having a single employer over the course of one’s life – a highly unusual situation except in the public sector – has a major impact on the quantity of funds available upon retirement. This does not even take into account that these funds are safer because the government, unlike a private company, runs little risk of being pushed into bankruptcy.

“This situation is unfair to taxpayers who work in the private sector, who in a way are paying for the generous retirement plans in the public sector while not benefiting from similar advantages themselves,” Mr. Girardin remarked.

The publication also points out that, according to a recent study by the Institut de la statistique du Québec, employees of the Quebec public administration have overall hourly compensation that is 3.6% higher than workers in the private sector. Overall compensation includes employers’ contributions to retirement plans.

“Spokespersons for the Common Front of public sector unions limit themselves to talking about wage differences,” added Michel Kelly-Gagnon. “Overall compensation is what needs to be examined to get a full picture. This type of analysis shows that there is no gap to close for public sector employees compared to private sector employees – quite the contrary. The government needs to recognize this reality, especially in a situation of budget deficits.”

The complete Economic Note published today, titled Are public sector plans too generous?, may be consulted free of charge on our website.

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The Montreal Economic Institute (MEI) is an independent, non-partisan, non-profit research and educational organization. Through studies and conferences, the MEI informs public debates in Quebec and Canada by suggesting wealth-generating reforms based on market mechanisms.

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Information and interview requests: Ariane Gauthier, communications coordinator, Montreal Economic Institute, Tel.: 514 273-0969 ext. 2231 / Cell: 514 603-8746 / E-mail: agauthier (@iedm.org)

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