Montreal, Thursday, October 9, 2014 – In the context of the debate over municipal pension plans, the Montreal Economic Institute proposes that we abandon defined benefit plans altogether and move to defined contribution plans, but only in the future, and that we gradually index the retirement age. These two solutions would progressively but sustainably solve the problem of pension plan deficits, contrary to Bill 3.
These solutions, initially presented in an open letter published last week in a major daily newspaper, are detailed more fully in an Economic Note published today.
The pension plans of municipal employees across the province of Quebec face deficits totalling $3.9 billion. For certain municipalities, pension plan contributions have exploded. “The status quo was no longer acceptable. The government had a duty to act to protect taxpayers,” says Youri Chassin, author of the Economic Note.
Bill 3, however, addresses the sharing of plan deficits without calling into question the factors that caused them. Defined benefit pension plans are facing deficits because three phenomena were underestimated by actuaries: increasing life expectancy, the drop in rates of return and the generosity of plans.
Even with Bill 3, taxpayers are for instance not fully sheltered from a new drop in market returns, whether it happens 5, 10 or 20 years from now. On the other hand, defined contribution plans entail zero risk for taxpayers.
Moreover, increasing life expectancy represents a cost for current plans, since benefits will be paid out for longer. This is even truer for municipal employees who sometimes spend more time in retirement than they do in the labour market.
According to the study released today, the retirement age should be gradually raised so that on average, people would work two years for each year of retirement. It will then be important to establish an automatic indexation formula as a function of the increasing life expectancy of Quebecers so as to divide longevity gains proportionally between retirement and working life, thereby depoliticizing the debate.
“The solutions proposed in this Economic Note allow us to tackle the problem of future deficits while at the same time respecting the agreements that were signed and the ability of taxpayers to pay,” emphasizes Michel Kelly-Gagnon, president and CEO of the MEI. “Our approach risks ruffling a few feathers because of its audacity, but these progressive and sustainable solutions deserve to be discussed seriously.”
The Economic Note entitled “Solutions for Municipal Pension Plans” was prepared by Youri Chassin, Economist and Research Director at the Montreal Economic Institute. This publication is available on our website.
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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.
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