Defined benefit pension plans threaten to undermine the finances of governments – and taxpayers, too. If we don't act now, it's only going to get worse.
These retirement plans might have sounded like a good idea in the 1960s, but a lot has changed since then. There are more and more retirees, and fewer contributors. We live longer, so pensions have to be paid out over a longer period. And rock-bottom interest rates diminish returns.
Yet, some of these retirement packages guarantee public employees 70% of their five best years of earnings. Inflation adjusted, and for life.
Increasingly, private businesses are abandoning these types of plans, replacing them with defined contribution plans (whose returns fluctuate with the market, like your RRSPs). But in the public sector, defined benefit plans persist, at taxpayer expense.
And guess what? Canadian taxpayers owe hundreds of billions of dollars in pensions and benefits promised by government. Ottawa's unfunded liabilities for its employees' pension plans total $227 billion, according to a 2011 study by the C.D. Howe Institute. These are, in part, futures taxes hanging over the heads of taxpayers, many of whom don't even have pension plans of their own.
If you think that's unfair, using tax dollars to bail out these plans will also leave less money for health care, education and road repairs, among other things.
On the other hand, public employees agreed to work under these conditions in good faith. Drastically and unilaterally changing the terms of their contracts would be unfair to them.
So what can we do?
Solutions exist. New Brunswick, for one, is restructuring its public pension plan to make it more sustainable. Among other changes, employees will have to contribute more to their plans. The retirement age will also gradually be raised, and retirees will not get cost-of-living increases in years when the markets perform poorly. Benefits could even be reduced if the economy crashes.
Other ideas, discussed in various political circles, go further in terms of risk-sharing such as requiring public sector employees to pay at least half the cost of their retirement plans. They could also transform part of a new employee's plan into a defined contribution plan, which tracks the stock market. This lifts a burden from taxpayers, while still leaving public employees better off than most future retirees.
We should act now, with politically feasible solutions. If we don't, the problem will only grow bigger.
Michel Kelly-Gagnon est président et directeur général de l'Institut économique de Montréal. Il signe ce texte à titre personnel.
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