If you’re under a certain age, chances are that you’re either not going to be able to save enough for your own retirement or you’re lying to yourself that you won’t want to retire anyway. It’s a given that you don’t have a pension plan, let alone a defined benefit plan. And in the current labour market, where getting a one-month contract is an accomplishment, it’s easy to look at public pension plans, and defined benefit pensions plans in particular, with a combination of resentment and bitterness.
Almost 12 million Canadians can lay claim to what’s been cleverly termed “pension envy.” Out of a workforce of 18 million people, two-thirds don’t have any pension coverage, and the number of people with defined benefits is even smaller. Add to the mix slow economic growth, low interest rates, tenuous employment, a personal investment system that routinely disregards retail investors, and a constant stream of stories of pension plan mismanagement, and you have a recipe for mass discontent.
Recipients of public defined benefit plans are derided for having it too good, and tax-payers are frequently told that they’re on the hook for unfunded liabilities. But before we decide that the fairest solution to retirement savings inadequacy and pension plan underfunding is pulling the plug on large public plans, it’s worth considering the main finding of a large study on some of Canada’s largest public defined benefit plans.
The study, conducted by the Boston Consulting Group (BCG) on behalf of Canada’s largest defined benefit plans, shows that an estimated 10-15% of beneficiaries collect the Guaranteed Income Supplement (GIS), compared with 45-50% of other Canadian retirees. This contribution alone saves close to $3 billion a year in GIS payouts.
Contrary to news reports that tax payers are funding public pensions, the study shows that “As much as 80 cents of every pension dollar comes from investment returns.” That kind of efficiency and leverage can’t come from personal savings or defined contribution plans, which simply lack the scale and pool of funds needed to create large investment returns at low cost. Other key findings include:
- The impact of defined benefit pensions in Ontario translates into $27 billion in expenditures on goods, shelter, recreation, and services, generating $6 billion in taxes
- The defined benefit plans examined collected more than $70 billion in contributions in 2011, paid out $74 billion in retirement benefits to Canadians, and invested approximately 35 per cent–or $714 billion–of Canada’s total retirement assets
- The Top Ten pension funds have invested roughly $400 billion in Canada, including $100 billion in real estate, infrastructure, and private equity. They comprise four of the top 20 global commercial real estate investors and four of the top 20 global investors in infrastructure assets, and directly employ 5,000 professionals in the Canadian financial sector and an additional 5,000 employees in their real estate subsidiaries
Despite this good news, pension envy is real. Most Canadians can’t save enough for retirement, and it may seem that the only way to level the playing field is to descend to the lowest denominator.
There’s an old Russian parable that succinctly describes our current pension envy and approach to large public pension plans. In his new book, Jim Leech, the outgoing CEO of the Ontario Teachers’ Pension Plan, recounts the story:
“Distraught over the loss of his most productive cow, a farmer grabs his fishing pole and sets out for the nearest stream. Sitting by a gurgling brook, the farmer jerks to attention when the rod bends in his hands. Acting quickly, he pulls in his line to discover a large golden creature – a magic fish. As he pulls his catch closer, the creature begins to speak.
“Please, sir, I am a magic fish. Let me go and I will grant you any wish.”
The startled farmer’s eyes narrow in suspicion.
“Anything you desire,” the golden fish again promises.
The farmer considers the unusual offer for some time. And then a smile crosses his face. “Anything?” he asks.
“Anything,” the fish agrees.
“Alright then, I want my neighbour’s cow to die!”
Just because some of us don’t have a good pension plan doesn’t mean we should support the decimation of our neighbours’ defined benefit plans, which would leave us all worse off. We shouldn’t be under the illusion that once defined benefit plans are eliminated they will be replaced with a better plan for everyone–it will just be one good option gone forever.
There are many proffered solutions to the retirement challenge, including an enhanced Canada Pension Plan and converting defined benefit plans with large unfunded liabilities to a Shared Risk Model, as is currently happening in New Brunswick. Alberta on the other hand, is preserving its public defined benefit plans, but active and new employees will have to pay higher contributions without receiving additional benefits, along with other measures meant to regain plan sustainability.
Whichever route we take provincially or nationally, a race to the bottom won’t help any of us retire any sooner or more securely–we might collectively be just a little worse off once we reach the bottom.
Michael Nicin is a former Editor-in-Chief of the Public Policy and Governance Review and an alumnus of SPPG, Class of 2010. Michael currently serves at the Director of Policy at CARP.