By Mark Milke
CALGARY, AB – One theory about politics is that because politicians must get votes to stay in power – that’s their “currency” – they are unlikely to act against their own self-interest. So politicians cater to the specific voters who put them in power in the first place.
Last year, when Alberta Finance Minister Doug Horner decided to reform government employee pensions, he proved there is an exception to every rule. (It’s not a state secret government unions were rather helpful to the government in the last election.) Thus, Horner’s attempt to reform pensions showed that, on occasion, politicians do act in the long-term interest of the public, even if that means occasionally offending their core supporters.
Previously, reforms to government employee pensions were sold by Horner as absolutely critical, something he repeated recently when he backed off more substantial improvements. He even noted that public sector pension plans “are no longer sustainable in their current form.”
The minister was and is correct. Defined benefit pension plans, widespread in the government sector, base their future benefits on actuarial projections, which in many plans have turned out to be optimistic.
The result to date has been one of two consequences: the direct taxpayer infusions, such as the $1.2 billion top-up in 2009/10 for what’s known as “pre-1992” Alberta Teachers’ Pension Plan (and the government’s assumption of the full unfunded liability in that plan), and hikes in pension plan contribution rates. For instance, increases in Public Service Pension Plan employee/employer contributions took place in 2003, 2007, 2010, and 2012.
In defined benefit plans, contribution increases are one option in dealing with unfunded liabilities. Point is, taxpayers ultimately pay through top-ups to a pension plan or through contribution increases.
In Alberta, 1,435,028 Albertans, or about 91 per cent of the 1.6 million private sector workers, did not possess a defined benefit pension plan in 2011. Just 9 per cent of the private sector has such a plan. Most Albertans will do fine by saving for retirement through other pension plans, as well as RRSPs, TFSAs and other savings vehicles. The catch is that specific benefit levels are not guaranteed; everything eventually depends on a combination of contributions and investment returns.
However, those private sector workers fund the politically-promised guarantees for the government employee pension plans. There are 278,252 people, or about 79 per cent of 351,500 government/public sector employees in Alberta, enrolled in such defined benefit plans.
That exposure is reason enough for the third option, a substantial reform of benefits.
As just one example of a possible reform, the government was proposing that those in the public sector wait until age 65 for full pension benefits (up from the current early retirement age of 55). The province retreated and will now let government employees retire at age 60 with a full pension.
That flip-flop was unnecessary and unhelpful to taxpayers. Also, Statistics Canada shows that the public sector in Alberta already retires, on average, two years earlier than those in the private sector.
Another example: the minister wrote to government unions to reassure and also to inform them that “pensions will still be calculated according to a formula that is based on the highest average salary.”
That’s another status quo policy in crying need of a change. It means government employees will continue to have their retirement benefits calculated based on a plan member’s highest five-year average salary, as opposed to career-average earnings. The latter approach would have moderated benefits; it would also have been fairer to taxpayers.
Even the Saskatchewan Teachers’ Federation, which runs its own pension plan, has moved away from using averages based on late career earnings to calculate pension benefits. Instead, for that union-run plan, as of 2015, eventual pension benefits will be calculated using career-average earnings.
The provincial government claims its retreat on reforms does not expose taxpayers to “undue risk and excessive contributions.” Wrong on both counts; taxpayers already pay excessively for government employee pension plans and for artificial guarantees they cannot magically create for themselves. Absent significant reforms on the benefits side, taxpayers are as exposed as your uncovered backside on a chilly winter day.
By again kicking the existing unfunded pension liabilities down the road, the province has exposed taxpayers to future risks and more bailouts, obvious or hidden. The government has also demonstrated that the theory about political behaviour – politicians mostly act in their own short-term electoral interest and not in the long-term interest of the public – is regrettably true more often than not.
Mark Milke is a Senior Fellow at the Fraser Institute and co-author of Public Sector Pensions: Options for Reform from the Saskatchewan NDP.