The truth about public sector pensions

Got pension envy? You’re not alone

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The large (and growing) discrepancy between private and public sector pensions in Canada has spawned the use of the term “pension envy.” I can certainly think of acquaintances who joined the federal civil service or became teachers right after graduating from university. On the whole, they put in their 30 years or so in the accompanying defined-benefit pension plan and were sitting pretty by their late 50s. In some cases, both halves of couples enjoyed such pensions, all back-stopped by taxpayers like you and me, who enjoy no comparable plan. The combined value could easily be the equivalent of dual RRSP nest eggs of between $1 million and $2 million (or more in the case of senior managers or executives).

Even if you’re fortunate to have a comparable DB pension in the private sector, these days corporate job security is such that there’s little assurance you’ll stay in any one place long enough to accrue a major pension payout. If you change jobs, whether voluntarily or not, there’s not likely to be the kind of pension portability provisions that may be available in the public sector. Also, there’s often pressure to commute the value of such a pension and transfer the proceeds into an RRSP or defined-contribution pension. The resulting “personal pension” will be neither guaranteed against market loss, nor automatically indexed to inflation.

When I’m talking to young people, I sometimes joke that one sure route to financial independence is to land yourself a government job right after college, make sure you’re in the DB plan if it’s offered and hang in for 30 or 35 years. Or as I quip, “If you can’t beat ‘em, join ‘em!” Of course, that would only be appropriate for young folk who are pretty conservative in their attitude to risk and who have no real conception of what they want to do with their lives. If they’re at all entrepreneurial, I think they’d do better in the private sector.

If you want to get a good understanding of the true value of public-sector pension plans, there are two sources I’d consult. One is the 2011 book Pension Ponzi, written by Bill Tufts and Lee Fairbanks (Wiley Canada), which is among the earliest of Canadian financial books to actually use the term “pension envy.” There the authors fret that these guaranteed, indexed-to-inflation pensions are creating two classes of retirees. For example, the average CPP benefit payment for all Canadian workers is $5,919 a year, compared to an average annual Ontario Teachers’ Pension Plan of $42,900 (as of 2010.)

The book’s introduction notes that the 20% of the Canadian workforce that belongs to public-sector unions (which also includes police officers, firefighters, the armed forces and the politicians who make these rules in the first place) “have quietly negotiated the most lucrative compensation packages in history.” All, the authors add, to be paid for ultimately with tax dollars from the rest of us and/or massive government debt.

A more recent source on this topic is arguably Canada’s top retirement expert, Malcolm Hamilton, a former partner for Mercer and now a Senior Fellow for the C.D. Howe Institute. In the first of two commentaries he wrote earlier this year for the think tank, Hamilton analyzed the fair values of these pensions and the true costs taxpayers bear to guarantee them. He concluded “employees in the public sector are paid more than is publicly acknowledged and, in many instances, more than their private-sector counterparts.”

He also found that “public-sector employees shelter more of their retirement savings from tax than other Canadians are permitted to shelter,” and third, that “taxpayers bear much of the investment risk taken by public-sector pension plans while the reward for risk-taking goes to public employees as higher compensation.”

The commentary is more technical than we can cover here, and more of interest to practicing pension actuaries, but what I gleaned from it is what I mentioned earlier. If you really envy these kinds of pensions and have the temperament to carry off the kind of work public-sector employees do for three or four decades, then by all means try and land such a job while you’re young. Then you too can be envied!

Jonathan Chevreau is the editor-at-large of MoneySense. He blogs here and at findependenceday.com. Find him on Twitter @jonchevreau.

7 comments on “The truth about public sector pensions

  1. and the stock market is not a ponzi scheme?

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  2. Instead of trying to knock those with a good pension down why don’t we try and find ways to bring everyone up to that level? All the more reason to have a universal system that provides “public service” pension levels to all. Mandatory contributions at source similar to taxes (or CPP or EI for that matter) based on income for a professionally managed pension fund that pays out a guaranteed indexed pension at the end. Some will complain that “the government screws everything up” but our current hodge podge public/private/RRSP/TFSA retirement system is overly complicated and is not doing a great job.

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    • Most public service pensions were negotiated as part of the pay package in collective agreements, except of course the politicians. So these pensions are in fact deferred wages. The elected politicians at the time approved these pensions plans. On a go forward bias, changing these plans is fair game, if one no longer likes the working conditions and/or pay package they can look for another job. Changing these plans retroactively is despicable and is motivated by envy and jealousy. An elderly and often weak/sick retired public servant, too weak to go back to work, has little to no recourse.

      I totally agree with David, we should stop basing the standard pension on the lowest common denominator and try to raise the bar for everyone.

      Also comparing a CPP pension to a teacher’s pension is distorting the facts. People who only have a CPP pension usually also get OAS and GIS. Teachers and many others pay a fair chunk of change contributing to their pension plans, if those who don’t have a plan had put this money away in an RRSP, taxable investment account, and/or now a TFSA, they would not be hurting so much. Life is a series of choices, if you made some bad choices it’s not the fault of those who made better choices.

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  3. Yes, all civil servants should lose their pensions. But why stop there? Did you know certain countries don’t even have pensions? Let’s remove pensions for everyone and really make it fair. Also, did you know that wages were significantly lower in a number of other countries? So let’s drop our wages to the wages of say Indonesia. So much great work to do and think what a great life we will all have. Look at Pakistan, low wages, non-existent benefits, super low taxes, big military and police and look how great they live! That can be us people!

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    • Well, I agree. Only why stop there? Perhaps the politicians will donate the 30% more Pension that they legally take more than any other Canadian is allowed.

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  4. A Family member is part of the OTPP and this past tax year made a mandatory contribution of $11,400. There,s a truth about public sector plans!!!

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    • Yes, I am a civic servant is a have not maritime province. My personal mandatory contirbution is over $10,000 per year. I suspect if the average citizen did the same with an RRSP and/or TFSA they would probably be okay in retirement after 35 years of investing. If said person just invested the cash with no interest or compounding (but reinvested their RRSP return each year) they would have $450,000. Essentailly, it would be way more than that with compound interest.

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