Submitted by Leo Kolivakis, publisher of Pension Pulse.
Our popular media has been filled lately with rote repetition of a convenient untruth: that public sector workers have a huge advantage over most others because they have cushy pensions provided by, or backed and guaranteed by, the taxpayer.
A recent story in the Toronto Globe and Mail contained no fewer than three iterations of this supposedly unassailable fact: “While most public sector employees have the security of taxpayer-backed pension plans”; “the relatively generous taxpayer-guaranteed pensions of government employees”; “the divide is between those with rich, taxpayer guaranteed defined benefit plans and the rest of us”.
So important is this fact that it must be repeated three times in one story? But never mind, one can find such references almost daily these days.
All this repetition of falsehood obscures a simple truth. To a greater degree than in any other sector, public sector employees pay for their own pensions.
8-9% contribution rate
More than half of the workers who get pensions outside the public sector do not pay directly for them at all – the employer pays the full cost. When workers in other sectors do contribute to the cost of their pension, it’s usually at the rate of about 3% to 5% of their income.
Public sector employees are unique in Canada in that they pay about 8% to 9% of their own incomes for their pension.
If all public employees received on retirement was what the government contributed to their pension plan, their pensions would be a mere 35% of income after 35 years of service. Hold the caviar, and don’t uncork the champagne for that!
There is an obvious point here but not obvious enough for the commentators, who ignore it in favour of their convenient untruths. Public sector workers may work for the public but their employer is the government. The wages and benefits of public sector workers are provided by their employer, the same as every other employee in Canada.
Their benefits were bargained for, and trade-offs were made along the way. For example, public sector workers traded off other benefits and greater wages to finance their pensions. So what’s wrong – after doing that – with a decent pension at the end of the day, especially since they pay for half of it themselves?
The real fact in Canada is that taxpayers subsidize every pension plan – all of the private sector plans for sure. This is because private sector employers can deduct the cost of private pension plans from their taxes – a clear case of the taxpayer subsidizing the cost of private plans.
RCAs for CEOs
There are RCAs. Have you ever heard of a Retirement Compensation Arrangement? RCAs are pension plans for business owners and senior executives, allowing companies to pay out exorbitant pensions to retiring executives. With an RCA, business owners and executives have an opportunity to increase their contributions to a retirement program beyond regular RRSPs and pension limits.
These programs allow for increased tax deductions to the corporation as well as the ability to increase retirement funds as a perk – growing in a tax-free environment. RCAs therefore cost every taxpayer in Canada. We all subsidize them – not only the pensions of ordinary private workers in this country but also the gargantuan pensions of business owners and CEOs.
Pious commentators who call for an end to taxpayer funding of supposedly luxurious public employee pensions should be careful what they wish for.
If we truly ended taxpayer underwriting of retirement income in this country, RRSPs would also go down the tubes. Although more than six million Canadians contribute to an RRSP, their annual contributions are relatively small. In 2007, the mean RRSP contribution for all Canadians was just under $2,400.
RRSPs benefit higher income Canadians disproportionately. Roughly one in four Canadians contributing to an RRSP makes over $100,000 a year, although they account for just 2.7% of all tax filers.
Ironically, these high-income investors are subsidized at a higher rate than are average Canadians. This small elite snapped up about 30% of the roughly $12 billion in tax deductions that Canadian taxpayers pay each year to subsidize this private investment.
One final point. Sometimes public sector pension plans have ended up short of funding. But when this occurs it is almost always because the employers did not contribute the amount of money they were supposed to contribute.
Employees paid their full share – they had no choice. But employers, governments in this case, often give themselves what are known as ‘contribution holidays’. This occurs when an employer decides that the pension plan has so much money that they do not need to match employees’ contributions and they award themselves a ‘holiday’.
At other times governments, as the employer, make use of the employees’ contributions to pension funds without paying the going rate of interest for doing so, thus causing the plans to be short.
Are these cases where the taxpayer is unfairly called on to guarantee the pension – or cases where the taxpayer is called upon to make up for the misfeasance of the employer?
These are strange days. Employees who dare to belong to a union are considered fair game for attacks – attacks on their wages, on their benefits, on their pensions. Instead of figuring out how to ensure decent wages for all Canadian workers, we are told that we must bring decent wages down. Instead of figuring out how to ensure that all workers get a pension, we are fed misleading information intended to weaken existing pensions.
Public pensions not the problem
Public sector pensions are not part of the problem. They are in large measure compulsory savings plans that employees themselves finance. And taxpayers, as noted, subsidize all pensions, which is sensible because retirement plans serve a social good. We the taxpayers subsidize RRSPs, even the huge pension plans for executives. Taxpayer backed pensions? Every one of them.
Don’t believe the current flurry of critiques of public sector pensions. All of these unwarranted attacks are based on a single, unsupportable, convenient untruth.
The National Union of Public and General Employees (NUPGE) is one of Canada’s largest labour organizations with over 340,000 members. Our mission is to improve the lives of working families and to build a stronger Canada by ensuring our common wealth is used for the common good.
While I will not dispute Mr. Brown’s assertion that public sector employees in Canada pay about 8% to 9% of their own incomes for their pension, I think he is missing a bigger point here.
There is an unprecedented crisis going on among private pension plans and I think this is going to boil over and impact public pension plans in the not too distant future.
Think about it. Private pension plans are imploding as companies go bankrupt or cutting costs. When private companies go bankrupt, their defined-benefit plans might be partially covered by the federal government, but if it’s underfunded, as most are, then the benefits will be cut.
What about public pension plans? If they are underfunded, either contribution rates and retirement age go up, benefits are cut or Joe and Jane Taxpayer will have to pick up the tab to cover the costs as these plans have a legal requirement to pay out benefits.
Today, the Bank of Canada (BoC) released its semi-annual Financial System Review. In my opinion, this is one of the best documents any central bank produces. It is excellent and covers many of the key risks of financial institutions, including banks, pension planss and insurance companies. Moreover, it covers the global economy and looks a key risks in the U.S. and elsewhere.
[Note: It isn’t perfect report because the BoC still lacks internal data from Canada’s large public plans to really gauge their embedded leverage and it needs to track the shadow banking system better.]
On page 20 of the report, the Bank of Canada discusses the funding status of private pension plans and notes the following:
Firms that sponsor defined-benefit (DB) pension plans are facing additional stress. The funding condition of DB plans in Canada deteriorated sharply in 2008, before stabilizing in the first quarter of 2009.
Chart A (click on chart above to enlarge) presents the trend in Mercer’s Pension Health Index, which incorporates indexes of the assets, liabilities, and funding positions (assets less liabilities) of a representative DB plan in Canada. Assets fell in 2008, largely because of the steep decline in Canadian and international equity markets. At the same time, declines in long-term bond yields caused the present value of liabilities to increase.
The sensitivity of the funding status of DB plans to the volatility of financial markets points to the need for pension reform in Canada, from the perspective of both plan sponsors and plan members. Private sector plan sponsors are facing large funding shortfalls at a time when profits are cyclically weak and access to credit constrained. In this environment, plan members are concerned about pension obligations being met.
To address these issues, reforms should focus on: (i) flexibility to manage risks and (ii) proper incentives. Reforms (regulatory, accounting, and legal) should also focus on providing sponsors with the flexibility needed to actively maintain a balance between the future income from the pension fund and the payouts associated with promised benefits. Small pension funds should be encouraged to pool with larger funds to better diversify market risk as another way to help make pension funds more resilient to market volatility.
The effective use of risk-sharing agreements between sponsors and members would also make pension plans more robust to economic and demographic shocks. Pension fund surpluses act as a buffer against unanticipated negative shocks to pension assets (or positive shocks to liabilities) at a time when it may not be convenient for the sponsor to make an immediate injection into the pension fund to offset the shock. Reforms should therefore also look at removing disincentives for sponsors to build a surplus and enhancing the benefit that sponsors might obtain from maintaining a surplus.
These recommendations shouldn’t just be for private plans, but for public plans too where incentive packages have gotten way out of whack as senior public pension fund managers are overpaid, taking excessive risks with other people’s money and often collect outrageous bonuses even when they lose billions.
If the Fed is going to police systemic risk, they better get private and public plans to report all the leverage on their balance sheets. Ditto for the Bank of Canada. I think they should be in charge of monitoring systemic risk here and they should force public pension plans to divulge their embedded leverage in both private and public markets.
Let me end with another inconvenient truth that public civil servants should be made aware of. Most self-employed people in Canada and elsewhere do not get to retire with a cushy pension and those that had some savings probably got clobbered by the market downturn in 2008.
I will bring it a little closer to home since my father and brother are physicians. On Monday, CTV reported that Canadian doctors are asking for a proper pension plan:
Doctors from across Canada are launching what they’re calling an email “MD Pension Action Day” today, to press the federal government to change rules so they can contribute to pension plans.
The doctors want federal Health Minister Leona Aglukkaq to call for changes to current tax legislation to allow physicians access to pension plans.
Under the current system, the federal government deems doctors to be self-employed, small-business owners. So, like plumbers or dentists, they are responsible for funding their own retirement, through RRSPs and other investments.
Yet unlike plumbers or dentists, doctors in Canada are paid by provincial governments who determine their fees and prevent them from charging costs outside of the system.
The doctors argue that every other health professional organization that works under the Canada Health Act is treated like a union and gets paid a pension from its union by the government. But physicians are locked out. What’s more, they say, doctors across Europe have group pension plans, but Canadian laws prevent them from doing the same.
The doctors want the federal government to change the Income Tax Act to allow them to collect pensions while remaining self-employed, explains Dr. Mary Fernando, who has been advocating for physician pensions for years.
“We pay our own overhead, that’s what makes us independent contractors,” she explained to Canada AM from Ottawa Monday. “We pay our staff and for every cotton ball we use in the office, but what we do not get to do is set our own fees. Those are set by the government.”
Time-strapped physicians have always had to manage their own retirement investments. Many Canadian doctors — whose average age now is 50 — have had such huge losses on the markets in recent years, they are being forced to delay retirement or even come out of retirement.
Other younger doctors have decided they would prefer to move to areas where they can make more money and have their retirement investments be better protected. Fernando believes that chaning the pension rules would give Canadian doctors one more incientive to stay in Canada.
“We lose physicians in large numbers. Over the last 30 years, we’ve sent 19,000 Canadian physicians to the U.S.,” Fernando said. “So as we continue to train physicians, it’s a bit like pouring money down the drain. We need to find new ways to not just train new physicians, but to keep physicians in Canada.”
It’s well-acknowledged that doctors earn good salaries. Gross income for family doctors averages close to $200,000. Specialists can earn $300,000 or even much more. Fernando says that what doctors are asking for is not new money. What they want is the right to direct salary increases to group pension plans.
“Right now, when provincial governments put a new dollar on the table for a fee increase, all they can say is: ‘This is a dollar more for your fees.’ They cannot say, ‘This is a dollar we can put aside for a pension. I will ask you to put aside your dollar too, and you will get both your dollar and our dollar if you work in Canada’,” Fernando explained.
Many doctors in Europe have access to group pension plans. The U.K., for instance, has an exemption in its tax law that acknowledges that fee-for-service doctors working in the National Health Service aren’t regular small business people, since they can’t set their own fees. So they have government-backed, defined-benefit pensions.
The Medical Post, a bimonthly magazine aimed at family doctors, has launched a media crusade to promote the pension proposal, called MD Pension Action Day. They’re asking the 67,000 licensed doctors in Canada to email Minister Aglukkaq today at Aglukkaq.L@parl.gc.ca to ask her to advocate changing tax law so Canadian doctors can get pensions.
A few months ago, my dad showed me a cover story from the Medical Post, Doctor shortage (and early retirement) over thanks to the stock market:
To gauge the impact of the financial crisis, all Dr. Maria Hugi has to do is look out the window of the home she purchased a few years ago in Dupont, Wash., with her fellow ER physician husband.
The couple, who also are both ER doctors in Vancouver, where they have their primary home, bought the little house to be nearer the Fort Lewis U.S. army base where they also put in shifts.
“The house next door foreclosed a few months ago,” said Dr. Hugi, “and its lack of value has affected the whole neighbourhood.” She figured her abode in Dupont, identical to the darkened building next door, has dropped by US$200,000 from the US$450,000 they forked out at the height of the housing market.
While few Canadian physicians have a totem of the financial collapse right outside their door, they do have vivid reminders of it as close as their nearest investment statement.
According to Manfred Purtzki, a Vancouver financial adviser, the average physician-held portfolio has shrunk by approximately 30% in the last year.
The Medical Post has heard from many doctors, particularly those nearing retirement, who say as a result of the financial meltdown they have seriously re-calibrated their retirement plans. The majority say they are taking on more work, putting in longer hours at the office or even effectively starting second careers in medicine.
Said Dr. Hugi, “Maybe it is because my husband and I are more invested in the U.S. that we really feel it. I have noticed it in Canada, too: There is no talk of retirement among people my age.”
Dr. Hugi and others posit, tongue in cheek, that the collapse of physician investments may have effectively solved the country’s physician shortage problem.
Baby boomer doctors such as Dr. Hugi, who were thinking of slowing down in the next five years or were on the eve of ending their professional lives, in particular are feeling the economic reverberations of the financial crisis.
Baby boomers constitute the majority of Canada’s medical pool: The average doctor age in 2007, the year for which the most up-to-date data are available, is just shy of 50 years, the Canadian Institute for Health Information reported in December.
Purtzki, a Medical Post columnist, noted doctors who retired in the last five years are the ones who are most worried, as well as those who plan to retire by the end of 2010. Especially upset by the turn of events are the doctors who “hate their job, and therefore have no inclination to continue working on a part-time basis to make up the losses.”
One doctor he knows has slumped into a depression because his net worth has fallen to $2.2 million from $3 million.
Purtzki said doctors who have recently retired or are soon to retire have a tough choice to make: either downsize their lifestyle or find additional sources of revenue. Many are steadfastly unwilling to make the shift, he said.
Dr. Hugi, one such hard-hit doctor, quipped: “To recoup about 40% to 50% of your savings or investments will probably take about 30 years.”
Doctors are fully aware of how badly their portfolios are doing, said MD Financial’s John Klaas. Based in Halifax, he’s the assistant vice-president of practice leadership; he coaches the company’s consultants.
MD Financial is owned by the Canadian Medical Association through its CMA Holdings business operation. It handles the investments and other financial matters of about 42,500 doctors, as well as more than 64,000 physician family members.
Klaas and his MD Financial advisers are fielding many calls from doctors who are on the cusp of retiring—or thought they were, until a few months ago. The callers are exhibiting “a fair degree of stress,” Klaas said.
He said it’s a good notion for these doctors to consider continuing on “with some subset of what they were doing, and create (additional) income for the time being.” The decision should be seen as “tweaking the retirement plan versus abandoning the retirement plan.
“And what this might let them do,” he added, “is continue having income: They don’t have to take anything from the portfolio—they can let the portfolio go through the machinations that it will—and they feel like they aren’t selling equities at a bad time,” referring to the ongoing ups and downs of Bay Street, the heart of the nation’s financial district.
Luckily, as Klaas pointed out, while Canada is in a recession, “health care in Canada is recession-proof.”
He said he could see as a demographic trend doctors shifting increasingly to semi-retirement as opposed to opting for full retirement.
Klaas emphasized that those doctors distraught about their portfolio’s collapse need to keep in mind that retirement income per se “is not the only thing that guarantees a satisfying retirement.”
The recently created complications of retirement doctors are facing “are the same issues that most other Canadians of that age group are facing,” said Warren MacKenzie, president of Toronto-based financial adviser Second Opinion Investor Services.
MacKenzie agreed with Klaas that doctors can rest easy knowing their incomes from patient-care are recession-proof. But doctors don’t have employer co-sponsored pension plans to fall back on, and “they do want to retire some day,” he added.
Indeed, doctors do have many economic advantages that the average Canadian doesn’t have. The one-payer system is recession-proof; Canadians get sick, and because of medicare don’t think almost at all about the cost of a doctor visit. Also, the overall Canadian population is getting older, and its collective health will worsen with age.
In short, doctors, if they do want to increase their income, can earn more revenue in their chosen career, unlike retirees in some industries. As Dr. Hugi observed, “Doctors certainly aren’t going to be thrown out on the street starving.”
Dartmouth, N.S.-based hospitalist Dr. Chris Childs is 68 and has not yet retired. He’s worked for more than 30 years as an independent family physician in the province. In recent years he’s worked part-time in a local psychiatric hospital.
He admitted in a recent interview he doesn’t have a firm retirement date. Now he plans to keep his shoulder to the medical grindstone “for the foreseeable future.”
“I had thought of it being sometime this year when my present job—or part of it—will end,” Dr. Childs said. “However, there are other job possibilities. I enjoy what I do and it makes sense not to be depleting my savings when the markets are so depressed.”
He said, “Amazingly, the pay (from the psychiatric hospital) has been an improvement on my GP earnings,” so he’s in the uncommon position of increasing his RRSP contributions, despite his age and recent stock-market events.
Dr. Childs said he is concerned about the state of his portfolio, which “has dropped by about 25%. Throughout last summer and fall I took a moderately optimistic view of the markets and made a few (new) investments, all of which have done badly despite them being in ‘good’ companies. Now, having been bitten, I am feeling much more cautious. But, I do think we are at or close to the moment when it makes sense to re-enter the market.”
He added, “I have delayed my retirement at least partly because of the financial crisis but we (he and his wife) haven’t changed our lifestyle as, fortunately, my income is unaffected so far. In any case we have never been ‘high rollers.’ ”
Observing that Nova Scotia family physicians earn relatively depressed incomes and that “only the ones seeing large numbers of patients made the sort of incomes doctors are popularly supposed to make,” he said he expected “these aging family doctors will just keep working as long as they need to or can.”
The fortunes of young doctors, too, have been affected. Dr. Sarah Giles, who completed family medicine residency only a few years ago and now does locums in northwestern Ontario and the Northwest Territories, is one such young doctor.
While the financial imbroglio has left her worried about her own investments, Dr. Giles still contributes to her RRSPs, and is considering jumping into the housing market, since prices have come off their historic highs.
She observed that while she only looks at her investment statements when she receives her monthly paper statement in the mail, older physicians she knows scrutinize their portfolios daily online.
These older physicians, she said, “are looking to delay retirement.”
Canadian doctors, especially those who made long-term saving a priority or were lucky enough to be especially high earners, may feel like they’ve been kicked in the socio-economic status, but perspective is needed.
Purtzki, the financial adviser, recommends medical practitioners who are despondent over their investments should look no further than their patients for solace. Doctors would be surprised “to find out that many retirees are happy to have $200,000 in the bank.”
Dr. Simon Bryant, a Canmore, Alta., family physician, was very philosophical about losing “a few hundred virtual dollars” on his investments. The financial system will some day recover and in the mean time it’s healthy to keep reality in focus: “There is as much oxygen in the world, as much fertile ground, as much fresh water,” and then he added, with a wink to the business world, “and as much manufacturing and transport capacity.”
I happen to believe that all self-employed workers in Canada – not just doctors – should pool their assets together and they should collect proper define-benefit pension plans similar to those awarded to public civil servants and backed by the federal government.
The current system rewards pubic servants and leaves private workers out in the cold to fend for themselves, leaving them vulnerable to all sorts of financial sharks peddling very bad advice.
The dichotomy between public and private pension plans, especially those of self-employed workers, is an inconvenient truth that policymakers will need to address if we are to secure the retirement of all workers.
I received and email from Diane Urquhart teling me that this motion unanimously passed:
Mr. Marston (hamilton East – Stoney Creek),seconded by Mr. Mulcair (Outremont), moved, — That, in the opinion of the House, in light of the legitimate concerns of Canadians that pensions and their retirement security may not be there for them in their retirement years, the Government of Canada should begin to work with the provinces and territories to ensure the sustainability of Canadians’ retirement incomes by bringing forward for review by the Federal-Provincial-Territorial Research Working Group at the earliest opportunity, measures such as:
a) expanding and increasing the CPP, OAS and GIS to ensure all Canadians can count on a dignified retirement;
(b) establishing a self-financing pension insurance program to ensure the viability of workplace sponsored plans in tough economic times;
(c) ensuring that workers’ pension funds go to the front of the line of creditors in the event of bankruptcy proceedings;
(d) in the interest of appropriate management of the CPP that the Government of Canada immediately protect the CPP from imprudent investment practices by ceasing the practice of awarding managers performance-based bonuses; and
e) take all necessary steps to recover those bonuses for 2009, ensuring managers in the future are paid appropriate industry-competitive salaries.
Susan Eng wrote me that CARP called on MPs to support increase to OAS, GIS, CPP, universal pension plan and a Pension Summit – vote on Tuesday.
Also, a Canadian parliamentary committee in Ottawa wants to hear from the chief of Nortel Networks why executives got bonuses during bankruptcy protection. On Tuesday morning, the committee voted that it has “supremacy,” and ordered Mike Zafirovski, Nortel’s CEO, to appear Thursday and testify. I can think of a few other CEOs of public pension plans that should be ordered to testify in front of a parliamentary committee as to why they received bonuses when the pension funds lost billions.