Thursday, March 20, 2014

Malcolm Hamilton on Public-Service Pensions

Well-respected pension expert Malcolm Hamilton has a new report entitled Evaluating Public-Sector Pensions: How Much do They Really Cost? He shows that public-sector pension costs are "materially understated and, as a consequence:
  • employees in the public sector are paid more than is publicly acknowledged and, in many instances, more than their private-sector counterparts;
  • public sector employees shelter more of their retirement savings from tax than other Canadians are permitted to shelter; and
  • taxpayers bear much of the investment risk taken by public-sector plans while the reward for risk-taking goes to public employees as higher compensation."
I approach studies skeptically and am frequently critical of mistakes made by authors of studies, but not here.  It is definitely worth paying attention to Hamilton.

12 comments:

  1. When it comes to pensions, it's all about the haves and the have nots. If the public sector wants to offer employees perks like pensions with indexing fine, but their salary should be lower to compensate for that. Instead we have gold-platted pensions in the public sector being funded by taxpayer dollars. I can see why so many people are up in arms.

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    1. @Sean: I think Hamilton's approach is a good start. If we were to determine the present value of the public-service pensions properly, we'd find they are worth more than the government says they are worth. Then it would make sense to either cut them back or ask workers to accept larger payroll deductions to pay their share of the cost. Either way, it would effectively be lowering pay.

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  2. public sector employees in the Ontario Public Service currently pay ~ 9% of their salary to their pensions

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    1. @Anonymous: Federal employees pay for a fraction of their salaries toward their pensions as well. The issue is figuring out the real value of those pensions so we know just how much the employer is paying.

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  3. Sorry Michael but I am a member of the Public Service Pension Plan and I contribute almost 8% per year to my salary. That is not an immaterial "fraction" of my salary. It is a lot of money for me but I pay it happily knowing my pension will be there when I retire. I am sure if most people had to contribute 8% of their salaries to a DC plan they would be up in arms.

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    1. @Anonymous: Who said that your 8% contribution is immaterial? My contention is that your pension is worth somewhere close to triple the amount you contribute. I'm currently contributing 10% of my salary to a DC plan, and I have to top that up with more to my RRSP and TFSA. Paying only 8% to end up with a 70% pension starting at 58 sounds great to me -- especially when taxpayers have to pay most of the cost.

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    2. The taxpayers are my employer and should pay in just as I assume your employer is paying into your DC plan. Just because they are taxpayers doesn't mean they shouldn't have to pay. A pension is just deferred income and I could be making more money in the private sector but choose to work in the public sector because of the pension. Although I don't know the exact pension sharing formula I do believe the government is going to a 50/50 split on the pension contributions which I don't believe is unreasonable.

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    3. @Anonymous: My DC plan gets 2/3 from me and 1/3 from my employer. It's only bad accounting that says your split is 50/50. Your pension is more valuable than the government says it is. It's appropriate for your employer to provide a match -- the only question is how much.

      I can't comment on your particular situation, but most government workers cannot get better-paying private sector jobs. The government's difficulty in getting rid of poor employees leads to the average competence getting dragged down. My employers has jobs with similar titles used in the government, but we routinely let go underperforming employees which leaves stronger performers. Many government employees couldn't cut it.

      I don't blame individuals who take a good deal when they see it in a government job. But this doesn't change the fact that government pensions are more valuable than the government admits, which means that government employees are paid even better than the government admits.

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    4. I agree with some of your points. I am an engineer in the public service and most, but not all, of my friends and colleagues who are practicing in my profession in the private sector make more money then I do. Most of the them have some sort of profit sharing/bonus structure which I don't. Granted their pensions are not as good as mine but again I am foregoing this extra income for the security of a government pension. I did a little research and by no means am I an accountant but as of 2013 it appears that the PSPP is fully funded. Currently for every $1 of contributions I make the government puts in $1.50 which is a good deal but again they are going to a 50/50 split which I don't think is unreasonable. Your employer should match as well.

      I don't want to get off topic but when I graduated from University over 20 years ago most of my classmates shunned government jobs because they felt at that time that their skills would be more valued by private sector employers. They didn't want to work in a unionized environment where everybody benefited at the expense of those who actually did most of the work. For the most part they have done better in current income but their current DC pensions are lacking and a lot of them are regretting their decisions based on the meager returns they have made in the markets over the last 10 years.

      I agree you should take advantage of the situation presented to you but I think more pressure should be brought to bear on corporations to either support an expanded CPP or bring back their own or pooled DB plans.

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    5. @Anonymous: My friends within the public service often complain about having to work with too many people who can't or won't do their jobs well. This exists in the private sector as well, but to a much lesser extent because more workers get let go. It is the presence of these weaker workers that prevents the average public service worker from being able to move into the high-paying jobs held by your private-sector colleagues.

      The claim that the PSPP is fully funded is based on the faulty accounting that Malcolm Hamilton exposes. Overly high return expectations are used to claim that current assets will grow to cover future obligations. When the required growth doesn't come, taxpayers will fill the gap to cover the obligations.

      Unfortunately, it's simply not possible to get pensions for everyone up to the standards of the public service pension plan. The main problem is that public service workers are able to retire very young. I read a report saying that the average retirement age is 58. If everyone over 58 didn't work but received a nice big pension, there just wouldn't be enough remaining workers to run the country. A default retirement age between 70 and 75 (getting a big pension) would be practical. Then those workers who wish to stop working earlier could do so with extra personal savings.

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  4. I think that the Teachers pension plan skews the results on retirement age. Most teachers I know are fully retired by 55. Full pension at my firm usually starts at 60 which is generous I agree but most people stay on a couple of extra years so we get 2 to 3 years on most people. Significant but not overly. As for the the overly high return expectations, you are correct to a point, but I just can't believe that interest rates will stay this low for much longer. I just can't fathom that. I think the low interest rate/ high house price situation in this country is doing more to keep people from saving and endangering retirements then the the whole DB/DC pension issue. Anyways my two cents.

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    1. @Anonymous: I agree that interest rates must rise at some point, but that won't necessarily do much to meet the return expectations of pension plans. Most DB pension plan obligations are indexed. This means that the discount rate used is a real return (a return above inflation). So, if interest rates rise and inflation rises at the same time, the real rate of return doesn't change. To meet the return expectations of pension plans, we'd need significant sustained economic growth. This isn't impossible, just as it's not impossible for the Toronto Blue Jays to set a record for number of wins this year. It's just not likely.

      In the end it's just not feasible to think that we could have everyone retire at age 60 or younger with great pensions; there just aren't enough younger workers to do all the work we'd expect to be able to pay for.

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