Canadian baby boomers don’t have to look very far in their circle of friends to find people retiring in their 50s on very generous life-long public service pensions. In their book Pension Ponzi, Bill Tufts and Lee Fairbanks try to persuade readers that “public sector unions are bankrupting Canada’s health care, education and your retirement.” Of course, unions argue differently. As with most debates between sides with polarized views, there is lots of room for both sides to be wrong.
While the authors make a number of excellent points, they hardly give a balanced view. This book is written to outrage you more than it is written to inform you. I’ll go through some of the book’s good and bad points before offering my own thoughts on public service pensions.
The Good Parts
Mounting public debt is a sign that governments at all levels in Canada have been overspending for decades. “There is really only one place that meaningful cutbacks can occur, and that is the size and cost of the government workforce and its salaries, benefits, and pensions.” When companies face tough times, they are forced to cut jobs. The same is true for governments if they plan to balance their books.
“The age for regular retirement in the public sector needs to be raised to 65 for full benefits, with penalties for early retirement.” I don’t like the use of the word “penalties” here because pension reductions should not be seen as a punishment. If you start collecting a pension in your 50s, you’ll collect money longer than if you start at age 65. The pension payments must be reduced to make the total payout the same.
To remain competitive, companies must routinely evaluate their workers and lay off workers who don’t perform well. However, “neither incompetence nor lack of achievement is cause for anyone to lose their job in the public sector.” This point is somewhat overstated, but it is largely true. Few bad public sector employees lose their jobs.
The “oft-touted idea that public sector employees would all receive more money were they working in the private sector is totally unfounded.” There is a very wide range of talent within the public sector. The most talented government employees in technical positions could do well in private industry, but many of the others could not get and hold a comparable private sector job. If public sector workers could easily make more money in the private sector, more of them would do so.
The Not-So Good Parts
Much of the book is devoted to describing specific pension-related abuses by top bureaucrats. These problems should be fixed, but I doubt they are representative of the typical public sector retiree. The authors use these examples to boil readers’ blood rather than inform them.
The authors give many dollar amounts in their examples of waste and abuse. Unfortunately, they adjust for inflation and investment returns only when it suits them. The pension abuses are bad enough without overstating them by adding up nominal dollars to be spent in future decades without adjusting for inflation.
The authors point to a report showing that a family with 2 children only needs 43% of their pre-retirement income to have the same disposable income in retirement. They arrive at this figure by deducting child costs, employment costs, mortgage payments, and retirement saving, and accounting for the reduction in income taxes. It is not fair to compare this 43% figure to a 70% pension. If we’re going to say that public service workers actually make much more than they appear to earn because of their pensions, then the actual percentage of their true incomes they receive as a pension is well below 70%. Put another way, we cannot count the retirement savings for the example family as part of income unless we’re prepared to count employer pension contributions as part of income for public sector workers.
Among the many people I’ve dealt with professionally in government as well as friends working in the public sector there is a strong feeling of entitlement to their pensions. On one level, this makes sense: they expect to receive what they were promised.
But there is more to this feeling of entitlement. I would say that almost everyone I know who has been in government for at least 25 years doesn’t like their jobs. They tough out as many years as they can to get to a pension they’ve earned through suffering.
The most common complaints I hear are bad coworkers, bad managers, and insufficient meaningful work. It’s normal for workers to complain a certain amount in the private sector, but things seem much worse in the public sector. No doubt there are parts of the public sector with good working conditions, but this seems to be more an exception than the rule.
The problem is that Canadians derive no benefit from the suffering of public servants. We can’t afford to pay people for enduring poor coworkers and a dysfunctional work environment. I would love to see a more efficient public sector where workers feel that their efforts have real meaning. This can only happen if the public service does a better job of identifying poor performers at all levels and laying them off.
Steve Jobs famously declared that he wanted only A-players working at Apple, no B-players. The public service doesn’t have to get rid of B-players; they just have to stop employing the obvious F-players.
On the specific pension issues raised in this book, here are my thoughts:
Pension Accrual: For the most part, pensions accrue at 2% per year for a 70% pension after 35 years. For some occupations, a 70% pension is reached after only 30 years. People should not be able to have a standard retirement before age 65. An accrual rate of 1.5% so that workers reach a 60% pension after 40 years makes more sense. For occupations with physical demands, it should be standard practice to shift workers to less demanding roles in their later years.
Retirement Age: The standard retirement age should not be earlier than 65. Like CPP benefits, anyone collecting a pension sooner than age 65 should get a reduced pension, even if they’ve reached the 40-year mark. This is not a punishment; it simply reflects the fact that pensions that start early will be paid longer. There should not be bridge benefits for those retiring early unless there is a corresponding reduction in pension benefits. Anyone who wishes to retire early should save up to make up the difference for a reduced pension.
Retirement Salary: Currently, pensions are based on an average of the best few years of income. This encourages “spiking” to artificially inflate earnings at the end of a worker’s career. The pension should be based on lifetime average earnings, but with appropriate adjustments for inflation and investment returns. CPP is a good model here. If you earned half the maximum pensionable earnings 30 years ago, this counts the same as earning half the pensionable earnings today, even though the dollar amounts are higher today.
Employee Contributions: It makes sense for employees to contribute half the value of a pension and for the government employer to contribute the other half. However, this can’t be based on unrealistic return expectations in defined-benefit plans. If you assume high investment returns, then you’ll conclude that very little needs to be saved today to cover pension payments in the future. Using realistic returns means employees would make a fair contribution to their own pensions. But it doesn’t make sense to use low bond returns either. The correct return to use is somewhere between bond rates and historical real stock returns.
Overall, I found this book useful for learning the important issues in the public service pension debate, but it is far from balanced. I encourage readers to seek out other points of view before drawing any conclusions.