Wednesday, September 25, 2013

Public Service Pension Plans Not Created Equal

Based on a recent Fraser Institute report, the Vancouver Sun editorial (Sept. 20, 2013) headlined "BC must address problem of public service pension plans" is wrong both in fact and tone.  It is one thing for the Fraser Institute to pen a disingenuous, ideological offering in which it conflates various public pension plans across the country; it is quite another for the Vancouver Sun to uncritically transfer these whole-cloth ideas as an editorial.

The first distortion is that public sector employee plans are lumped in with the self-serving, gold plated pension plans of members of parliament and members of the legislature.  These plans are not the same and they are not funded in the same way.  The latter include taxpayers' contributions of many multiples of the contributions regular public employees.  With public service plans, the employee from earnings and the employer usually contribute very similar amounts.

The second contrast I would make is a very critical contrast between the public service pension plans in the Federal government and the public service pension plans in British Columbia. 

The Federal Government funds annual public-service pension payouts from general revenue.  Over the years, the contributions of employees from their earnings does not go into a separate pension fund.  Direct contributions from the employees' salaries are transferred into general revenue along with a 'matching' book-entry payment from the taxpayer. 

So, when a Federal Government employee begins to collect the defined-benefit pension at the end of her or his career, there is no separate fund.  These payments are funded by the general revenues, year to year.  Hence, in the case of the federal pension, there is an ongoing unfunded liability.  So, in the case of the Federal government, there is a 'pension problem'.  But the problem is not a problem created by the rich treatment of employees; it is a problem of poor fiscal arrangements made by the Federal Government policy makers -- the politicians.

The public service employee pension plans in British Columbia operate very differently and there is no taxpayer problem.  In British Columbia, on each pay cheque, the public sector employers and each employee make roughly similar contributions to specific defined-benefit pension plan funds (College Pension Plan, Municipal Pension Plan, Public Service Pension Plan, Teachers' Pension Plan, Work Safe BC).  In these cases, the funds are actually deposited and administered by an organization at arm's length from government, the BC Pension Corporation.  Ultimately, the BC public sector pensions are funded by these funds; not from ongoing general revenue.

I am a retired member of one of the BC plans.  My gross monthly pension is $1,564.47 or, in pay-cheque terms, about $782 by-weekly.  As indicated above, none of this before-tax pension money comes to me from the taxpayer.  It comes from the built-up pension fund and the revenue earned by the investments of that fund.  In this regard, the operation is similar to the manner in which the Canada Pension Plan operates. 

On behalf of current and future pensioners, those administering these funded plans, invest the monies in order to fund the future payouts.  For example, the March 31, 2013, report for the College Pension plan indicates that over the past 23 years, the fund has earned a return of in excess of 8% annually; and for the last year reported, investment income was in excess of 5%.  All the other BC plans operate similarly.  The BC pension payouts are funded overwhelmingly by earned income from investments.  Not from the taxpayer.

It is true that pension contributions by employees and employers are adjusted regularly to take account of actuarial assessment of the funds liabilities into the future; but just as with any other expenses one considers nowadays, the costs of future pensions is not static.  Costs go up.  Such costs likely would go up also for the defined contribution plans apparently favoured by the Fraser Institute.  In this world of ongoing inflation, surely no employer would hold employees to a one-time-only pension benefit amount.

While I am grateful to have the pension I have, I would argue that it is anything but gold-plated and though it is a defined benefit plan, it is NOT a problem to the BC tax payers.  In fact unlike the Fraser Institute, I pay income taxes just like most others. 

 The tax-free status of organizations such as the Fraser Institute -- now that really is an editorial worth writing.

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