In my last column, I made the case for Pooled Registered Pension Plans (PRPPs). It's important that Canadians save money for retirement, but unsustainable public sector pension plans could put all of us in the poorhouse if politicians don't get serious about fixing them. Let me put the problem in perspective.
Imagine it's March, 2013 and you discover to your considerable horror that you must pay the government $9,000 in addition to the taxes you normally fork over. If every other Canadian made the same discovery, it's no small exaggeration to suggest there would be riots in the streets and governments would quickly find themselves out of office.
Sounds pretty far-fetched, doesn't it? Well, you and I, and every other man, woman and child in Canada are each on the hook for an extra $9,000 to pay for the $300 billion (or more) in promises to public sector pension plans that governments don't have the money to pay. That's according to an excellent report, Canada's Hidden Unfunded Public Sector Pension Liabilities, by CFIB's chief economist, Ted Mallett.
The shortfall exists even though public sector employers (meaning taxpayers) injected an extra $1.27-billion per year into these plans between 2001 and 2010 and is on top of the large amounts governments and public sector workers are already paying towards their pensions.
If you find that scary, you may wish to avoid Ted's follow-up report, Public Sector Pensions: a Runaway Train? While private sector pension plan membership has remained flat, there were 3.14-million Canadians enrolled in public sector pension plans as of last year. That's an increase of 26.6 per cent since 2001 -- more than double the rate of growth in total private sector employment.
In other words, there are more government employees than there were a decade ago, so the pension problem has only become more unmanageable. Canadians could face a bleak future of higher taxes and reduced government services unless action is taken, and soon. Think this can't happen? Have a look at what is happening in Europe and the U.S. Canadian governments are already starting to struggle with these costs. The City of Montreal's pension plan now eats up 13 per cent of its operating budget, which is even more than the amount dedicated to public transit!
Clearly, the public sector pension system is financially unsustainable. It's also grossly unfair, when you consider:
• Similar jobs in public sector employees are paid $19 billion more than if they were paid at private sector norms;
• The average public sector employee retires at 61 with full benefits, while the average private sector worker waits until 63 (the average retirement age for self-employed Canadians is 66); and
• You and I as taxpayers contribute two dollars for every dollar a federal public sector worker contributes to his or her pension.
Not surprisingly, union leaders don't see a problem with this situation. Heck, they argue the government should fix the pension gap by forcing employers to provide workers with similar pension benefits to the ones they enjoy. It sounds nice until you remember that Canadians have yet to hear any union boss explain which pot of gold Canadian small business owners will find to help pay for these expanded costs.
All of this begs the question: how do Canadians prevent a financial catastrophe from taking place? CFIB has been pretty clear about the steps that need to be taken. Governments have to get serious about reining in their costs. That means bringing public sector wages back in line with private sector norms, pushing back the age at which full pension benefits are earned, and moving from a "defined benefit" to a "defined contribution" approach to pension entitlements.
None of this means that current retirees or civil servants close to retirement should have their benefits cut, but if we don't start soon, the country will be in big trouble. The federal government and some provinces are beginning to realize the size and scope of this problem, but so much more needs to be done.
Can we win this fight? You bet we can.
Dan Kelly is President of the Canadian Federation of Independent Business (CFIB). Learn more about CFIB at www.cfib.ca.