Retirement — a heftier bill than expected

If the San Jose mayor’s plan to tackle deficits in municipal employee pension plans is upheld, other cities could follow suit.

An important battle is being waged in California, and its outcome could wreak havoc on many retirement plans here in Canada.

Mayors and municipal bankruptcy experts are watching San Jose closely as its mayor, Chuck Reed, fights to have his plan to tackle deficits in municipal employee pension plans upheld in court. The city now spends 20% of its general fund on these pensions, including medical coverage, and this year will be worse. According to The New York Times, libraries have been closed and firefighters laid off in order to pay for this.

Under Reed’s plan (which was approved by 70% of the voters in a referendum), workers would contribute significantly more to keep their current benefits. If they refuse, they would be offered less generous pensions, with a later retirement date and lower pension indexation. Furthermore, new employees would only be able to enrol in defined contribution plans, which, like RRSPs, are subject to the ups and downs of the stock markets. Guaranteed plans or defined benefit pensions, which taxpayers top up if the markets plunge, would be a thing of the past.

The unions are firmly opposed to the San Jose mayor’s proposal. If the court rules that this reform plan is legal — a final decision could take time and both parties have promised to appeal should the ruling go against them — other cities are sure to follow suit.

Promises that cannot be kept

Politicians here should pay attention to the developments in San Jose because our own numbers are about to hit us full force. According to a 2012 Canadian Federation of Independent Business study, which was based on Statistics Canada and Public Accounts data, the unfunded shortfall of Canada’s public sector pension plans (federal, provincial and municipal) likely surpasses the $300-billion mark — a burden of $9,000 for every man, woman and child in Canada.

A horde of baby boomers is barrelling toward retirement. They are living longer and the cost of their retirement is soaring. Meanwhile, governments have not set aside enough funds and low interest rates are depressing returns.

Who will foot the bill? It would be unfair to put taxpayers on the hook for the entire amount by raising taxes. Most of them do not even have pension plans through their employers, much less the bulletproof version. Should Canadians be forced to work until they are 70 to pay for their neighbours’ Freedom 55?

And we can’t blame the civil servants: they negotiated their employment conditions in good faith and expect the government to keep its word. The real culprits are long-gone politicians who traded promises for votes and current elected officials who choose to bury their heads in the sand.

Now is the time to act

We can hope for an economic boom to pull us out of this mess or for interest rates to climb and improve returns, as they have in recent months. Unfortunately, there is little chance of both scenarios coexisting for long. If rates increase too quickly, Canadian consumers, already deep in debt, could be pushed over the edge.

We must act now and agree on a way to share costs. Some Canadian cities and provinces have begun, by increasing employee contributions, for example. New Brunswick, for one, has linked part of its future revenues to market performance. This is good news and it’s a start. As for more ambitious reforms, the outcome of the legal battle in San Jose could very well plant a seed in some people’s minds.