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article imageOp-Ed: Pension gap creating tension between haves and have nots

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By Bill Tufts     May 9, 2011 in Personal Finance
Hamilton - Statscan released a report today on the status of pension plans in Canada. Most Canadians do not have a pension plan while government workers do. Now more government workers have pension plans that private sector employees.
In its report Statscan shows that pension plan membership in the private sector is falling and that most public sector employee have access to gold-plated plans. Membership fell 2.1% in the private sector as more employees were dropped from plans and the public sector on a hiring spree increased the number of employees on it's plans.
The recent troubles in the economy have forced more and more companies to reevaluate the viability of pension plans. Many companies have either changed plans to defined contribution, frozen plans to new members or closed their pension plans completely.
A defined benefit pension plans is one where the company or taxpayer guarantees an income for the employee in retirement. This contrasts with the defined contribution plan where the employees can only draw income against the funds that have accumulated inside the pension plan.
The Labour Force Survey done by Statscan shows employment numbers at the end of 2009. The pension plan membership numbers were also as of the end of 2009. At that time there were 3.4 million public sector employees and 10.6 million private sector employees. Those with defined benefit pension plans included 2.8 million public sector employees (82%) and 1.7 million private sector employees (16%).
The private sector has suffered hardship over the past three years but the public sector has remained unscathed. There has not been much discussion around the disparity between public sector employees with gold-plated pension and private sector with much lower coverage.
Earlier this year the LA Times wrote an article called The pension haves vs. the have-notsThe article asked "Can the substantial disparity between public and private sector retirement benefits be sustained much longer? We think that it probably cannot". It cannot be sustained financially or politically.
There is the implicit promise in defined benefit pensions that the employer or taxpayer will make good for any pension shortfalls and will be responsible for guaranteeing the income stream promised to the employees in retirement. Governments at all levels are starting to face serious challenges from pension shortfalls. Although the public sector pensions have been trying to suggest that the fall in stock markets was the main reason for the pension shortfalls, this is only a small part of the problem.
The number one determinant of rising pension costs is skyrocketing wages. We saw this when Ontario Teacher's Pension Plan reported it's performance for 2010, a record year for investment performance, yet the pension shortfall grew even bigger. The same story is happening across Canada in municipalities, universities and other government organizations.
An irritant for taxpayers is the fact that government are depositing ever increasing amounts of tax dollars into the public sector plans in order to shore them up. The report from Statscan shows the numbers.
Total employer and employee contributions to RPPs in 2009 amounted to a record high of $53.4 billion. Employers contributed 71% of the total, up from 67% in 2008.
About 33% of the employer contributions, roughly $12.6 billion, were for unfunded liabilities, more than twice the amount in 2008.
Statscan does not show if the shortfalls were paid into public sector plans or private sector ones. We do know the $12.6 million for shortfalls was paid into defined benefit plans because defined contribution plans cannot have an unfunded liability. This means that just the unfunded liability contributions averaged over $2,700 per employee. On top of that there was the additional $40.8 billion paid into these plans, the major portion of it by the employer.
Last year over 60% of Canadians did not make a contribution into their RRSP account,. The largest majority stated a lack of funds was the major reason for not making a contribution. That did not stop them however, from contributing heftily to the pension plans of their neighbors in the public sector. Ever increasing portions of taxes are going into these plans.
In 2009 the total RRSP contributions for all Canadians were $33.0 billion down from $33.3 in 2008.
Bill Tufts is the curator of Fair Pensions For All
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
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