Point/Counterpoint: James Pierlot’s Pension Reform

Pierlot: An $80,000 salary in the public sector is not a “dangerous fallacy” a “misrepresentation” or a “seldom exception”. The Ontario government reported this year that more than 1 in 10 of its public sector workers receive salaries in excess of $100,000 per year. This does not include the value of non-taxable pension and other benefits, which are worth 30-40% of pay. Routinely, experienced Ontario teachers make $70-$80,000 per year. As reported in the Globe and Mail on November 19, 2008, Ontario elementary school teachers were seeking a 12% pay increase over 4 years that would see the top elementary school teacher salary increase to $94,000. This means that right now, an elementary school teacher can earn as much as $82,000. A high-school principal in Ontario makes about $120,000/year. Accordingly, it is evident the $80,000 example used in the article is reasonable.

But supposing the article had used a lower salary, such as $60,000. In that case, the pension value for an individual after a 30-year career would have been $700,000, or $1.4 million for a two-income family (not including RRSP savings). This is almost almost six times as much as the median at-retirement pension savings of Canadian families as reported by Statistics Canada ($244,800). At a salary of $50,000, the public sector family’s pension savings would be worth 4.5 times more than the median Canadian family retirement savings. In other words, whatever salary you use, there is a huge gap between public and private sector workers in terms of pension saving, The article assumed 30 years of service at retirement. This is a reasonable assumption: Statistics Canada reports that in 2006/2007, federal public sector workers retired with an average 29.2 years of service.

It is not accurate to suggest that the structure of public sector pension plans is “obviously designed to retain a valuable employee for the longest time possible”. Rather, the opposite is true. Public sector pension plans have generous early-retirement benefits such that an employee who is age 60, has 30 years of service or has 80 or 85 “points” can retire with a pension that is not subject to the early retirement penalties is that are typical of private sector pension plans. In addition, public sector plans pay “bridge” benefits to replace CPP benefits until age 65.

Because of these early-retirement benefits, few public sector workers stay until age 65 because if they did, they would effectively be working for part of their salary. Consider a public sector employee making $70,000 per year who vests in an early retirement pension with 30 years of service. The pension will pay $42,000 per year (indexed). If the worker does not retire, he/she is effectively working for $28,000 ($70,000 – $42,000). Most public sector workers quite logically decide this doesn’t make sense, and this is the reason why the median retirement age is 58 in the public sector and 62 in the private sector (Statistics Canada). It is also important to note that a public sector pension’s value is generally greatest when early retirement is taken because the pension will be paid over a much longer period of time. Although a monthly pension paid after 35 years of service will be higher, the value of the pension will often be lower because it will be paid over a shorter period of time.