Pension Envy

For all of its financial acumen, the Ontario Teachers’ Pension Plan, like the rest of Canadian society, has not been immune to the demographic squeeze play inflicted by the aging baby boomer generation. In a country with more seniors and a low birth rate, fewer working Canadians must support a growing population of retired people.

Without question, the same math applies to OTPP. For much of the past decade, Teachers’ has technically been in the red, because the amount of money going out, in the form of payments to retirees, has exceeded the volume of payroll contributions coming in from the dwindling ranks of active teachers.

The reason behind this shortfall has nothing to do with investing savvy. As the average age of Ontario’s teachers has risen along with that of everyone else in the postwar generation, the number of dues-paying members has plummeted, while the roster of those receiving benefits (like Vic and Linda Genova) has pushed steadily upward. In 1970, says Leech, the proportion was ten to one; today it is just 1.5 to one. In other words, fewer and fewer teachers are being called upon to support more and more pensioners.

For many teachers, the duration of their retirement exceeds the span of their careers, an actuarial anomaly no one expected in 1990 when the plan was established and which has added billions in costs. The twenty-five-year-old who starts teaching this fall and retires in 2045 may still be collecting a pension cheque in 2085.

OTPP first came face to face with the longevity dilemma back in 2007, when its executives commissioned a detailed actuarial study of members’ health and lifespans; because its predecessor, the Teachers’ Superannuation Fund, was founded in 1917, they had excellent data on generations of educators. The organization hired Robert Brown, director of the University of Waterloo’s Institute of Insurance and Pension Research, to crunch the numbers. His findings were startling: teachers were living far longer than the average Canadian pensioner. In practical terms, this meant OTPP’s sponsors had to come up with a way of adding $6 billion to its war chest and ensuring that it could continue sending pension cheques to all of those octogenarians.

Leech itemizes the reasons for the members’ robustness. Teachers smoke less, because cigarettes were first banished from staff rooms in the ’60s, long before the ban reached many other workplaces. They are on their feet for much of the day, so they tend to be healthier. Many are familiar with good nutrition habits, due to curriculum content. Then comes the clincher: teachers are also healthier because they experience less anxiety about . . . retirement.

“If you have a secure pension plan, it’s almost a self-fulfilling prophecy,” Leech says. In a follow-up report, moreover, Brown drove home his point about the relationship between health, longevity, and income security. “Long-term income is a better predictor of health than current income,” he wrote. “In this regard, the very significant pensions that teachers have (and their cost-of-living adjustments) are an important reason for their enhanced life expectancy.”

In an earlier work on health care spending, he had already delivered this bombshell in a policy aside: “Income and income security could be more important to the life expectancy of a nation than traditional health care delivery. In fact,” he argued, “if social security income programs were eroded so as to find more money for the funding of health care, the life expectancy of the affected population could go down.”

To critics of public sector pensions, he is in effect saying that the government’s upfront contribution to these retirement savings plans pays for itself in the long run because the beneficiaries consume fewer health care dollars later in life.

Others reframe his point by focusing on the dearth of retirement security for a growing number of Canadians who do not have access to such plans. “The absence of pensions for many private sector employees will have extensive long-term consequences,” warns former York University president Harry Arthurs, a law professor who led a major review of Ontario’s pension policies from 2006 to 2008. “Rather than saying we should get rid of public defined benefit plans, we should be looking at ways to restore the prospect of a decent retirement to those who have lost it.”

The question, of course, remains how.

The answer is hard-wired into the way the most successful pension plans manage the funds they collect from their members. Unlike conventional mutual funds, defined benefit plans (whether public or private) are legally required to deliver specific benefits to their retirees over the course of many years. Therefore, the federal and provincial actuaries who regulate these investment pools must consider a range of variables that go beyond the straightforward rate of return. It is a complicated calculation with many moving parts: Does a plan provide survivor benefits? Is it calibrated to replace 75 percent of a member’s pre-retirement income, or 60 percent? And when are members eligible to start collecting?

For pension plan executives and their actuaries, the math focuses on a single metric: the discount rate, the fund’s target rate of return once inflation has been stripped out. In the world of pension management, the discount rate is a highly politicized number. Most Canadian public sector plans rely on conservative rates, and OTTP’s is especially conservative, at 3.1 percent. By contrast, many American state and municipal plans, which tend to take greater risks, have set themselves much higher rates, in the 7 to 8 percent range. In other words, they are betting on stellar future returns as a means of keeping current contributions to a minimum.

Pensions with higher discount rates tend to buy riskier investments. A recent study by a Dutch-American research team found that US public sector pension funds are unique in the world for taking on an unwarranted degree of risk, even though their members are aging fast. The problems, which had been building for years, hit home after the 2008 meltdown, when all of those optimistic forecasts proved to be pure fiction and many workers saw their retirement savings evaporate in the recession.

In recent years, recklessly managed public sector pension plans have been behind much of the financial, and therefore political, turmoil in US local and state governments. Across California, municipalities filed for bankruptcy as they failed to make pension payments to the growing ranks of retired civil servants. “Many cities are hobbled by retiree obligations that consume 10 percent or more of revenue,” reported Bloomberg last year. “And unlike other expenses, which can be cut or deferred, pension costs are intractable.”

Canadian pensions are not immune. Air Canada, observes Ambachtsheer, has allowed its overly generous plan to accumulate a $3.7-billion deficit. If the airline hits another patch of commercial turbulence before it sorts out its pension shortfall, he says, employees could see their retirement savings reorganized or reduced. Nortel employees fared much worse: they saw their savings consumed in a bankruptcy proceeding.

OTPP and other well-regarded Canadian public pension plans, such as the Ontario Municipal Employees Retirement System (OMERS) fund, have resisted the temptation to play possum by promising members that higher future returns will solve the financial pressures imposed by the demographic avalanche. As Leech says, “Our sponsors realized that these kinds of shifts won’t be solved by doing ‘a little better’ with our investments.”

In the past few years, Leech has pushed OTF’s executive and the Ontario government to begin thinking hard about the practical consequences of the demographic dilemma facing the plan. The problem boils down to this deeply controversial question: is it reasonable to entitle Ontario’s teachers to retire in their mid- to late fifties, knowing that many will continue drawing a pension into their late eighties and beyond?

Even while the Ontario Liberals and the province’s teachers spent much of 2012 locked in a nasty labour battle, the two sides continued working together to arrive at a solution to the shortfall. Earlier this year, they agreed to temporarily amend a provision that sees benefit payments indexed to inflation, a fix that has saved $9.6 billion in the past year.

That deal does not completely close the gap, though, and the tough decisions have yet to be made. Ambachtsheer does not believe the government, with its still-sizable budget deficit, should increase its contribution. “Taxpayers have to get out of the business of underwriting pension risk for employee groups,” he says.

Leech, moreover, points out that hiking payroll deductions, beyond the 12 percent, is unfair to younger teachers, who will end up paying far more over their careers for the same level of benefits received by those who retire in the next few years.

Therefore, with a kind of mathematical inevitability, the focus of the debate between the two sides has fallen on retirement age. Ambachtsheer is blunt in his view. Early retirement, he says, “can’t go on. It’s not a question of if; it’s a question of when.” He continues: “Taxpayers can’t afford this arrangement anymore. Resolving this is going to be tough. In game theory terms, it’s no longer win-win. It’s win-lose, and no one wants to be a loser.”

Harry Arthurs was recently appointed to lead a task force that will attempt to find common ground by sometime next year. Meanwhile, Leech has taken care to brief the OTF executive about potential gains from extending the average teaching career by even a few years.

Terry Hamilton, the OTF’s current president, is a genial bear of a man, a science teacher from Thunder Bay, Ontario, who, at fifty-seven, is very much part of the boomer march that so preoccupies Leech and his team. Reciting Leech’s message, Hamilton says that on average the fund has about $800,000 in assets for each teacher, which will generate enough annual income to cover the promised pension payments for life. For every additional year on the job, that nest egg should grow by about 10 percent, thanks to further contributions, as well as growth in the underlying investments. “That increases the value very quickly at the end of your career,” Hamilton says, “which is why Jim Leech would like us to teach longer.”

Still, as Hamilton well knows, it will be a difficult sell: teaching is a tough job, and burnout is a real professional risk. Teachers are also used to thinking in terms of the eighty-five factor, one of the appeals of entering the profession in the first place. “They like the ability to end their careers at a relatively young age,” he says. “They might not feel they’re up for it anymore.”

What is most remarkable about this ongoing negotiation is that the OTPP has forced its sponsors to pull their heads out of the sand and have a rational conversation about the plan’s long-term sustainability. Too bad the same can’t be said of Canada’s federal and provincial governments, which, with few exceptions, have refused to engage in a frank debate about the health of Canada’s retirement savings system. All we know is that most Canadians can’t afford to retire early. What’s more, the tax incentives for individuals to contribute to RrSPs—which represent tens of billions of dollars of deferred tax revenue every year—have failed to create an adequate cushion.

New Brunswick, with one of the oldest populations, seems to be the exception. In 2010, premier David Alward appointed a three-person pension task force to criss-cross the province and hammer out just these kinds of compromises between such private sector employers as hospitals and municipalities and their unions. “The issues are the same as with Teachers’, only more so,” says task force member Paul McCrossan, an actuary and a former Tory MP. One notable victory: figuring out how to prevent the municipal employee pension for Saint John from dragging the city into bankruptcy.

New Brunswick MLAs are considering legislation that enshrines this more flexible approach in law; other provinces, including Ontario and Alberta, are following suit. However, McCrossan notes, “No other government has taken on the problem with this urgency. The demographics are what’s driving it.”

Yet according to Susan Eng, who oversees advocacy for the Canadian Association of Retired Persons, the Harper government has resisted looking for a national solution to the retirement savings shortfall—insisting, for example, on unanimity among the provinces, a frustrating political hurdle. (Full disclosure: I write a politics and public policy column for Zoomer magazine, which is published by CARP.)

In recent years, CARP, on behalf of some 300,000 members, has pushed Ottawa to confront the coming crisis in retirement savings among middle-income Canadians, many of whom have no defined benefit plan and cannot invest their savings in large pension funds. In 2008, the organization began promoting a universal pension plan that would see Canadians compelled to contribute part of their earnings to a large pool, as a means of increasing their retirement savings. “The argument concerns what kind of country we are talking about,” Eng says. The purpose of a pension system, she continues, is to prevent people from retiring in poverty: “Have we achieved that yet? ”

Sixteen years ago, Canadian governments put their minds to solving a related problem, and did so with remarkable alacrity. In the early ’90s, federal regulators warned then finance minister Paul Martin that the Canada Pension Plan was running a large deficit and would likely exhaust its funds by the time the boomers started to retire in large numbers.

Moving quickly, the federal Liberals pushed the provinces to agree to increase CPP/QPP contributions and replicate the Teachers’ approach for the billions in government bonds sitting in the CPP kitty. As part of the reforms, the feds established the Canada Pension Plan Investment Board, a fund largely modelled on OTPP. Since 2000, it has grown from $44.5 billion to $183.3 billion, with the CPPIB investing in stocks, infrastructure, real assets, and government bonds. The changes have ensured that Canada’s three basic retirement programs—CPP, Old Age Security, and the Guaranteed Income Supplement—will remain solvent for decades to come.

These programs provide a safety net for low-income seniors, and a marginal level of pension income for everyone else. However, for middle-income earners who did not manage to max out their RSPs (there is always something more important to do with one’s cash), the retirement picture looks muddy at best. Many just don’t have the discipline to save prudently or consistently. If they are depending on RSPs, the health of their nest eggs depends to a great extent on their financial acumen and the markets. You gambled on overhyped stocks? Sold in a panic? Too bad. As Terry Hamilton says, “If I knew how to make money in the stock market above the rate of inflation, I probably wouldn’t be in teaching.”

The Tories have floated the idea of pooled retirement savings plans, but this reform looks like yet another serving of alphabet soup (RSP, TFSA, RESP)—one more tax incentive that seems destined to be underutilized. According to StatsCan, only six million Canadian tax filers put money into their RrSPs in 2011, with a median contribution of $2,830, almost $20,000 below the allowable maximum. “Voluntary pensions are inadequate,” says Leech’s co-author, Jacquie McNish, who points out that their new book includes case studies on pension reform in the Netherlands, Rhode Island, and New Brunswick. “That’s the nature of the beast,” she says.

Some groups, like the Canadian Labour Congress, believe the solution is to double CPP contributions as a means of forcing people to save more for retirement. (These extra funds would flow into the CPPIB, which would invest them.) Others agree. “Why not straightforwardly double the plan? ” wonders Harry Arthurs. He answers his own question: such measures are unacceptable to the Harper Tories. “It’s ideologically rather than politically untenable,” he says.

Ambachtsheer points out that governments in other countries, for instance Finland and Australia, have taken far more aggressive steps to ensure that individuals beyond the lowest-income earners have sufficient savings for their old age. When I ask David Peterson about how Canada should tackle these seemingly intractable issues, he says reform is “long overdue,” but adds that making additional savings mandatory “is a helluva philosophical question.”

It is. Eng suspects the Harper government has backed away from such a solution because it may anger Bay Street, which depends on the flow of billions of RSP dollars. But in a speech this February, one of the titans of Canada’s financial world, CIBC president and CEO Gerry McCaughey, warned that almost six million Canadians and those in their twenties and thirties will face a “significant decline” in living standards during retirement, because they have not saved enough and did not have access to a large, well-managed pension plan. His solution: reforms that would allow Canadians to voluntarily invest much more of their savings in the powerful CPPIB, or something like it, with the proviso that they must wait until retirement to withdraw the funds.

“People who have been advocating for this had to be picked up off the floor,” says Eng. Having an ally like a bank president has given pension reformers a huge boost. Still, McCaughey stopped short of calling for a compulsory retirement savings system, which is destined to be a political flashpoint. Leech, in fact, intends to use his post-OTPP independence to go on the road and drive home the argument in favour of pension reform.

On this contentious issue, Neil Orford, a history teacher in Shelburne, Ontario, offers a cautionary tale from a time when it was easier for teachers to commute their pensions, that is, withdraw their accumulated savings from the OTPP and invest the funds as they saw fit. He recalls that private investment firms came around to the school boards, encouraging teachers to make the leap, and he knows several who took the gamble. Some did okay, but many others paid dearly. “I can think of one teacher who jumped early, lost it all, and was back supply teaching for the next ten years consistently to earn back half of what he had lost,” says Orford. “Another guy lost the family farm and had to go back to full-time teaching with another board until he was sixty-five.”

As Leech says, “The reason the teachers have a very good pension is they were required to save.” In response to the accumulation of such tales, in 2001 Mike Harris’s Conservative government pushed hard for reforms to discourage older teachers from cashing out of their pension plan.

Vic and Linda Genova say they have heard similar stories as well, but Vic adds an interesting grace note to the discussion. All of those automatic deductions from their weekly paycheques didn’t register while the couple was still working, and the withheld contributions didn’t feel compulsory.

“You don’t notice the money you don’t have,” he says.

But they notice it now.

Other Stories by John Lorinc for The Walrus Magazine

The New Cold War by John Lorinc (June 2012) • Citizen Lab, a group of University of Toronto hacktivists, techies, human rights advocates, and academics, is leading the global charge for democracy in cyberspace

The Merchant Banker by John Lorinc (July/August 2009) • Is the recession really over? A profile of Bank of Canada governor Mark Carney

Who Killed Canada’s Education Advantage? by Roger Martin (November 2009) • A forensic investigation into the disappearance of public education investment in Canada

John Lorinc has won multiple National Magazine Awards and contributes regularly to The Walrus.  To visit The Walrus and read quality Canadian articles, click here.


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