Politicians’ pension plans aren’t the only problem

Pay and pensions are always no-win minefields for politicians Photo source pensionpulse

Contrary to the Major report on Alberta MLA pensions, a defined benefit plan is not the way to go

By Mark Milke : Pay and pensions are always no-win minefields for politicians, but here’s the problem when anyone thinks about that issue in isolation: it misses the massive price tag that exists for the entire public sector, of which political compensation, transition allowances and retirement benefits are only one component.

Politicians are part of a much larger public sector and the debate should always focus on what governments should or should not do (and from which the size of the public sector then flows); what is affordable for taxpayers; and private and public sector comparisons.

Defined benefits plan cancelled by Klein

In his recently-released report on political pay and pensions in Alberta, former Supreme Court Justice John Major recommended that Alberta reinstate the defined benefit pension plan for MLAs. (Defined benefit plans guarantee retirement benefits and are calculated based on years of service and salary earned.)

That plan was cancelled by Premier Ralph Klein before the 1993 election. Sometime later, MLAs were given a transition allowance; they also now receive matching contributions to their RRSPs. The transition allowances, or at least the size of them, are controversial to say the least.

Defined benefit pension plans are problematic. The public sector plans in the United States have been found to have massive unfunded liabilities resulting not only from a change in economic conditions but because earlier actuarial assumptions were too optimistic. That, and rather generous provisions in the plans themselves.

Estimates on unfunded liabilities at the state level alone range from $3.01 trillion (from economist Andrew Biggs) to $3.23 trillion (from Robert Novy-Marx and Joshua Rauh). Problematically, when public sector defined benefit plans have liabilities, it is taxpayers who most often pay.

In Alberta, taxpayers alone are now liable for just over $10.1 billion in various public sector pension liabilities. The most expensive chunk of that is the pre-1992 portion of the Alberta Teachers’ Pension plan.

That liability, for which taxpayers are solely responsible, is $7.4 billion. In addition, the liability for post-1992 teachers’ pensions is $484 million. Combined, that represents 77.5 per cent of all pension liabilities faced by the provincial government. The remaining liabilities amount to just over $2.2 billion, of which pre-1993 MLA pension liabilities are $42 million – or four-tenths of one per cent of the total liability “bill.”

Had MLAs retained their pension plan after 1993, that $42-million liability would be higher. However, even if it were triple what it is today, it would still be a small portion of what taxpayers face because of defined benefit plans in the public sector.

As for the transition allowances paid to defeated or retiring Alberta MLAs, the cost of which was $14.8 million, that is equivalent to less than two-tenths of one per cent of all pension liabilities. I’m not suggesting reform of transition allowances is not desirable – it is – but the big elephant in the room is the much larger liability in total public sector pension liabilities.

By way of comparison, defined benefit plans have been declining in the private sector for some time. The nationwide numbers show private sector membership in defined benefit plans peaked in 1990 at just over 2.4 million members; it has since declined to under 1.7 million members as of 2010.

An increasing number of companies, insofar as they offer a pension plan at all, offer defined contribution plans where the employer will match an employee contribution to a pension plan but set level of benefits are not guaranteed in retirement. Many companies (and the Saskatchewan NDP government in the 1970s) moved in this direction to avoid the “GM legacy” effect: lots of promises, but not enough cash in the retirement accounts decades later.

In contrast to the private sector, the number of public sector employees in defined benefit plans has increased significantly since 1974. The number of public sector employees in a defined benefit plan reached a new high as of 2010, with more than three-million members. That was double the roughly 1.5 million public sector members enrolled in 1974.

Major report focus too narrow

The Major report was 330 pages long and its sole focus was MLAs. That is not his fault; that’s what Premier Alison Redford asked him to investigate. The provincial government should have assigned – and still can – the commission a more significant topic to review of the entire public sector pension issue, just as New Brunswick’s Progressive Conservative government did last year.

On the specific issue of MLA pensions, matching amounts for MLA contributions and transition allowances, albeit made more modest in the latter case, are preferable to defined benefit plans. Defined contribution plans and transition allowances create no unfunded liabilities. Defined benefit plans do. And the taxpayer price tag for any liabilities there – over $10-billion in just Alberta alone – are not cheap.

Mark Milke is the Alberta director for the Fraser Institute. He can be reached at mark.milke@fraserinstitute.org

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