The current fight between the government and the province's retired teachers over cost-of-living increases to pension payments is a good illustration why it is dangerous to offer rich benefits to a huge public work force. Protecting pensions against inflation is a tricky thing to do, especially when its effect is compounded by a policy to encourage people to retire early.
And that is one reason retired teachers, most of whom leave the work place before they are 60, are getting cost of living adjustments far below inflation. A report written for the government by former minister Tim Sale contends that the COLA clause was premised on the expectation that adjustments would equal two-thirds of the rate of inflation (something retired teachers dispute), but for many years COLA payments matched inflation. Actuaries warned repeatedly this was compromising the account. The pension board, comprised of government and teachers' union representatives, however, continued the practice and eventually changed actuarial firms.
Poor attention to the account alone was not the only problem. In the mid-1990s, teachers, along with various other public servants, were encouraged to retire early, at 55, and they did. Reducing the public payroll punted costs to another side of the ledger. Demographic trends show people are living longer, thereby drawing pensions longer. In the past there were seven working teachers for every retiree, today there are 1.4 working for every one retired.
The government has proposed, on Mr. Sale's advice, some fixes to recharge the COLA account and to legislate a definitive cap on annual adjustments. Retired teachers are angry, rejecting the proposed fix that they say will keep many of them poor and leave the account at risk.
The government is in no position to be committing the taxpayers to increased liability. Last year it borrowed $1.5 billion to cover off part of its $2.2 billion unfunded future liability for pension payments to retired teachers. It will be borrowing again this year to cover some of the $1.8 billion in future liability for retired civil servants. All of them are/or will be owed cost-of-living payments.
The benefits that made sense in an earlier time have lumped hefty future costs on the taxpayers, most of whom work in a private sector where pensions get no hedge against inflation. It made sense in the past to encourage teachers and nurses to retire early but both are in demand today.
Everything is negotiable. Deals made in past contracts with public servants must be honoured but future agreements must reflect a different reality. Wage increases can be offset by reducing early retirement or by delaying the date when COLA payments kick in. Demographic trends are hard to fight, but the government can use the give and take of collective bargaining to get a better deal for taxpayers.
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