Our pension peril is the third rail of politics
TheStar.com – news/Queen’s Park – A new book, The Third Rail, explains why most politicians keep their distance from the perils of pensions.
Oct 31 2013. By: Martin Regg Cohn
The Third Rail, a new book on our pension peril, takes its title from the electrical rail that powers subways: Touch it, and you’re electrocuted.
That’s why most politicians keep their distance from pensions: They’re terrified of being zapped.
Undaunted, Finance Minister Charles Sousa points cheerily to an advance copy sitting in his sixth-floor office. He’s reading and heeding it, but disregarding the danger.
Sousa, it seems, isn’t afraid of being singed. On Friday, Ontario’s treasurer will convene his provincial counterparts in Toronto to sell them on long overdue reforms to the Canada Pension Plan, setting the stage for a premiers’ summit next month and a December showdown with federal Finance Minister Jim Flaherty.
Advance copies have gone out to most of the politicians around the table. The wise ones will read the Third Rail — and get a grip on it.
Co-authored by Jim Leech, one of Canada’s renowned pension wizards, the book is essential reading for decision-makers. And an indispensable primer for voters — the people who ultimately call the shots, and who will pay the price if the pension peril is put off for another day.
As head of the Ontario Teachers’ Pension Plan, Leech has street cred: His massive, $130-billion fund has achieved consistently high returns (13 per cent in 2012), at low risk, for an aging cohort of teachers (300,000 members).
When Leech talks, politicians listen. When he writes a book, it’s worth buying.
Written in accessible language (co-authored by Report On Business reporter Jacquie McNish), it outlines the demographic and fiscal pressures that pension founders didn’t foresee, and that fund managers closed their eyes to.
Retirees are living far longer than ever envisioned, and fewer workers are entering the labour force to backstop any pension losses (inter-generational diversification). Many teachers now spend more years collecting pensions than they do paying for them. The math no longer adds up, if it ever did.
Record high investment returns have petered out, replaced by low interest rates that are wreaking havoc. Employers have been forced to top up their pension funds at a time when cash is scarce, prompting most private firms to phase out traditional retirement plans for new employees.
“Pension plans were never designed to withstand these threats,” the book argues.
In the postwar boom, nearly half of all Canadian workers belonged to pension plans. Now, only 39 per cent get workplace pensions. In the private sector, a mere 12 per cent of employees belong to so-called “defined benefit” pensions that promise to pay a fixed amount upon retirement.
“Our business, labour and political leaders are preoccupied with laying blame or denying the enormity of the looming crisis,” the book says. “Politicians, loath to go near the third rail, reassure us our pension fears are overstated.”
Against that depressing backdrop of overstretched workplace pensions, the Canada Pension Plan is the underpowered pillar of our retirement system. Founded in 1966, the CPP now pays out an unrealistic maximum of $12,000 a year.
Leech warns that the CPP “will be of marginal assistance to middle-income earners.” He supports a proposal that would see someone earning $50,000 a year increase his CPP contributions from $2,300 to $2,930 annually — retirement payouts to $17,500 a year. A worker earning $100,000 a year would contribute even more to get an enhanced pension of $30,000 a year.
“Our problem is not a shortage of ideas but rather a lack of courage and political will,” Leech writes. “To date, the federal government has ignored any proposal to expand CPP.
In an interview, Leech expressed skepticism about an Ontario Pension Plan(OPP) that the province is considering to supplement the CPP if talks fail.
“It would be more expensive, because you have to start building the infrastructure to manage that fund,” he said. “It’s so much easier, it makes so much more sense to go the CPP route.”
Did he give that advice to Sousa when he last met Ontario’s treasurer? “My answer to him was that it (an OPP) was feasible, but clearly a second choice.”
As for Flaherty, with whom he talks regularly, Leech can’t explain the federal government’s timidity. But he is optimistic that the provincial finance ministers, who are closer to the ground, will lose their fear of the third rail after reading his book.
“I hope some of them will buy it and read it before Friday.”
There’s still time.
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