Chapter 3
The Role of the Unions
Meticulous attention should be paid to the special relations and obligations of public servants to the public itself and to the Government . . . The process of collective bargaining, as usually understood, cannot be transplanted into the public service . . . a strike of public employees manifests nothing less than an intent on their part to obstruct the operations of government until their demands are satisfied. Such action looking toward the paralysis of government by those who have sworn to support it is unthinkable and intolerable.
President Franklin Delano Roosevelt, 1937
Consider the following statements:
“I love my job as a teacher; I can't imagine doing anything else.”
“I love my job as a police officer; I can't imagine doing anything else.”
“I love my job as a firefighter; I can't imagine doing anything else.”
“I love my job as a coal miner; I can't imagine doing anything else.”
Which of the above quotes is likely not true? Keep your answer in mind as we look at one of the key players in our discussion, the public sector employee unions.
If you do a quick search of the thousands of documents, articles, and blogs that have been written on the topic of public-sector compensation in the last few years, you will find over and over again that unions have been accused of creating unsustainable wage, benefit, and pension contracts. Let's take a look at the role that unions have played in this.
Are Unions Good for Canada?
From the United Food and Commercial Workers website:
Why Unions are Good for the Canadian Economy
Many historians credit unions with the rise of Canada's middle class and the general prosperity of the country. By helping more workers make decent wages with more job security, unions were largely responsible for stabilizing the economy and stimulating its growth. Because of unions, more working people could afford houses, better food, clothing, cars, and other consumer goods. Increasing demand for these things created more jobs and even more economic growth.
Better-paid and more secure workers could also pay more in taxes to support the growth of public services like schools, roads, clean water, police services, electricity, and health care. Even those who have never belonged to a union have benefited from their existence all their lives.1
Figure 3.1 Where Trouble Lies2
So, those are good things, right? Shared prosperity for one and all and the growth of public services. By 1970, close to 30 per cent of the private sector workforce was enrolled in unions. This reflected the nature of our economy, based as it was on resources and manufacturing, with many jobs requiring hard physical labour and offering increased risk of shortened careers through injury or death. Forty years later the majority of private sector jobs are in service industries, union membership in Canada is down to 16 per cent of the private sector, and private sector unions are no longer a significant force in our economy. This trend is global in nature. In the American private sector, trade-union density has fallen from a third in 1979 to just 7 per cent today. In Britain, once a hotbed of organized labour, the number has dropped from 44 to 15 per cent. Less than one-fifth of workers in OECD (Organization of Economic Co-Operation and Development) nations belong to unions.3
In the last half of the 20th century, unions had succeeded in raising the incomes and standard of living of their workers to the point where parents often told their children to “get a job with a large company, work there for a lifetime, and retire with a company pension.” Although the nature of their work continued to be hard physical labour, unionized employees in the private sector made more money than their counterparts in the public sector and in non-unionized businesses.
In the area of pensions virtually all unionized workers were guaranteed defined benefit pensions as one of the rewards for a lifetime of building a profitable company. Today, however, with profits continually at risk from rapidly-changing market forces, virtually all private companies have moved to defined contribution pension plans for new employees, and most unions have accepted this as a necessary but unpopular concession to keep the company afloat and their members employed.
How have public sector unions fared in these tumultuous times? What concessions have they made to ensure the long-term stability of their members' jobs and the survival of their employers? The correct answer would be, “Few, if any.”
Of course public sector unions (PSUs) haven't had the same history as private sector unions. No child labour issues, no brutal work conditions, no thuggery on picket lines, no profit-hungry owners. PSUs developed in a comparative atmosphere of mutual support and respect. Even the decision to unionize was requested of, and supported by, the governments that employed them. Consider this summary of the founding of the Ontario Public Service Employees Union (OPSEU), originally called the Civil Service Association of Ontario (CSAO), from the OPSEU website.4
1911
The Civil Service Association of Ontario is created as a coal-buying co-operative and social club and to discuss ways of improving the civil service. About 200 people attend the initial meeting. Women are not invited. They agree to get the government's approval before proceeding further. The provincial government then had about 1,000 employees. Salaries were set by the lieutenant-governor. Pay increased with service, and long-term employees got first crack at promotions. There was no overtime. Ministers could fine staff up to $20 for misbehaviour. There was no appeal. There was no retirement age. A pension of one month's salary a year was granted to old-timers let go for ill health, and widows of career officials.
A lot has changed in 100 years. Twenty per cent of Ontario's civil servants attended the first CSAO meeting, but today approximately 70 per cent of all government workers are unionized,5 with the remainder being seasonal or contract employees. In 1911, Ontario had 1,000 public sector workers. One hundred years later that number is 1,325,764, with a salary cost of $73.8 billion per year.6 Across Canada the total government workforce is 3,604,999 people, or roughly 20 per cent7 of all employees in the country. In Ontario for example, over 55 per cent of provincial government spending is on employee wages. When governments look for areas in which to control spending, they currently focus on infrastructure, taxes, grants, programs, and funding, but there is really only one place that meaningful cutbacks can occur, and that is the size and cost of the government workforce and its salaries, benefits, and pensions. Of the total 3.6 million government workers in Canada 3 million belong to a taxpayer-supported pension plan and 2.8 million of these are in a defined benefit plan.8
From a small group of people seeking a better price for coal and ways to “improve the civil service,” we now have a massive group of highly-educated and highly-motivated people who seek to influence public policy to guarantee their job security, incomes, and pensions.
It's interesting to note the divergent paths taken by the private and public sector unions. Private sector unions fought for their creation and went on strike in the early years. Today they strike infrequently and most unions are happy to have their members working at all. Public sector unions spent most of their early years as part of the system working to “improve the civil service,” but have more recently turned militant. Strikes, however, are on the decline. In 2005 there were 328 strikes in total in Canada; by 2010 the number had dropped to 175.9
In particular, PSUs have become highly politicized, spending millions of dollars to influence voters and elect politicians sympathetic to their causes. Note also that they have no party allegiance, freely supporting whichever party they believe will reward them most handsomely. CUPE, the Canadian Union for Public Employees, is particularly known for its political and social activism as noted by Wikipedia:10
[CUPE] has involved itself in broader struggles for social justice and equality, and emphasized the role of social unionism, as opposed to the more conservative business unionism practised by many North American unions. President Jeff Rose was known for outspoken opposition to Brian Mulroney-era wage restraint, free trade, the GST, privatization, deregulation, and cuts to public services. In 1991, Judy Darcy followed Rose and became the defining face of CUPE. One of Canada's most visible and colourful labour leaders, Darcy was a vigorous opponent of privatization, two-tier health care, and free trade agreements. Darcy was firmly committed to the union's involvement in broader social issues, and under her tenure CUPE strongly attacked the invasion of Iraq, condemned Canada's involvement in ballistic missile defense, and spoke out loudly in favour of same-sex marriage. Darcy stepped down in 2003 and was replaced by Paul Moist.
In May 2006, the Ontario wing of CUPE voted unanimously to pass a resolution to support the “international campaign of boycott, divestment, and sanctions against Israel until that state recognizes the Palestinian right to self-determination.” This position was not supported by the CUPE national office.
As we can see, public sector unions have developed an agenda of their own that goes far beyond the traditional concerns of workers' rights, working conditions, and benefits. They have become a political entity in their own right, pushing an agenda that extends to foreign policy, marriage laws, free trade, sexism, child care, energy climate change, gender issues, highways and toll roads,11 and anything else that strikes their fancy. Unions have become, like our political parties, largely independent of the people who elect their leaders. They clearly affect the results of our democratic process. Consider the millions they now spend on political campaigns. This is really your money, since it comes, ultimately, from the taxpayer. The unions' goals are to protect job security and secure higher salaries and lucrative benefits and pension packages for their members. These would also be paid for with your money.
Think we're exaggerating? In April 2011, the Ontario English Catholic Teacher's Association (OECTA) levied a $60 charge on its 45,000 members to create a $3-million advertising fund for an upcoming provincial election.12 The move was opposed by 33 per cent of voting delegates, but the contribution was mandatory. So much for preserving the democracy of our political process. Teachers who may choose to vote Conservative or New Democrat in the election are now financing the Liberal's re-election campaign. Can you imagine a private corporation forcing its members to pay into a slush fund to support a specific political party? The campaign is being organized by a group called “Working Families.” Working Families may sound like a group of parents getting together to fight for what's best for their children, but in reality it is an umbrella group of unions getting together to try and protect their incomes and pensions. Working Families13 includes the OECTA, as well as the Ontario Secondary School Teachers' Federation, Elementary Teachers Federation of Ontario, Canadian Auto Workers, Ontario Nurses Association, Service Employees International Union, International Brotherhood of Boilermakers Local 128, The Millwrights, The Painters District Council Local 46, Ontario Pipe Trades Council, International Union of Operating Engineers Local 793, International Brotherhood of Electrical Workers, and the Provincial Building and Construction Trades Council.
The unions' goal is to ensure that Ontario Premier Dalton McGuinty's Liberals—known to be very favourable to teachers—get re-elected. To prevent undue influence of elections through vote-buying, strict laws are in place to limit the amount that political parties can spend on their campaigns. Currently however there are no limits on the amounts that external organizations can directly spend themselves to support or attack a political party before the “writ period.” Third-party groups are prohibited from directly contributing more than $9,300 per year to the party and $6,200 to any particular riding association per year.
The $3 million raised in 2011 remains under the control of the OECTA and is therefore not subject to election spending laws. It can be spent in any way the OECTA chooses, to support the party provincially or to target key ridings. We're not convinced they have much to worry about. While McGuinty is considered pro-teacher because his wife is a teacher and his father was also, PC leader Tim Hudak has at least equal connections. According to a PC website, “Ontario PC Leader Tim Hudak understands the importance of classroom education because he comes from a family of school teachers. Tim's dad was a teacher and principal in the Catholic school system, his mother was a special-needs school teacher, and his sister has also been a teacher in the Catholic school system.”14
As evidenced by OECTA's fund-raising, this union is very concerned about losing influence. Public sector unions will strike whenever necessary to achieve their goals. Unlike private sector strikes however, when PSUs strike it is not the owner who suffers (as FDR pointed out) it is the customer—which is you. When transit workers go on strike, the public is inconvenienced. When teachers strike, children are deprived of the opportunity to learn. When garbage workers strike, taxpayers must put up with rotting garbage in their homes and local parks. Whereas once our civil servants sought to “improve the civil service,” now they seek to improve the rewards of being in the civil service.
Public sector unions have now become so powerful that they seek to influence a greater share of public sector spending, enforcement of wage settlements, benefits, pensions, and working conditions at all levels of government. Attempts to control the power of unions meet with strikes, work slowdowns, and huge advertising campaigns aimed at forcing elected officials to support union demands. Unions often allow contract negotiations to stall for months until a politically-opportune time (such as just before an election) creates the proper environment for a favourable outcome. Settlements are retroactive, so unionized employees never lose in this scenario.
To control this type of influence and pressuring of politicians, limits need to be placed on unions. Currently in Canada the activities of unions work within the bell jar into which no light can shine. There is no disclosure about the amount of money that unions raise, how it is spent, or how much they pay their leaders.
John Mortimer, a union watchdog with Labour Watch, a non-profit organization that educates workers who may not want to unionize, has shed some very alarming light on the situation in Canada. Labour Watch has attempted to uncover the extent of union influence in Canada and found it a very daunting task. The amount of union dues paid in Canada is unknown but estimated in the hundreds of millions of dollars. Imagine 3.6 million government workers earning $60,000 per year, all paying 1–2 per cent every year in union dues. It adds up to a lot of money.
In his attempts to uncover the activities of unions, Mortimer regularly refers to the United States Department of Labor disclosure statements by unions. The U.S. requires unions to file financial reports, disclose activities and expenses, and publicly list the salaries of senior union bosses. None of these requirements exist for Canadian unions, and the mandating of similar information is an important step that must be undertaken to protect taxpayers in Canada.
If all other measures fail, contract disputes go to arbitration, where highly-paid lawyers and former civil servants have absolute authority to impose a resolution on the taxpayer. In most cases, arbitrators award settlements higher than those that have been negotiated in the past without arbitration. Arbitrators are usually better paid than the employee groups whose wages they are arbitrating, so it is easy to see why they might side with the employees. If you are an arbitrator earning $150,000 a year, a request to grant a 3 per cent raise to workers making $65,000 might not seem unreasonable. Politicians are often quoted as defending the high increases awarded to the public sector by suggesting that the only alternative would be arbitration, and they feared the awards there would be higher. Arbitrators, arbitrary? Webster's Dictionary defines arbitrary as “guided by will only; high-handed, despotic, absolute.” In truth, there is no one who can be considered impartial in this situation. We all bring our own paradigm to the table, which is why a mandatory balanced budget must be the foundation of good government. Arbitration should start with the premise of “live within your means,” and any arbitration award should be within current budgets, not added to current budgets, as is now the case. Arbitrators point to a lack of legislation in this area. It's time our government faced up to its responsibilities to the taxpayer and took control of this situation. We will discuss this further in Chapter 10.
The basis for most decisions in arbitration is called parity. Arbitrators look to other contracts negotiated in the civil service to decide on an appropriate settlement. This is a disaster for hospitals, universities, and cities because although their employees are paid by the municipality, they belong to provincial unions. This broader market comparison creates compensation awards based on the wealthiest cities in the province. These contracts are then beyond the control of employers, and their needs (or budgets) are not taken into consideration. Settlements for workers need to be determined on the ability of each municipal employer to pay, and not on what other communities can afford.
Unions have an unfair advantage which costs taxpayers more than they should have to pay. They have full-time staff whose only job is to negotiate and lobby for better benefits, dealing with government negotiators who have no power to enforce settlements. In negotiations, unions present examples of the highest labour settlements they can find and if all else fails, they go to labour-friendly arbitrators to ratify contracts based on these “parity” demands.
This system is failing Canadians and it must be changed. Disclosure laws need to be implemented to expose the inner machinery of the unions and the arbitration system. Arbitration needs to be amended to take into account taxpayers' interests and not just those of the union.
We now have a government “of the employees, by the employees, for the employees.”
We can see also that this has not always been the case. The OPSEU website notes that “The Great Depression leaves anyone with a job feeling pretty lucky. Ontario civil servants accept wage rollbacks to retain their jobs as the country goes through an economic upheaval.” This is from the 1930s. Will we experience déjà vu in 2011? We doubt it.
Teachers and Their Pensions
Let's take a look at a typical public sector pension and see how it has evolved over the years. We'll use the Ontario Teachers' Pension Plan (OTPP) as our example. When it started in 1917, the OTPP offered teachers who had been working for 40 years a pension of $1,000 per year.15 It was not until 1933 that that amount was increased to $1,250. In 1945 the pension was increased to a maximum of $1,500 for teachers who had 36 years of service and were 65 (men) or 62 (women) years of age. By 1954 teachers had eliminated the $3,000 annual cap on pensions and the pension was based on the last 10 years' average salary.
None of this could be considered particularly spectacular although signs of things to come were evident. In 1965 retirement with a pension was allowed at age 55, a full 10 years before most Canadians could retire. After that it was a matter of ratcheting up the annual pension income that would be received. The OTPP pension was no longer a simple means of staving off poverty in old age, but became a tool to find new ways of creating wealth for retiring teachers.
In 1971 survivors were added to the pension plan, so that if a teacher on pension passed away before his spouse, his spouse would continue to receive a pension, usually about 60 per cent of the previous total, until she died. In couples where both husband and wife were teachers, the survivor got to keep both pensions when the spouse died. In 1971 it was still common for one parent to be the main breadwinner and the other parent to be at home raising children, so the spousal survivor benefit made a lot of sense, preventing homemakers from becoming penniless widows upon the untimely death of their partner. Today, of course, it is rare to find a home in which both parents are not fully employed, but this spousal benefit has never been removed from any public sector pension.
New pension “windows” were opened up. These windows allowed teachers who had not yet qualified for their full pension to get one based on a combination of minimum years of working and age. For example, the first window in 1986 provided for an unreduced pension for pension plan members who were aged 55 with at least 10 years of service. In 1998 the “85 factor” was introduced as a “temporary” measure and was converted a few years later into a permanent benefit. It allowed anyone who had a combination of years worked plus age totalling 85 to retire on full pension. For example, a 55-year-old teacher with 30 years and a 65-year-old teacher with 20 years of classroom time would both be fully qualified for a pension. The most recent OTTP goodie was to base pensions on the highest or best five years of salary, rather than on average earnings. This again is a benefit that does not occur in the private sector and substantially raised pension income for retired teachers. (See Chapter 2 for an example of how much difference this single benefit makes.)
Based on the current salary grid in the province of Ontario, many teachers will be retiring with a salary in excess of $90,000 per year. The salary grid is the practice of automatically advancing up the pay scale by moving to a new job classification or getting an increased salary based on simply having worked another year in the same job, doing the same work. A school board may claim to be limiting union raises to 3 per cent; this figure applies to the annual base salaries in the contract but in reality, the total cost is higher because some employees have moved up to the next grid level of seniority or have been promoted to the next pay level. The total compensation may reach 5–6 per cent even though the announced “contract settlement” was for only 3 per cent. Politicians use the lower number to promote themselves as representing the taxpayer by “holding the line” on staff costs. Then the multiplier effect of the additional benefits and pensions based on the true salary increases kicks in as well. So when you read “3 per cent wage increase,” think 5–6 per cent out of your pocket and into theirs. A 70 per cent pension will give them a pension income starting at around $63,000 per year, including CPP.
These levels of income are well above the average worker's wage in Canada of around $46,00016 per year. Not the worker's pension, mind you, the worker's wage. These pensions put retired teachers into the top 20 per cent of senior incomes.
The amount of lump sum value of a pension of a mid-level public sector employee is in the range of $600,00 to $1.3 million.17 This is the total liability of the taxpayer. If the pension fund is short—and the OTPP declared a $17.2 billion shortfall in 2011—the fund can ask the taxpayer to make up the difference. The plan paid out $1.8 billion more in 2010 than it collected from employees, and this gap is expected to grow to $5.3 billion per year by 2030.18
An employee retiring at age 55, with a $63,000 pension has a life expectancy of another 29.8 years.19 Assuming that the pension is adjusted for inflation at 2 per cent, the retiree will receive over $2.5 million in pension income based on normal life expectancy, and at the end of 29 years will have an income of more than $110,000 per year. Currently there is a dramatic trend to teachers living over 100 years of age. These employees will earn over $4.6 million, with about $856,000 coming from the CPP program assuming indexing of 2 per cent.
In the meantime, the workload of teachers has been reduced. As we know, teachers have always received about three months' holiday a year, when summer vacation and Christmas and March breaks are added up, so their salary is really for three-quarters of a year. This effectively takes a $90,000 salary to the equivalent of $120,000 a year, based on the number of weeks worked. In addition to that, we have seen teaching days shortened by 30–60 minutes a day. We have also seen a move toward dramatically smaller class sizes. Despite declining enrollments across the country we have not seen corresponding reductions in the cost of our education system, because potential savings have been consumed by these adjustments to teaching conditions. Nor will we see reductions. There are currently some pension plans that have only 1.5 teachers working for every retired teacher.20 The teachers' pensions are underfunded, meaning that each year some of the current government budget (which is made up of your tax dollars) must go into the pension fund to top it up. Salaries and pension top-ups constitute over 75 per cent of the education budget.21 As of 2010, on average, retiring teachers will work for 26 years but be paid pensions for 30 years.22 Retirees in 1970 averaged only 20 years in retirement because lifespan was shorter and retirement later in life. In June 2011 the OTPP announced an agreement with the provincial government to eliminate the current $17.2 billion shortfall by increasing employee pension contributions by 1.1 per cent over three years.23 Of course the teacher's contributions are tax-deductible from their income, whereas your contribution is . . . wait for it . . . just plain tax. So even though in principle the teachers are matching the taxpayers' contribution, in real terms you are paying more than your share.
To “Air” is Human, to Buyback Divine
Here's another interesting little twist the public sector unions have come up with and sold to senior bureaucrats and politicians that you probably didn't know about. It's called pension buyback or, in the U.S., “air time.” This feature allows government workers to essentially buy pension-qualifying employment years, so that they can receive pension benefits for years they didn't actually work.
Pension managers claim that once invested, the payments will generate income sufficient to pay the higher benefits, but as we know, investment returns are unpredictable whereas pension payout is guaranteed by taxpayers. It has been estimated that the cost to taxpayers could be as high as $6 for every one dollar invested by a worker through a buyback.
Here's how the Public Works and Government Services Canada website24 promotes the benefits of pension buybacks:
Advantages of buying back prior service include:
- increased pensionable service, which increases your pension;
- increased pension benefit for your survivors;
- the completion of 35 years of pensionable service at an earlier date; and
- the possibility of retiring earlier.
All pension benefits payable under the plan relate directly to service and salaries. As the number of years of pensionable service to your credit increases and you reach higher levels of salary, the pension benefits that you and your eligible survivors can expect to receive increase accordingly.
Note the terms “prior service” and the “completion” of pensionable service in the website notice above. We would suggest that “service” in this situation is actually no service at all, and that “completion” is actually the avoidance of completion. Even the term “buyback” suggests that the worker is “buying back” something that was hers but was lost or taken away. We guess the “advantages” of pension buyback all accrue to the worker, and none to the taxpayer. Almost all public sector unions have now included this option as one of their contract provisions. Quelle surprise! This is a great example of the one-sided nature of public sector compensation packages. Here's an example:
Pension Buyback Illustration
OMERS website
Lisa bought her two years of service at age 42, when she was earning $40,000 and had 12 years of Healthcare of Ontario Pension Plan (HOOPP) service.25 Those two years would cost $9,200 using current buyback rates.
Assuming her average annualized earnings at retirement are $53,000, and that she lives until age 80, she will receive $602,100 in pension over her lifetime, compared to $539,700 without the buyback. For $9,200, Lisa receives $62,400 in additional pension—more than six times what she paid for the buyback. This does not include the annual cost-of-living adjustments that would be applied, making her real benefit even higher.26
In Sickness and in Health
Yes, there's more! Public sector employment contracts usually include the following: life insurance, extended medical plan, dental care plan, short-term disability, and long-term disability. Some of this, of course, is 100 per cent fully paid for by the taxpayer and in some plans retired employees pay 50 per cent. Through an accounting concept called OPEB, or other post-employment benefits, these benefits are extended from the moment of retirement until the retiree reaches 65. At this point universal senior benefits are provided by the provincial government, mainly prescription drugs. Some plans continue health coverage until death or the death of a surviving spouse.
Let's look at a typical “liability for sick leave benefit plan.” Here's an excerpt from the City of Hamilton's employee contract with its librarians:
Under the sick leave benefit plan of the City, unused sick leave can accumulate and employees may become entitled to a cash payment when they leave the City's employment. An actuarial valuation as at [sic] December 31, 2009 has estimated the accrued benefit obligation at $39,292,000. Changes in valuation assumptions have resulted in an increase in the liability to $39,292,000 from the expected liability of $32,436,000.27
We would guess that one in a thousand taxpayers knows that cities, universities, hospitals, school boards, and colleges have these debts to employees simply because the workers didn't take time off for being sick. This, of course, is the complete opposite of employees who take sick days because they're entitled to them when they're not actually sick. But that's a whole other story. If you extrapolate the Hamilton numbers across the country, you will see that we have a $2.73 billion liability in our municipal public sector alone for this kind of sick leave benefit.
The liability for the aforementioned health, dental, and life insurance bridge benefits for Hamilton city workers who retire before the age of 65 is even uglier. As of December 31, 2009 the city estimated this cost at $101 million, an increase from the expected liability of only $74 million. The national liability for these bridge benefits at all government levels will be in the billions.28
In its financial statement Hamilton blames “changes in valuation assumptions” for the 21 per cent increase in liability. This probably reflects the concern that returns on investment in the future will not be as substantial as they have been in the past. It is these changes in valuation that think tank experts cite in charging that governments are understating the true size of your funding liabilities.
Some of the other more notable OPEB expenses include the City of Toronto at $2.4 billion,29 Hydro One at 980 million30 and Ontario Power Generation at close to $2.3 billion.31 Almost all of the government organizations we examined have these hidden liabilities. Taxpayers need to understand these hidden costs and hold politicians accountable. It is outrageous that taxpayers fund such juicy benefits for public sector employees especially when none of these benefits are offered to the average working Canadian.
A sampling of these benefits includes sick leave not taken, accrued vacation pay at retirement, health benefits, and severance or termination payouts at retirement. This burden needs to be eliminated from the taxpayers' pocketbook and these perks eliminated from government contracts. At the very least, the cost of health care must be shared with retirees. A report by the C.D. Howe Institute32 suggests that Ottawa and federal employees were underfunding their employee pension plans by about 50 per cent of annual requirements, guaranteeing future funding shortfalls. The eventual shortfall will be picked up by taxpayers. “The federal government's net pension obligation under the fair-value approach stands at almost $208 billion—some $65 billion larger than reported in the Public Accounts,” said the report. C.D. Howe says that contributions last year should have been 34 per cent of annual wages but that only 18 per cent was being contributed currently.
And then of course there's the “liability for vacation benefits.” These are vacation days earned by employees as of December 31 of a given year but not taken until a later date. The Hamilton liability alone as of December 31, 2009 has been estimated at $23 million, or $1.6 billion nationwide.
The nationwide cost for these three liabilities alone—sick leave, bridge health benefits and unused vacation pay, just fringe benefits, if we use Hamilton's numbers as a benchmark—would total $11 billion and that's just for municipal employees. These municipal shortfalls will have to be made up through increased property taxes. Maybe in retirement we will see droves of people leaving cities and moving to rural areas where property taxes are lower, since these areas have fewer public service employees to care for 'til death do us part.
Portability
Pensions in the private sector were designed to create loyalty and retain trained and qualified staff within the company. Public sector pensions, on the other hand, allow total portability, meaning that you can take your pension with you wherever you go—from hospitals to universities, from cities to provinces, and even to the federal level. This allows workers to go wherever they can get the best deal—even in the same field—without their pensions being lowered. This may seem innocuous, but actually encourages competing departments in the same field, public works for instance, to outbid each other—with your money—to attract skilled staff from each other.
For instance, if you are a brilliant manager working in Lethbridge, Alberta and doing a great job for taxpayers there, the City of Calgary might offer you a higher salary to come work for it. In a private sector job, you would have to weigh the cost of losing ground in your accumulated pension credits, and might decide to stay put. In the public sector you would receive an increase in your pension by moving, since that pension is based on your highest average salary. This encourages a constant brain drain from one staff to another, incurring additional training and hiring costs without any benefit to the taxpayer. Buybacks and portability are not provisions that are available to private sector workers—yet another reason why public sector compensation is out of step with the private sector.
Spiking Pensions
It was common practice in many plans for employees in their final years to spike or “boost” their incomes by working overtime, since this extra income was included in pension calculations. In some cases workers could boost their pensions to 100 per cent of their salary. In 2010 the City of Fredericton investigated a serious problem it had with its employee pension plan. The plan was only 80 per cent funded. One of the key problems was that overtime was allowed to be used in the final average salary calculation.33
When the City of Winnipeg conducted an overtime audit they discovered that most of the overtime was going to seniors employees who also earned the highest salaries. Senior employees got first opportunity on any overtime that was offered as a result of union seniority rules. Rather than having a policy of giving overtime to the lowest wage employees they ended up using the highest wage employees. If pension spiking is included in the pension calculation the cost of the pension is driven up in addition to the premium wages that are paid. In an unrelated issue Winnipeg discovered possible collusion between workers whereby one worker would call in sick, allowing a co-worker to book the overtime. Of course the worker calling in sick would be taking a paid sick day.34
Where the worst abuses have been found in the public sector are in cases where a senior employee has complete discrepancy over the level of overtime worked. Without pension disclosure in Canada it is impossible to determine the full extent of this pension abuse, however in the U.S. where they do have pension disclosure laws, some employees have pensions that exceed their base salary. In some instances retiring allowances, sick-pay payouts and vacation time payouts have been used in the pension calculation.
Accrual Rate Changes
When the public sector wants to juice up its pensions it can change the accrual rate, as mentioned in Chapter 2. This is how public safety employees (police, firefighters, and military) have arranged to retire on full pension income at an even earlier age than other public sector workers. Recent changes to the British Columbia pension act,35 for example, changed the accrual rate for safety workers to 2.33 per cent. Most provinces have changed pension laws to follow suit. This had the effect of giving these workers a full pension after only 30 years of working. Using the pension formula 30 years times 2.33 per cent, yields 69.9 per cent. At 30 years of service, public safety workers will be eligible for the 70 per cent of income pension, instead of having to work for 35 years using the standard 2 per cent accrual rate. This resulted in a huge retroactive increase in pensions and the huge costs associated with them, picked up course by taxpayers.36
Once this change was made for police and firefighters, unions then proceeded to obtain these same benefits for other workers. Paramedics and correctional officers in Ontario became eligible soon after, and then there was a campaign by the unions to bring on probation and parole officers, sheriffs, highway safety officers, and conservation officers. We are waiting for them to include dog catchers on this list. After all, dog catchers are exposed to a public safety risk, trying to catch dogs on the loose!
These accrual rate changes to engineer earlier retirement ages with full benefits fly in the face of worldwide government policies that are delaying retirement for private sector workers. Greece, for instance, recently raised its early retirement option to 63 from 58, while France increased its retirement age by two years to 62. Canada cannot avoid raising its retirement age but these changes will not apply to the public sector, whose employees currently become eligible for pensions at 55, or 50 in public safety jobs, or when their age and service adds up to 85 for teachers. Federal politicians are eligible for pensions at age 55.
Consider the following conclusions from the United Nations:
- By 2050, the number of older people in the world (aged 60 and over) will exceed the number of younger people (under age 15) for the first time in history.
- Globally, there are now 629 million people aged 60 and over. By 2050, there will be two billion.
- In 1950, for every senior citizen (aged 65 and above), there were 12 people aged 15–64. By 2050, the ratio will have plummeted to one to four.
- The “oldest old” (those aged 80 and above) are the fastest-growing age group in the world. Their numbers are rising by 3.8 per cent a year.
- The number of centenarians (aged 100 years or older) is projected to increase 15-fold, from 210,000 this year to 3.2 million people in 2050.37
The UN says the “historic crossover” from the young to the old is so profound that it parallels the magnitude of the Industrial Revolution. In Canada, the federal government just made accrual rate changes to the CPP which punish private sector workers who retire early, thereby reducing their CPP payments. Interestingly, these changes do not apply to government workers, and the protected class of employees. So you are expected to work longer to earn more taxable income that can be siphoned off to pay for them to retire earlier. The age for regular retirement in the public sector needs to be raised to 65 for full benefits, with penalties for early retirement. This, we are sure you agree, would be fair to all taxpayers.
Firefighters and the military have an unusual situation. Generally, they are paid for simply being on call, should they be needed. Canada hasn't been invaded for 200 years, but “standing on guard for thee” has become a fairly lucrative occupation for the 90,000 members of our armed forces. Canada's new foreign policy of sending troops to fight in Third World civil wars has put a small number of our forces at risk—the highest commitment of troops to Afghanistan at any one time was 3,800—and cost the lives of over 150 young men and women, but the majority of our forces have desk jobs and will never see fighting action. Those who do see combat receive additional danger pay as compensation—and not nearly enough, we might add—but to provide them full pensions five years earlier than other public sector workers and 15 years earlier than the general public is unjustified. The current military budget is $60 million per day,38 an amazing amount for a government department that affects so few Canadians on a daily basis. Despite Canada's lack of enemies, defence spending has increased from 5.6 per cent of Federal Government expenditures in 1996–1997 to 7.7 per cent in 2010.
Firefighters are on call 24 hours a day, but if there's no firefighting to do, they often sleep regular hours at the station. They are actually paid to sleep, or rather, in the words of one official: “We are not paid to sleep, we are paid while sleeping, and that's a different thing.”39 Different words maybe, but same upshot. Recently, the fire departments of major cities have rearranged their schedules so that firefighters can “work” seven days straight, 24 hours a day, and have the rest of the month off.40 Yet they are paid full-time wages, benefits, and pensions. Many run their own part-time businesses or do contract work on the side. After all, these are young, healthy men and women. What else would they do with three weeks off each month?
Fire departments claim they must recruit the “best and the brightest” and certainly there is danger in actually fighting a fire, but the public is not fooled by these claims. Vacancies in fire departments routinely attract thousands of applicants because the job is widely considered to be one of the best in the public sector, and that's saying something.
Sustainability of the Current System
The three biggest pension plans in Ontario are those of Ontario teachers (OTPP), municipal workers (OMERS), and the health care system (HOOPP). Pension contributions for these three plans in Ontario have risen 400 per cent over the past 10 years. In 2000, Ontario taxpayers contributed just under $1 billion into these pension funds. This money is in addition to the yearly taxpayer contributions made as the employer-portion of their basic contract. In 2009 these plans required almost $4 billion—a 400 per cent increase in 10 years. And that's just in Ontario. As with all public sector pension plans, as increasing numbers of boomers retire, taxpayer contributions will escalate substantially.