Why do Angie and Brad come out so far ahead, while Courtney and Dave must make do with retirement scraps? For one thing, most government pension funds are indexed to inflation, ensuring they aren’t eroded by rising consumer prices. In most public sector pensions, retirement payments are also calculated based on an employee’s peak earning years. But tax rules also give defined benefit plan members a staggering advantage over most other workers. In any given year a worker with a defined contribution plan and RRSPs can only put away a total of 18 per cent of his income. Yet the combined contributions of government workers and their employers can, by the end of a 35-year career, easily equal 30 per cent of an employee’s salary. That means a 55-year-old government worker with three decades under his belt and a $60,000 salary would effectively have contribution room of more than $25,000. The same worker in the private sector would be restricted to an RRSP limit of just over $11,000. “I will never argue that public sector workers shouldn’t have good pensions, but how is it fair that these rules have been structured from the beginning to give an opportunity to one class of worker that isn’t available to another class?” Pierlot asks. “It’s appalling and it’s immoral.”
Union leaders like Brown argue that any suggestion that government workers enjoy better pensions at the expense of taxpayers is unfounded because, he says, they pay dearly for their pensions. Put another way, Angie and Brad, for instance, may have to live on less while they’re working because they’re forced to save more. But even so, the standard of living that public sector employees now enjoy in retirement is absolutely lavish compared to other workers, and it’s getting more and more so. The median retirement age for public sector workers, for instance, has fallen steadily since the late 1980s to 58. Not so with private sector workers, who typically tough it out to at least 62. With the obliteration of private retirement savings over the last year, experts say it’s likely many workers will have to toil into their 70s—long after most public sector workers the same age will have settled into their cottages.
This problem will continue to grow, Pierlot says, unless government radically reforms the retirement system. He says the 18 per cent contribution limit should be scrapped, in favour of a lifetime tax-deferred savings limit of, say, $1.5 million, a move that Britain made in 2006. The rules that require pension plans to be sponsored by employers should also be tossed out, so workers can pool their retirement savings in large target benefit plans set up by trade associations, or financial institutions. For many workers it’s already too late, but the changes would help ensure pension inequality doesn’t become entrenched for generations to come.
As for the thorny issue of pay and perks like sick-day banks, Mazerolle says governments and Crown corporations have botched negotiations by springing their concession demands at the last minute. With numerous public sector contracts set to expire over the next couple of years, managers need to make it clear now that many of the perks that unions have cherished for 50 years have become anachronistic. “The way to do this is to put everybody on notice now and say, ‘Look, things have changed,’ ” he says.
Of course, the ideal solution for most workers would be to raise private sector benefits to public sector levels, rather than reduce everyone to the lowest common denominator. Unfortunately, with the economy the way it is, that seems unlikely. The solution may lie in a happy medium instead—but one thing is clear: hiking taxes on already beleaguered private sector workers to pay for increasingly deluxe benefits for the public sector is not an option. With public tempers rising faster than the piles of garbage in Toronto and Windsor, it’s a message that the public sector and their government employers can no longer ignore.
