Pension problems

State-pensionsThe Progressive Labour Party seems to be getting some traction with its populist approach to Opposition – essentially hammering away at the idea that “rich” businesses are getting all the breaks from the OBA while “poor” individuals are getting the short end of the stick.
Derrick Burgess’s press release this week criticizing the freezing of civil service pension increases is a case in point.
This, Burgess said, was just another example of the One Bermuda Alliance Government taking hard earned rights away from the people who could least afford it while throwing tax breaks at businesses, who, by inference, do not need them and are just profiting from them.
Other examples included increases in health insurance premiums for the elderly, hospital costs for seniors had risen by 10 percent and that health insurance had gone up by eight percent. Vehicle licensing and passport renewal fees have also been increased.
But what about the facts?
The pension freezes only apply to the Public Services Superannuation Fund, the civil servants fund, the and the Parliamentary Pension Fund, which frankly is the greatest wheeze ever invented and should be a national scandal (from which Burgess will benefit quite handsomely, incidentally).
The PSSF, as it currently stands, has a $1 billion unfunded liability and according to the actuarial studies, will run out of money in 26 years or so, at which point the taxpayer will have to pick up the bill, which will be in the hundreds of millions a year.
This clearly is unsustainable. Former PLP Premier Paula Cox said this is what kept her awake at night, and to her credit, she took a few small steps to resolve the problem.
However, the PLP’s big contribution to making the problem worse was to allow civil servants to stop donating to the fund for a period of time in return for a wage decrease (thus keeping their salaries the same).
At the moment, according to The Royal Gazette, PSSF and parliamentary pensions are reviewed every two years. If inflation has risen by more than 0.5 percent, then they receive an increase.
The legislation proposed by Finance Minister Bob Richards on Friday takes away that requirement.
It may be just accounting, but by taking away the mandatory cost of living adjustment, the unfunded liability immediately drops by about 25 percent or $250 million. That is real money, although it still leaves a gaping hole that must be filled somehow.
The problem with the PSSF and the Parliamentary funds is based on bad decisions made at the outset. Both are defined benefit plans, which means the pensioners get a pension based on a percentage of their salaries multiplied by the number of years of service, regardless of what they put into the fund. Then they get inflation linked increases as well.
That’s all well and good. But when the PSSF started, retirees started getting pensions immediately, even though they may not have contributed – what’s known as pay as you go.
So the fund was behind from the start. That was OK in the early days when there weren’t many pensioners and there were plenty of people contributing to the fund. And if the fund ran short, Government planned (and did) top it up from the Consolidated Fund.
Now there are plenty of pensioners, and it is quite possible the civil service will shrink, if only through attrition. Even so, the approach above could not last.
There are only two ways to genuinely resolve the pension problem. One is to put more money into the scheme, either through increased contributions or through a one-off injection of funds from the Consolidated Fund. The first is not feasible because those same civil servants will not wish to see their contributions increase right now. Topping up the PSSF from the Consolidated Fund won’t work now because there’s no money to do that either.
The only other way is to reduce or freeze the amount of money going out. That is what is happening. It does not mean that pensions will never be increased. But it gives some breathing space to enable the Government to come up with a better plan.
Steps like increasing the retirement age would help, but are not enough.
The only real solution is to convert both plans to defined contribution plans, and to grandfather these in, so existing pensioners would get the same benefits they do now, while current workers would be able to keep their contributions.
The private sector essentially moved to DC plans in 2000, but Government failed to do the same. If it had, it would have saved a lot of problems now. Basically, with defined contribution plans, you take out in pension what you put in, which is completely fair.
It is likely that the BPSU and the other unions won’t see it that way, but we are out of easy choices.
The PLP knows all of this because it avoided (for the most part) dealing with the problem for 14 years.
2040 is not that far away. It means that any 40-year-olds in the civil service will not have a pension when they retire because everything they have contributed has been paid to their elders. And a 50-year-old will have no pension at the age of 75.
No doubt Burgess will be leading the protests then as well, but he should remember how he opposed taking a sensible step to deal with the problem in 2014.
Richards probably won’t deal with that issue for a while. he said in the Budget debate that he was more concerned with closing the budget deficit than with this problem, so structural changes to the PSSF are probably a year or more away. But this is the first step in what will be a long march to fiscal sanity.
One aside: If the PLP believed in shared sacrifice, it could table a bill to reduce the future pensions for the current group of MPs and their successors.
Next: Do tax breaks really only help companies?

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