Funding Cuts Expose CBC Pension Ponzi
By Bill Tufts & Lee Fairbanks
The Federal Government recently announced budget cuts to the CBC of $27.8 million this year increasing to $115 million by 2014-15. The CBC budget for 2011 was $1.1 billion.
Teeth are being gnashed over the loss of staff and programming, but these cuts pale in comparison to the costs of propping up their pension ponzi scheme. How will it fund its current pension solvency deficit of $801 million (2010) up from $382 million the previous year?
In 2010 employees contributed $26.9 million but $51.2 million was added by taxpayers. The split is supposed to be 50/50, but CBC has chosen to ask taxpayers to fund the deficit without asking employees to contribute more. To properly fund the pension solvency shortfall, the CBC, under normal accounting rules, would be required to fund an extra $160 million each year over the next five years.
The CBC pension is a mature plan with more 9,066 retirees receiving money from the plan and than the 8,086 employees paying into the plan. Every employee fired from CBC increases the cash required from taxpayers to prop up a plan that is flawed by design.
Much of CBC’s pension problem can be attributed to a highly controversial decision to allow “retroactive” pensions to employees who previously did not qualify for them. Under a program called “buy-backs” starting in the early 2000s, members of the ACTRA union were allowed to purchase pension credits in the CBC plan, triggering a lucrative - but underfunded - guaranteed pension.
In a new report we released on the CBC pension plan we discovered that employees invested only $68 million for the ACTRA buy-back but will get an estimated $461million in additional retirement income.
End Early Retirement, Keep People Employed
Our Federal, Provincial and Municipal governments need to reform the public sector plans. This includes eliminating early retirement, keep employees working longer thus reducing the number of retirement years. The average age of retirement for CBC employees is 58.3 years and this compares to the recent increase in Old Age Security (OAS) to age 67.
One option would be to reduce employee compensation to allow all employees to keep their jobs. Rather than cut 5% of the workforce, creating unemployment and adding to the pension shortfalls, existing workers should take a 5% wage cut to keep full employment. This was done with great success at the non-union Hamilton’s Arcelor-Mittal Dofasco plant during the economic slowdown in 2009.
One Solution: Hybrid Plan
A popular solution for pension plans with problems like those at CBC is a hybrid pension. United States federal employees have been offered this plan since 1983. California Governor Brown recently recommended a hybrid as part of his pension reforms package and Rhode Island introduced a new plan with Canadian insurer Great West Life being one of the finalists to manage it.
Currently the typical public sector defined benefit plan pays 2% of final average salary times the number of years worked so that 35 years times 2% reaches the 70% replacement income.. The CBC plan has minimal employee contributions at 6.67% and relies on high investment returns to fully fund the plan. These types of plans are vulnerable to poor returns, aging demographics and staff cutbacks. They have become obsolete in the private sector with both General Motors and Arcelor-Mittal forcing existing employees out of defined benefit plans into defined contribution.
The Hybrid plan offers a guarantee of 1% of the employee's salary and a contribution-based top-up that is funded on a flexible basis with employees deciding how much they want to contribute, matched by the employer. The defined contribution portion has a contribution limit designed to replace 1% of income.
In September 2011, arbitrator Kevin Burkett resolved a long-standing pension dispute at Air Canada by choosing a union offer to accept a hybrid pension. The change in plan design will cut the pension shortfall in half and limit the company’s future risk.
For employees locked into a 2% pension plan in which they are mandated to contribute half the costs for fund deficits created by earlier generations, annual costs are skyrocketing. The Ontario Municipal Worker’s Pension (OMERS) recently forced both sides to increase their contributions with employees and taxpayers both funding 14% of salary, up from 10.7% just 5 years ago. Despite this large increase the OMERS deficit rose by $2.7 billion in 2011, adding to an existing $4.5 billion pension shortfall.
Many younger employees are questioning the value of these high contributions to pay pensions for retired employees at the same time shortfalls increase, leaving doubt in their mind if the pension will be there for them at retirement.
Stay tuned to your radio to see how CBC will solve its financial problems.
Bill Tufts and Lee Fairbanks are founders of Fair Pension For All and co-authors of Pension Ponzi: How Public Sector Employees are Bankrupting Canada’s Health Care, Education and Your Retirement (Wiley & Sons, 2011)