(This column originally appeared at the Huffington Post blog on September 27th, 2016)
Last week, with a midnight deadline looming, General Motors Canada struck a deal with their workers’ union, Unifor, to avert a strike and allow GM’s Canadian operations to continue uninterrupted.
As with most labour negotiations, this couldn’t have happened without both sides putting a little water in their wine. And crucial to this deal was Unifor’s willingness to agree that new employees would be put onto a defined-contribution pension plan. With any luck this move will rub off on their union brothers and sisters working in government.
Given the number of Canadians who have no employer-based pension plans at all, the details of different types of pension plans might seem unimportant. But when it comes to the prospective risk and costs faced by an employer, the difference between defined-benefit and defined-contribution plans cannot be overstated.
In short, defined-benefit plans guarantee retirees a certain level of retirement income, regardless of how much money is in their pension fund. In contrast, defined-contribution plans pay out based on a pension fund’s balance and return on investment – meaning that if the return is lower, so is the payout.
While defined-benefit plans are preferred by many retirees, the flipside is that they can be extremely expensive for employers, who are required to cover the difference when pension fund returns are lower than expected. In GM Canada’s case, the pension fund faced a shortfall of $3.6 billion as of last year.
These shortfalls can occur because the employer didn’t put in enough money, because the employee didn’t put in enough money, because investment earnings were lower than expected, because retirees are living longer than expected, because the inflation rate is higher than expected or any combination of these factors. In other words, with defined-benefit pension plans it’s really easy to get some projection made decades in the past wrong and end up with a shortfall.
Unifor first seemed to acknowledge that defined-benefit pensions were on the way out in 2012, when they agreed to put new employees onto a hybrid defined-benefit/contribution plan. With this latest deal, they have all but conceded that the era of defined-benefit pension plans in the private sector is in its twilight.
While it’s great news for GM that they have a union that takes a realistic approach on pensions, the news is less great when it comes to our government employee unions.
Take the Canadian Union of Postal Workers (CUPW), which recently reached a tentative agreement with Canada Post. Even though Canada Post faces a pension shortfall of $6.2 billion, all reports suggest that CUPW did not make any concessions on defined-benefit pensions. For an organization that is barely breaking even in the face of falling demand for its services and higher costs, this hardly seems prudent.
And then there is the broader issue of most government employees. Detailed numbers are hard to pin down, but one estimate by the Canadian Federation of Independent Businesses put the figure for unfunded government employee pension plans nationwide at around $300 billion.
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So why does Unifor get it on pensions, while CUPW doesn’t?
No doubt Unifor would have liked to have kept defined-benefit pensions. But to their credit, they looked at the bigger picture: better to preserve jobs by giving up some benefits, than try to dig in on a huge expense to the employer and jeopardize everything. After all, GM Canada doesn’t have bottomless pockets (although they have been known to come begging for a bailout from taxpayers).
But government employee unions like CUPW have no such incentive to compromise. In CUPW’s view, governments have unlimited resources, since they can always get more money from taxpayers by raising taxes. They know that government will not go out of business no matter how hard they bargain. This mindset should alarm Canadians who are concerned about getting value for money for the taxes they pay.
Going forward, CUPW and other government employee unions face an important choice. They can continue to cling to an expensive and unsustainable pension model that is all but extinct outside the insulated walls of government. Or they can take a page from their more pragmatic private sector brethren, and choose to be part of the solution – helping ensure both prudent use of taxpayer-funded resources, and a more sustainable footing for government services over the long term.
Aaron Wudrick, CTF Federal Director
Email: awudrick@taxpayer.com
