By Catherine Swift
One of the main drivers of these problems is the demographic tsunami currently hitting all developed countries around the world, and this tsunami is now reaching Canada’s shores.
Canada did manage to weather the financial meltdown better than most for a number of different reasons that involve good luck as much as good planning, but we should not feel smug that we will not in the near future be facing the very same issues that are now bedevilling Greece, Portugal, Wisconsin, Ohio and so many others.
The problem is multi-faceted. One very important part of it arose from the increasing unionization of government workers that started many decades ago. It used to be that a government job meant lower pay, but more job security and a better pension than an equivalent private-sector position.
The unionization of government employees was deemed to be a non-starter as governments do not operate in a true marketplace that imposes the proper checks and balances on union demands.
But unionization did creep into the public sector in the 1960s, and since then public sector unions have been amazingly successful at ratcheting up government workers’ compensation, benefits, time off for vacation and other reasons, pensions and increasingly early retirements. And of course, job security remains much better in the public sector than in the private sector.
Governments of all political stripes were very much complicit in this process, as caving into union demands was much more politically palatable than facing strikes of government workers or unions vocally opposing their party in elections. And governments face no market realities that would put constraints on union demands, as they are one of the few businesses that can by law require its customers to purchase its services via the payment of taxes.
Meanwhile, private-sector unions have had to scale back their demands over the years in the face of market realities. Those realities are just beginning to hit governments around the world now, as many of them effectively face bankruptcy.
Research by the Canadian Federation of Independent Business and others based on Canadian census data shows that the gap between the compensation and benefits of a government worker and the comparable job in the private sector is large and growing. Based on the most recent census data for 2006, the gap at the federal level was 41.7 per cent, 24.9 per cent at the provincial level and 35.9 per cent at the municipal level of government.
Government employees also work fewer hours per week, take longer parental leaves – often with topped up salaries – have more vacation time, take many more sick days and retire considerably earlier than their private-sector counterparts.
This state of affairs is, of course, profoundly unfair to the private-sector taxpayers who are collectively putting tens of billions of dollars into rich pay packets and pensions while struggling to put away a bit of money for their own retirement. But unfairness aside, it is also financially unsustainable, as countries such as Greece, Spain, Portugal, the United Kingdom and others are currently finding out. After all, governments are not self-sustaining, and need to rely on the taxes from a healthy private sector to exist.
Another issue is that excessively paid government employees distort labour markets. I frequently hear from small business owners about how they are paying very high taxes so that, using their tax dollars, governments can effectively poach away the workers they have trained with better pay and benefits for those workers.
Compensation levels being out of whack in government is certainly an important issue that needs to be addressed, but the real problem comes in the form of the massive amounts of money now owed by all of us in the form of pension promises that are either totally unfunded or dramatically underfunded.
Government workers generally believe that they pay for their pensions, but the simple truth is that most don’t pay anywhere near half the cost. At the federal government level, they pay about 35 per cent of the contributions, and at that rate the plans are still massively underfunded.
The first objective has to be to have all governments fully disclose the unfunded liabilities in all of their pension plans.
At the federal level, the government admits to an unfunded liability of about $200 billion in the largest pension plan. Did we hear anything about that in last year’s election? And many analysts believe that is a serious underestimation of the real amount owed. And there are many liabilities that are not disclosed in any way at all levels of government and the many agencies and boards that are attached to them.
So good data must be the first step. Once we know the magnitude of the problem – and I am sure it will be shocking – many changes need to be made to make these plans financially sustainable in future, such as increasing retirement ages and having defined contribution plans for new employees.
The gold-plated defined benefit pension plan has gone the way of the dodo in the private sector as it is simply unaffordable. The same needs to happen in the public sector.
Increasing the retirement age has been a hot topic of late for governments trying to cope with their pension woes. We have already seen the plans to gradually increase eligibility for Old Age Security from 65 to 67. Much more needs to be done.
For instance, no private-sector worker should be asked to wait until 67 for OAS benefits until everyone in the public sector works until at least 65.
Impending labour shortages also means that individuals over 65 will be needed to keep the economy going and will likely want to keep working and many will have to for financial reasons.
Overall trends show that unions are disappearing in the private sector as our economy changes and businesses have to be more competitive. The last bastion of union strength around the world is in government, and this is why we have seen the vicious pitched battles in a number of U.S. states and European countries – unions are fighting for their lives and will not give up easily.
The riots in Montreal have been instructive on how very clueless and entitled the students and anarchists are about the nature of the real problems and how to resolve them. The renowned historian Niall Ferguson recently commented that the younger generation should all be Tea Partiers if they knew what was good for them, as they will soon be carrying the can for all the debt that has been built up over the past few decades.
There have been few people or organizations willing to discuss these crises because they are difficult and unpopular, but the price of ignoring them is great and disastrous. This is why we at CFIB have been willing to be the skunk at the garden party, and we will continue to do so.
Only just recently have we seen some of our political leaders express some awareness that we have problems in these areas, but much more awareness and action is needed – and soon. And every Canadian can help to put pressure on our politicians to act, as that is the only thing that will bring about the kind of change we need to maintain and hopefully enhance Canada’s status as a strong, resilient economy with a bright future.
Catherine Swift is board chair of the Canadian Federation of Independent Business. This is an edited version of the keynote address she delivered earlier this month at Carleton University’s Leadership Luncheon.