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O Beholden Canada

from the magazine

O Beholden Canada

America’s northern neighbor is beset by familiar pension-funding problems. Autumn 2014

This summer, Montreal residents witnessed a strange sight: local police abandoned their traditional uniform pants and instead donned casual attire, ranging from camouflage and fluorescent-colored trousers to multicolored slacks. Some cops bizarrely even donned skirts. The dressing down was all done to show cops’ anger at the Quebec provincial government’s proposals to cut the costs of municipal pensions by getting workers to contribute more toward their retirement.

Call it Canada’s summer of pension discontent. Governments throughout the country are grappling with as much as $300 billion in unfunded government-worker retirement debt. In a country of just 38.5 million people, that’s a pension problem roughly equivalent to the one that California faces. And it’s widely shared.

Municipalities throughout Quebec, for instance, owe some $4 billion in retirement promises that have yet to be funded, prompting the province’s new Liberal government to demand this summer that workers pay more to bolster the system. A new report on the finances of Ontario’s government-owned utilities revealed their pensions to be unsustainable without deep subsidies from Canadian electricity customers. For every dollar that workers contribute toward their retirement, government-owned utilities now spend on average about four dollars, raised through electric bills—though the cost is even higher at some operations. The news is even bleaker at the federal level, where Canada faces more than $200 billion in total retirement debt for public workers, when the cost of future health-care promises made to public-sector workers is combined with pension commitments. One big problem is pension debt at Canada Post, whose budget is so strained that the federal government gave the mail service a four-year reprieve on making payments into its pension system, even though it’s already severely underfunded.

At the heart of Canada’s pension woes are some of the same forces that have helped rack up several trillion dollars in state and local pension liabilities in the United States. For years, Canadian governments have provided generous pensions at low costs to employees. Workers could earn full benefits while retiring in their mid-fifties, even as they lived longer. Politicians relied on optimistic assumptions about stock-market returns to justify those benefits. Governments were quick to grant additional benefits to politically powerful employee groups, but they underfunded pensions when budgets got tight.

Now, unsurprisingly, workers are opposed to giving up their lavish benefits. That’s why municipal employees throughout Quebec ditched their uniforms and other work clothes in protest this summer. “We want to send a clear message to government that if it continues on that path, it’s going to be war,” a union official told the National Post. War has come. In Montreal, where annual pension costs have soared to the U.S. equivalent of more than $500 million, more than 100 cops called in sick on a July Saturday as part of a “blue-fever” protest. Firefighters busted up an August city council hearing on pensions and ransacked the meeting hall as police, called in to restore order, stood by and did nothing. A Montreal Gazette editorial dubbed the incident “an assault on our very democracy.” In September, Montreal officials accused firefighters of slowing down their response times to fires as a protest against the proposed reforms. Meantime, Quebec electricity technicians threatened to strike over calls to curb their generous pensions. In a vote, 95 percent of utility-union members backed union plans to halt maintenance work on certain power stations to pressure the government-owned utilities into backing down from their pension demands.

Still, Canadian politicians have pushed forward with reform proposals. They have no alternative, given the spiraling cost of pensions and a growing sense among the country’s taxpayers that they’re financing a better retirement deal for government workers than most other Canadians enjoy. Quebec City mayor Régis Labeaume described provincial pension-reform proposals this summer as necessary “to put an end to a profound social, financial and intergenerational injustice for which Quebec taxpayers and its youth will be forced to pay the cost.” Quebec’s reform agenda includes requiring employees to contribute at least as much as taxpayers now do toward government pension plans, limiting cost-of-living increases for retirees, and capping a municipality’s pension contribution at 18 percent of salaries. Anything extra to keep a plan funded would have to come from employees, not taxpayers. Similarly, reformers called for electric utilities to negotiate new pension agreements, with the goal of having workers contribute as much to pensions as the taxpayer-subsidized electricity employers do. Alberta has proposed ending age-55 early-retirement provisions for government workers and capping contribution rates by governments. Unfortunately, while their proposals are ambitious, Canadian governments haven’t accomplished much yet in the way of actual reform. Much work remains.

In Canada and in America, taxpayers are realizing that politics and government-retirement programs—especially those that promise workers rich benefits, regardless of whether money exists to finance them—are a toxic combination.

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