BMO weighs in on troubling RSP trends and public sector unions

Canadian GDP was rocking in Q4, though I would like to dig below the surface at some underlying trends.  I’ll hopefully get to that tomorrow.  In the meantime, the two must-reads of the day come courtesy of BMO:

1)  Troubling Trend Sees Canadians Dipping Into Their RRSPs Prior To Retirement

This research report was released on Saturday.  Among the troubling trends:

  • 40% of people with an RRSP have dipped into them before retirement.  However, it should be noted that not all instances where people tap into their registered investments are necessary poor financial decisions.  The First Time Home Buyer Plan is one example.  The Lifelong Learning Plan is another.
  • However, the survey found that only 35% of people who had tapped into their registered savings had done so using these two programs.
  • Emergencies, such as the loss of a job, was the reason given by 36 per cent of respondents while paying off everyday debt, such as credit card balances, was given as a reason by 26 per cent.
  • Sadly (bone-headedly?), 6 per cent of those who dipped into their RSP did so for a vacation or other leisure venture.  Nothing like sacrificing future financial stability on the alter of immediate gratification.  Here’s a great example of marshmallow eaters in action!

Other key findings:

  • Those in BC (48 per cent) are more likely than those in other provinces to have pulled out money for an emergency

No shock there considering BC’s negative savings rate for 10 years running. Hard to build a cash cushion when you’re living on HELOCs and credit cards.

Thank goodness for a massive (unsustainable) expansion in house prices to give people access to HELOCs or the whole province would really be in trouble.  All jabbing aside, the social fallout of the massive property bubble in BC is becoming increasingly obvious.  VREAA continues to document anecdotes from bright, young professionals who have thrown in the towel on Vancouver and have sought greener and cheaper pastures.  From a balance sheet perspective, two things should be obvious about BC’s current financial predicament:

i)  A credit crunch is increasingly likely.  I shudder to think just how many bank write-offs on unsecured debt will originate in BC once the boom ends.

ii)  The fallout from a house price realignment will bring the BC pseudo-economy to its knees.  Unfortunately, the pain will be acute as all data suggests that many BC residents have little in the way of liquid assets.

2)  Union Backlash to Government Deficit Reduction Plans

BMO chief economist Sherry Cooper weighed in on the plight of public sector unions on both sides of the border in a commentary from today.  Normally I’m not a huge fan of her writing, but Cooper nailed this one.  Some key quotes:

The consternation arises mostly with respect to the pension and health care benefits of these workers, which are more generous than for the private sector, particularly for those working in small businesses.

In the U.S, the public sector remains among the few employers that have not shifted to defined contribution plans. As well, they offer health care benefits at little or not cost to the employee. This has become a touchy issue in Canada as well, as some have questioned the fairness of taxpayer dollars going to the ‘gold-plated’ pensions of government workers.

As an offset, however, public sector salaries are on average lower than private salaries, although it varies from job to job. The gap is greatest for higher-earning job categories.

Labour laws are more favourable towards unions in Canada than in the U.S. This difference is reflected in unionization rates. The U.S. unionization rate is only 7% in the private sector, compared to 16% in Canada. The gap is even greater in the public sector where the unionization rate of public employees is 36% stateside compared to a whopping 71% in Canada.

In both countries, regional governments are trying to cut costs by squeezing public sector compensation and are bumping up against substantial dissent.

I have no problem with the government having to match private sector payrolls to attract quality, but let’s make sure we compare apples to apples.  Rather than look solely at the dollar value of the salary, it would be much more fair to compare the full value of all benefits, including gold-plated and often unsustainable pensions.

Having been a member in the two largest public sector unions in Ontario, I can confidently say that the typical public sector employee is hard-working and diligent in their duties.  My concern has never been with the employees themselves.  My concern has always been that if I’m right about the future, and if large unions approach negotiations with the same ‘pay up or we strike’ mentality, it’s not going to end well.

That being said, I can also say that many in the public sector are completely out of touch with reality.  As one example (and trust me I could give you many), I recently had a discussion with colleague about our pay.  I’ve had countless similar discussions in the past.  The view was that the top-end educator (be they public school, college, or university) deserved their near 6 figure salary and also deserved the 4 percent pay increase per year being sought by the union at that time.  When I asked my colleague what they would be making if they weren’t teaching, they conceded that it would be less than half of their current salary and without benefits or pension.

This has been my concern with large public sector unions.  We are well compensated.  In many cases we are beyond well compensated.  So when the government comes along at a time of significant economic challenges and asks the public sector to consider a temporary year wage freeze, we should give some thought to the plight of many in the private sector before getting riled up.  We would do well to consider our employment and compensation prospects in the public sector before making demands about what we ‘deserve’.  If in fact a public sector employee is underpaid once all benefits are considered, they have a legitimate concern.   If not, they may want to consider voicing to their union reps that perhaps they don’t need to approach the next round of negotiations with an ‘get what we can, not what’s necessarily fair’ mentality.

At any rate….back to the BMO article:

But even in Canada, burgeoning government deficits are forcing the hand of politicians anxious to cut costs. The Ontario Liberals, trying to trim a nearly $19 billion budget deficit, raised the hackles of local unions when they announced in the 2010 budget that they would seek a two-year wage freeze on about one million public sector employees.

The fact is, however, that union workers cannot alone bear the burden of deficit reduction. Regional governments can no longer enjoy some of the big-ticket vote-getting items in their budgets. Changing the terms of union benefits is the equivalent of enforced pay cuts.

Bottom Line:

Nevertheless, expect union power to continue to erode, not just in the U.S.,
but in Canada and Western Europe as well…No longer can employers afford to guarantee lifetime retirement income and health benefits, not even public sector employers.

Hear, hear!

-Ben

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20 Responses to BMO weighs in on troubling RSP trends and public sector unions

  1. backwardsevolution says:

    Public sector unions are well compensated. No wage increase seems appropriate.

    • Draat says:

      If the private sector is expecting an average raise of 2.5% why does it seem appropriate that public sector unions receive nothing?
      http://smr.newswire.ca/en/hay-group/hay-group-2011-salary-increase-projections-for-canada

      • Agree Draat

        But it works both ways. When private sector wages fell during the recession, I don’t recall too many unions volunteering a pay cut. At the end of the day all public sector pay increases should largely be pegged to increases/decreases in the private sector.

      • data junkie says:

        Ben, couldn’t you reasonably state that not cutting public sector wages during a recession was stimulative, in that it ensured that at least SOME of the population was gainfully employed with solid middle-class jobs throughout the instability? I mean, we wasted money on much stupider things than ensuring a bunch of white-collar professionals didn’t take an unnecessary pay cut, including bailouts of the banking sector and continued corporate tax cuts at a time of falling revenues.

        If you want to decrease government administrative spending, you can:

        1) stop delivering certain programs (and after the 90’s, the fat has been cut and we’re down to pretty lean meat in terms of programs, at least in my observational experience working as a lobbyist at the federal level), or;

        2) Trim the number of public servants delivering those services (more plausible than #1 IMO, especially if you reversed the stupid rules that make it impossible for departments to efficiently hire full-time employees, necessitating bloated outside contracts and expensive ‘temporary’ employees), or;

        3) Cut public sector wages and benefits. I’m most sympathetic to the benefits side of this, as most public servants I know make wages that are in line with the private sector equivalents (especially for the shit they put up with), and moving the Feds in particular to a 50/50 pension cost split would be a good place to start. I’m receptive as well to the idea of going to a DC pension instead of a DB one… as soon as someone shows me a proposed DC system that doesn’t rely on the rampantly insane stock market. If retiring public sector boomers were as pantsless going into retirement as their private sector cohorts, that might be ‘fair’ in a meta sense, but it would only deepen the policy nightmare we’ll face as people come to terms with retirement on very little means.

        In short: comfortable middle class jobs via the public sector may not be ‘fair’ to the private sector (for the record: I have never been a public servant, nor has my wife), but let’s not confuse the real issue, which is that knocking them down a peg won’t lift anybody else up. Short of proposing an alternative setup that would see everybody benefit, I’m inclined to simply view them as the only people with a shot at a decent life anymore.

      • Lumpen says:

        data junkie –

        Full agreement with you, and #3 is probably where the most benefit can be gleaned. I won’t address the “pantsless” scenario in retirement, as so much of it depends on whether you want to wear Armani or Bargain Bob.

        There is a middle ground between DB and DC – a cash balance plan where the value grows at a certain rate and acts as a DC plan for employees, but gov’t takes the asset performance risk. Don’t know what an appropriate return might be, but presumably linked in some fashion to Canada long bonds.

        This just occurred to me, and I’m sure there are all kinds of problems, but it seems like it might be intriguing idea to play with. Let the PS choose what kind of plan they want, and price it according to the market.

        Low bond yields at the end of 2010 – a year’s credit will cost you 15% in 2011. High yields, it’s only 8%. Not a perfect link, to be sure, but current contributions bump up the asset base in a low yield environment.

        On the other side, if the employee doesn’t want to pay 14% to get the contrib year, gov’t will make a 10% contribution of salary on top of their gross (or whatever the correct # turns out to be) to an RRSP for the employee. If it were a high-yield year, maybe it’s only an 8% contribution.

        The employee gets to elect in the last month of each year for the following year.

      • jesse says:

        “knocking them down a peg won’t lift anybody else up”

        This is an issue of how best to recoup the costs of bailing out the economy from a potential depression. If you believe everyone should pay equally then you raise taxes. If you believe that everyone should be compensated equally based on their contribution, it’s on the table to look at public sector wages. I am, after all, one of their employer’s shareholders.

        I would not ask a public sector employee to accept anything less than would be available in the private sector when looking at total compensation, nor would I ask a public sector employee from one tier of government to accept lower compensation than one from another tier, for the same services provided. If that means taxes must be raised to balance things out, so be it; but let’s get the data first.

  2. jesse says:

    The negative savings rate in BC seems odd to me. I think there is something else going on — are the data correct?

    • Best Place on Meth says:

      British Columbians pay a much higher percentage of income for shelter than anywhere else in Canada without higher wages to compensate.

      That leaves less money for everything else.

      The negative savings rate makes perfect sense to me.

  3. Pingback: BC Negative Savings Rate: Does not Compute | Vancouver Condo Info

  4. Draat says:

    I don’t see a reply hyperlink behind the post from financialinsights in response to my comment so I will create a new thread.
    As far as I can tell there have been wage increases all through the recession. We can cherry pick various sectors where wages have fallen but that is statistical manipulation. To apply average increases to the public sector is the fairest way to ensure their wages don’t become better or worse than average.
    http://www.hewittassociates.com/intl/na/en-ca/AboutHewitt/Newsroom/PressReleaseDetail.aspx?cid=7234

    • WordPress allows a 3 comment limit under each thread. We agree that public and private sector wage growth should approximate each other. It hasn’t.

      At the federal level, pay for public administration workers has increased 71% since 1991 vs. 47% for the entire economy. And that is only considering weekly earnings. Throw in benefits and it paints a different picture.

      I’m suggesting that it wouldn’t be the end of the world, nor would it be unjust to see public sector wages under-perform private sector for a few years to ease taxpayer burden as we try to right the fiscal ship.

      • Draat says:

        If the call for a wage freeze is to correct an actual or perceived imbalance created from previous wage settlements then a complete overhaul of the civil service job structure and pay scale might be in order. That way the pay will be based on the merit of the job/task being performed. Any redundant positions could even be removed. On the other hand I wouldn’t doubt there are many public servants that are underpaid compared to the private sector. They don’t dare leave because the golden handcuffs (promised pension) which they have paid into their entire career would be adversely affected. If fairness is truly the goal then wholesale freezing of the entire public service is not the answer. Using the current downturn in the economy as an opportunity to kick around civil servants doesn’t pass the smell test especially when the people in power are telling us that there is no economic problem. Who to believe?
        http://www.bloomberg.com/news/2011-02-28/canada-economic-growth-rate-accelerates-to-3-3-in-4th-quarter-on-exports.html

  5. jesse says:

    “Using the current downturn in the economy as an opportunity to kick around civil servants doesn’t pass the smell test especially when the people in power are telling us that there is no economic problem. ”

    I think the two are not mutually exclusive. Governments spent a significant amount of money to keep the economy from plunging into depression. That money needs to be paid back in the form of reduced spending and higher taxes. That will impede economic growth going forward but won’t necessarily cause the economy to shrink and BoC governor Carney has hinted at this for over a year now.

    A wage freeze on the civil service is akin to a tax increase, and probably more politically expedient when the average numbers Ben highlights are benchmarked against the private sector. Out of interest I would like to see direct benchmarks for a selection of government jobs compared to those in the private sector and, as Ben mentioned, include DB pensions, vacations, and other perks like hotel discounts etc., as well as well-defined working hours in the calculations. In addition it’s instructive to compare various levels of governments to each other and I believe there is a definite discrepancy on this front, one that’s becoming more and more difficult to justify as “austerity” runs its course.

  6. data junkie says:

    “This is an issue of how best to recoup the costs of bailing out the economy from a potential depression.”

    Howabout freezing the corporate income tax at its present level rather than the planned further 3% decrease?

    Or maybe a new bank tax to recoup the cost of shuffling all those mortgages off to the elephant graveyard known as the CMHC… heck, I’d settle for the banks no longer profiting off of CMHC mortgages they write, or CSBFP loans for that matter.

    My point is not that there is no place to trim in the public service… I believe I laid my case out fairly clearly above that there certainly is, barring issues relating to them becoming just as problematically broke upon retirement as the rest of Canadians. Rather, my point is that the debate is unsurprisingly focused on attacking the middle class (as public servants overwhelmingly are) to preserve corporate tax cuts that blew a hole in the budget a mile wide.

    Nor, for that matter, am I explicitly against corporate tax cuts in of themselves. But, if we are talking austerity and belt-tightening, why are we continuing with a multi-year tax decrease program?

    • jesse says:

      Whoa slow down on the corporate tax cuts talk! Raising taxes for corporations and individuals should always be on the table but it’s not what we’re discussing in this thread

      The open question remains: are public sector compensations fair compared to the private sector when including all benefits, and are public sector wages fair between various parts of the public sector?

      The answer may not necessarily be that the public sector is overpaid.

  7. Draat says:

    “If you believe that everyone should be compensated equally based on their contribution, it’s on the table to look at public sector wages. I am, after all, one of their employer’s shareholders. ”
    Wow, that comment takes me back. Over 15 years ago when I was a federal government worker and the temperature was around -35. A man came in out of cold into our office and the first words out of his mouth were “Jesus Christ – so this is where all my tax dollars are going – turn down the heat!” My co-worker and I stared incredulously at the man and were too stunned to answer. First – we had no control over the heating system in the building. Second – we were too in shock that anyone could be so rude. The whole episode got me to wondering just what people consider “fair” treatment for civil servants – obviously there are some that believe warmth is too much. Now that I am employed in the private sector I can honestly say I don’t miss listening to guys at the local coffee shop (or on the internet) bitching about government workers. The irony is that the guys who bitch the most about being a taxpayer are usually those that qualify for the GST Rebate cheque.

  8. jesse says:

    “I don’t miss listening to guys at the local coffee shop (or on the internet) bitching about government workers.”

    I for one will not pass judgment on government workers’ abilities, attitudes or conditions. I am concerned when I see comparable workers with comparable working conditions (and office temperatures) receiving different levels of compensation. I don’t see compensation disparity too large in either direction as healthy, but I also don’t claim they are disparate today. It is something on the table to be reviewed, that is all. And, I believe, it is regularly reviewed anyways; I just haven’t bothered sussing it out.

    As a starting point perhaps it’s worth analyzing disparity (if there is any) between comparable positions at various government levels. There seems to be some level of thought that federal employees are compensated better than, say, provincial employees for the same work. Is there a justifiable reason why this might be true, or is it just not true, or is there reason to start aligning the two (up or down)?

  9. Paxtor says:

    Hundreds of Police Constables (lowest rank) make over 100k per year + benefits. I recall seeing one particular constable who made over 150k. I’m sure also that you all remember the TTC bus driver who made over 200 grand last year.

    I can’t imagine for a moment how anyone could argue that their salaries are comparable to the private sector. There is a resort bus driver in my town who makes 12 per hour. The best comparable to a police officer is a security guard. I wonder if they make over 100 grand?

    The Civil “Service” was established to benefit society at large, not to pilfer it

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