SCHOOL FOR THOUGHT

The real value of Ontario teachers’ pensions

Judging by the comments, there was so much interest in yesterday’s posting that I am encouraged to post another excerpt from Pension Ponzi. This excerpt (pp. 56-58) is relevant to Doug’s statement that “the lump sum value of a teachers pension is about $500 000 only in the sense that a private person would need about $500 000 in the bank to produce an annuity equal in value to the average teacher’s pension”.

• When it started in 1917, the OTPP [Ontario Teachers’ Pension Plan] offered teachers who had been working for 40 years a pension of $1,000 per year. It was not until 1933 that that amount was increased to $1,250. In 1945 the pension was increased to a maximum of $1,500 for teachers who had 36 years of service and were 65 (men) or 62 (women) years of age. By 1954 teachers had eliminated the $3,000 annual cap on pensions and the pension was based on the last 10 years’ average salary.
• None of this could be considered particularly spectacular although signs of things to come were evident. In 1965 retirement with a pension was allowed at age 55, a full 10 years before most Canadians could retire. After that it was a matter of ratcheting up the annual pension income that would be received. The OTPP pension was no longer a simple means of staving off poverty in old age, but became a tool to find new ways of creating wealth for retiring teachers.
• In 1971 survivors were added to the pension plan, so that if a teacher on pension passed away before his spouse, his spouse would continue to receive a pension, usually about 50 per cent of the previous total, until she died. In couples where both husband and wife were teachers, the survivor got to keep both pensions when the spouse died. In 1971 it was still common for one parent to be the main breadwinner and the other parent to be at home raising children, so the spousal survivor benefit made a lot of sense, preventing homemakers from becoming penniless widows upon the untimely death of their partner. Today, of course, it is rare to find a home in which both parents are not fully employed, but this spousal benefit has never been removed from any public sector pension.
• New pension ‘windows’ were opened up. These windows allowed teachers who had not yet qualified for their full pension to get one based on a combination of minimum years of working and age. For example, the first window in 1986 provided for an unreduced pension for pension plan members who were aged 55 with at least 10 years of service. In 1998 the ‘85’ factor was introduced as a ‘temporary’ measure and was converted a few years later into a permanent benefit. It allowed anyone who had a combination of years worked plus age totalling 85 to retire on full pension. For example, a 55-year-old teacher with 30 years and a 65-year-old teacher with 20 years of classroom time would both be fully qualified for a pension. The most recent OTPP goodie was to base pensions on the highest or best five years of salary, rather than on average earnings. This again is a benefit that does not occur in the private sector and substantially raised pension income for retired teachers….
• Based on the current salary grid in the province of Ontario, many teachers will be retiring with a salary in excess of $90,000 per year. The salary grid is the practice of automatically advancing up the pay scale by moving to a new job classification or getting an increased salary based on simply having worked another year in the same job, doing the same work. A school board may claim to be limiting union raises to 3 per cent; this figure applies to the annual base salaries in the contract but in reality, the total cost is higher become some employees have moved up to the new grid level of seniority or have been promoted to the next pay level. The total compensation may reach 5-6 per cent even though the announced ‘contract settlement’ was for only 3 per cent. Politicians use the lower number to promote themselves as representing the taxpayer by ‘holding the line’ on staff costs. Then the multiplier effect of the additional benefits and pensions based on the true salary increases kicks in as well. So when you read ‘3 per cent wage increase’, think 5-6 per cent out of your pocket and into theirs. A 70 per cent pension will give them a pension income starting at around $63,000 per year, including CPP.
• These levels of income are well above the average worker’s wage in Canada of around $46,000 per year. Not the worker’s pension, mind you, the worker’s wage. These pensions put retired teachers into the top 20 per cent of senior incomes….
• An employee retiring at age 55, with a $63,000 pension has a life expectancy of another 29.8 years. Assuming that the pension is adjusted for inflation at 2 per cent, the retiree will receive over $2.5 million in pension income based on normal life expectancy, and at the end of 29 years will have an income of more than $110,000 per year. Currently there is a dramatic trend to teachers living over 100 years of age. These employees will earn $4.6 million, with about $856,000 coming from the CPP program assuming indexing of 2 per cent.