In Part I of Facing the Fiscal Reality we discussed how Canada has finally begun to address the implications of being an aging society. Part II focuses on the question "who pays?"
If we, as Canadians, become poorer these events will take place and they will be collectively borne by the Canadian public. However, how much of the burden we each shoulder individually will depend very much on decisions made by government and this is why it is important to be under no delusions about what this government or any government is deciding. They are deciding how much the public sector pays versus the private sector and they are deciding how much younger Canadians pay versus older Canadians.
To understand this, we need to understand the current situation. Over the last forty years public sector employees have enjoyed a steadily growing wage premium over the private sector, in part due to a heavy subsidization of their retirement plans. A typical federal public servant contributes only 37 per cent of the costs of their pension benefits versus 100 per cent for a private sector employee. Stated more bluntly, private sector employees not only contribute to their own pensions but also to much richer, on average, public sector pensions. Public sector workers do not contribute to private sector pensions. Furthermore, this public sector pension is fully indexed against inflation and ultimately guaranteed by the taxpayer. In other words, if our current record of poor productivity growth continues, and we do get poorer, the current plan is for much poorer private sector workers to further subsidize this public sector plan.
It’s not surprising in light of this that public employees retire younger and with higher incomes than private employees. It is a wide and growing inequity. This Budget is a watershed for one important reason. It takes the first baby step towards reversing this trend. The government has announced its intention to review pensions for Members of Parliament and federal employees. However, let’s not fool ourselves. A “review” is not a change. It’s simply testing the political winds. And make no mistake, the people who designed these inequitable policies also benefited from them, so do not expect any talk of rolling their pensions back, although this has happened in other countries. The plan appears to be one of imposing the change on future employee and future Members of Parliament.
The apparent intention of the Government to ensure that only its younger employees bear the consequences of the adjustment provides a useful segue to the issue of how governments determine “who pays?” question across different age groups. It’s been remarked in some quarters that this Budget risks,“generational war”. This is a mistake. In one sense, generational war has been underway for forty years. It was really ushered in the 1970s, when governments began to run large program deficits. A program deficit is a situation where spending minus interest costs exceeds government revenues. The federal government ran program deficits for roughly ten years in the 1970s and most of our national debt was a result of our inability to control the resulting interest costs. In fact, what happened is that in the 1980s, governments were forced to run program surpluses despite large budget deficits.
The practical meaning of these “program surpluses and Budget deficits” is that people entering the workforce in the 1980s began to get considerably less per tax dollar than the people who came before them and these inequities widened in subsequent years. The federal Budget deficit was, in fact, a large transfer of wealth and income from these generations to those that had come earlier. In light of this it is not surprising at all that this period saw a concentration of wealth in older Canadians and income declines in younger Canadians. There was a steady decrease in retirement ages from the 1970s through to the 1990s.
Stated another way, young Canadians are at the wrong end of an intergenerational wealth transfer. Their parents and grandparents paid less for their services than they were worth. They passed the rest of the bill to the young who have to pay more for services than they are worth. This is how one generation transfers wealth to the other. In previous generations the transfers used to go from old to young.
This Budget actually exacerbates the intergenerational transfer of wealth from young to old. The decision to gradually raise the age of eligibility for old age security will not affect anyone over the age of 54. Now, there is little doubt that we need to rein in the costs of this program.
However, the decision to delay the implementation of these policies simply means larger adjustments will be forced on later retirees. It also means that the people responsible for creating the federal debt will pay the least for this adjustment.
However, this raises another point. The generational war is still really a war of ideas. There are no shortage of older Canadians who have recognized the need to make social programs and living standards sustainable long after they have passed on. These are people who have argued for balanced budgets and a scaling back of unsustainable remuneration and double and triple dipping pensions. There is also no shortage of younger Canadians who have taken to the ramparts to defend policies which would exhaust social programs and leave them burdened with debts like Greece.
Subsequently, what does this all mean to First Nations in Canada?
If we, as Canadians, become poorer these events will take place and they will be collectively borne by the Canadian public. However, how much of the burden we each shoulder individually will depend very much on decisions made by government and this is why it is important to be under no delusions about what this government or any government is deciding. They are deciding how much the public sector pays versus the private sector and they are deciding how much younger Canadians pay versus older Canadians.
To understand this, we need to understand the current situation. Over the last forty years public sector employees have enjoyed a steadily growing wage premium over the private sector, in part due to a heavy subsidization of their retirement plans. A typical federal public servant contributes only 37 per cent of the costs of their pension benefits versus 100 per cent for a private sector employee. Stated more bluntly, private sector employees not only contribute to their own pensions but also to much richer, on average, public sector pensions. Public sector workers do not contribute to private sector pensions. Furthermore, this public sector pension is fully indexed against inflation and ultimately guaranteed by the taxpayer. In other words, if our current record of poor productivity growth continues, and we do get poorer, the current plan is for much poorer private sector workers to further subsidize this public sector plan.
It’s not surprising in light of this that public employees retire younger and with higher incomes than private employees. It is a wide and growing inequity. This Budget is a watershed for one important reason. It takes the first baby step towards reversing this trend. The government has announced its intention to review pensions for Members of Parliament and federal employees. However, let’s not fool ourselves. A “review” is not a change. It’s simply testing the political winds. And make no mistake, the people who designed these inequitable policies also benefited from them, so do not expect any talk of rolling their pensions back, although this has happened in other countries. The plan appears to be one of imposing the change on future employee and future Members of Parliament.
The apparent intention of the Government to ensure that only its younger employees bear the consequences of the adjustment provides a useful segue to the issue of how governments determine “who pays?” question across different age groups. It’s been remarked in some quarters that this Budget risks,“generational war”. This is a mistake. In one sense, generational war has been underway for forty years. It was really ushered in the 1970s, when governments began to run large program deficits. A program deficit is a situation where spending minus interest costs exceeds government revenues. The federal government ran program deficits for roughly ten years in the 1970s and most of our national debt was a result of our inability to control the resulting interest costs. In fact, what happened is that in the 1980s, governments were forced to run program surpluses despite large budget deficits.
The practical meaning of these “program surpluses and Budget deficits” is that people entering the workforce in the 1980s began to get considerably less per tax dollar than the people who came before them and these inequities widened in subsequent years. The federal Budget deficit was, in fact, a large transfer of wealth and income from these generations to those that had come earlier. In light of this it is not surprising at all that this period saw a concentration of wealth in older Canadians and income declines in younger Canadians. There was a steady decrease in retirement ages from the 1970s through to the 1990s.
Stated another way, young Canadians are at the wrong end of an intergenerational wealth transfer. Their parents and grandparents paid less for their services than they were worth. They passed the rest of the bill to the young who have to pay more for services than they are worth. This is how one generation transfers wealth to the other. In previous generations the transfers used to go from old to young.
This Budget actually exacerbates the intergenerational transfer of wealth from young to old. The decision to gradually raise the age of eligibility for old age security will not affect anyone over the age of 54. Now, there is little doubt that we need to rein in the costs of this program.
However, the decision to delay the implementation of these policies simply means larger adjustments will be forced on later retirees. It also means that the people responsible for creating the federal debt will pay the least for this adjustment.
However, this raises another point. The generational war is still really a war of ideas. There are no shortage of older Canadians who have recognized the need to make social programs and living standards sustainable long after they have passed on. These are people who have argued for balanced budgets and a scaling back of unsustainable remuneration and double and triple dipping pensions. There is also no shortage of younger Canadians who have taken to the ramparts to defend policies which would exhaust social programs and leave them burdened with debts like Greece.
Subsequently, what does this all mean to First Nations in Canada?
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