Public service unions will have to bite the bullet on pensions

The speedy passage of a Bill ending the Canada Post lockout marked the beginning of a much larger battle to bring burgeoning public sector compensation costs under control. The key issue in the postal dispute was reform of the inflation indexed “defined benefit” pension plan that guarantees up to 70% of earnings starting as early as age 55.

The C.D. Howe Institute warns that the unfunded pension liability for federal workers is some $65 billion higher than noted in the public accounts.

And across the country, financially-strapped provincial and municipal governments also face huge and growing pension liabilities as a wave of baby boomer public servants retire.

There’s also a strong and growing sense of unfairness among the non-government electorate, two-thirds of whom don’t have any kind of employer-funded pension.

And many of those who have employer pension plans have seen them converted to “defined contribution” plans, wherein the size of an employee’s pension depends on what the accumulated funds will buy at retirement.

Implementation of this pay-as-you-go type of plan is the only way of getting government pension costs under control.

Air Canada’s costly defined benefit pension plan, a legacy of its former crown corporation status, was also the main issue in the recent strike.

CEO Calvin Rovinescu made it starkly clear why the airline has no choice but to move away from defined benefit pensions, “We are an airline of 26,000 employees supporting 29,000 retirees.”

Air Canada’s pension deficit is already $2.1 billion, and it will have to fund another $1.5 billion over the next four years.

The main issue in both labour disputes may have been the same, but the reality facing Air Canada and its unions is drastically different than for postal workers.

Westjet, Air Canada’s main domestic competitor, has a highly motivated non-union workforce, all of whom have an ownership stake as shareholders. Rather than a pension, employees earn a share of profits.

Air Canada must compete, and that’s simply not possible unless it wins changes to its pension plan.

Failure to achieve competitive compensation has forced many unionized businesses into bankruptcy.

The result is a precipitous drop in Canadian private sector unionization rates, all the way down to 16%.

By contrast, public sector unionization rates have grown steadily to 71%.

Taxpayer funded monopoly status has empowered government unions to extract ever more extravagant wages, benefits and even “no contracting out” clauses that block competition.

Strike-fearing governments have repeatedly capitulated to these demands.

A recent study by The Frontier Centre for Public Policy found that the wages of federal public administration workers grew by 59% between 1998 and 2009, twice as much as across the entire economy.

Public service wages and benefits have mushroomed at all levels of government, and not just in Canada.

A report earlier this year in the Economist stated that dangerous levels of debt and deficits throughout the OECD are leaving governments with no choice but “to stand and fight”. Here again, the most urgent battles will be over pensions.

American states have a combined unfunded pension deficit of some US$5 trillion and many European Union countries also face debilitating unfunded pension liabilities.

British Prime Minister David Cameron is determined to reduce the power of public sector unions by creating “a new presumption . . . that public services should be open to a range of providers competing to offer a better service. In future, the State would have to justify why it should ever have to operate a monopoly”.

Introducing private sector competition for government-funded services should also be a fundamental objective here in Canada.

But even if that is done with vigour and determination, there are parts of government where contracting out is impractical. So what should the Harper government do to rebalance the unsustainable and unfair imbalance between public and private sector compensation? Here are two simple but powerful rebalancing measures that should be legislated by parliament – classify public services that do not face significant private sector competition to be essential service monopolies, where strikes are forbidden and union/government disputes are settled by arbitration.

And mandate that arbitrators must consider private sector wages and benefits, including pensions, as fundamental factors in their settlement rulings.

These are patently fair measures, but they would be fiercely opposed by union leaders who never should have been allowed to extract such excessive compensation in the first place. The legacy of these excesses is that taxpayers are no longer willing and governments are no longer able to fund them.

Gwyn Morgan is the retired founding CEO of EnCana Corp.