Public Workers Asking Too Much?

The three-week-old STRIKE by municipal workers in Toronto has spawned mountains of stinking garbage, left public swimming pools empty and wreaked havoc for working parents who rely on city-run daycares.

This article was originally published in Maclean's Magazine on July 20, 2009

The three-week-old STRIKE by municipal workers in Toronto has spawned mountains of stinking garbage, left public swimming pools empty and wreaked havoc for working parents who rely on city-run daycares.This article was originally published in Maclean's Magazine on July 20, 2009

Public Workers Asking Too Much?

The three-week-old STRIKE by municipal workers in Toronto has spawned mountains of stinking garbage, left public swimming pools empty and wreaked havoc for working parents who rely on city-run daycares. But the strike has also brought with it something else: the sudden realization that not all jobs in Canada are created equal.

In what many would call the real world, an economic earthquake has shattered lives, erased nearly 400,000 jobs, and obliterated a lifetime of retirement savings, hopes and dreams. Yet despite that, PUBLIC SECTOR workers with iron-clad pensions and rock-solid job security have opted to wage a battle for pay hikes and the type of arcane perks that were almost unheard of in the private sector, even when times were good. "Everyone who works within a large apparatus like the government believes the whole world works that way, when in fact it doesn't," says Ted Mallett, chief economist with the Canadian Federation of Independent Business (CFIB). "There's a distinct lack of appreciation for what's changed outside in the real world."

UNIONS dismiss such comments as the rantings of right-wing lobbyists hell-bent on dismantling ORGANIZED LABOUR. Despite the public outcry over the strikes and polls which show that many citizens deeply oppose them, union leaders insist the outrage is largely manufactured. "Public jealousy is being whipped up," says Larry Brown, secretary-treasurer of the National Union of Public and General Employees (NUPGE). "The idea that there's a mollycoddled public sector workforce is just not genuine." Yet any sober analysis of the numbers shows most government workers do enjoy a distinct advantage over their private sector counterparts. Government workers enjoy enviable pay, more luxurious benefits and in almost all cases, astonishingly better pensions.

A string of labour battles in recent months has plastered this growing inequality all over the headlines. The strike by 24,000 city workers in Toronto has brought Hogtown to a standstill. Members of the Canadian Union of Public Employees (CUPE) are seeking a wage increase in the range of three per cent a year, in line with what transit employees and police received last year through arbitration. But public fury has centred mostly on the workers' sick-day bank. As it stands now, many city workers can sock away their unused paid sick days, up to 18 a year, and cash out up to six months' worth when they retire. The sick bank has left a $250-million unfunded liability on the city's books, which is why other regions around Toronto have done away with them. But CUPE is adamant the sick-day bank remain untouched. "The city is putting the knife to us," Ann Dembinski, president of CUPE Local 79, said recently.

Meanwhile in Windsor, a bitter strike by city workers is already into its third month. Workers voted to strike over the city's attempts to curb post-retirement benefits for future workers, such as medical benefits. Paul Moist, the national president of CUPE, which represents striking workers in both cities, says the disputes happened because employers tried to take away well-established benefits. "I think the recession is being used as ground cover because workers are vulnerable," he says.

The list goes on. In Ottawa this past winter, bus drivers rejected a seven per cent pay raise over three years and shut down the capital's transit system for seven weeks after the city tried to curtail their right to set their own schedules. In Calgary and Edmonton, municipal workers landed contracts in May that offered pay raises of between 3.5 to 4.5 per cent this year and next. And in B.C., striking paramedics, who say other emergency workers earn more than they do, are seeking an amazing seven per cent raise each year for the next three years.

To say all this has left regular workers feeling bitter puts it mildly. "The whole public sector is going to get tarnished" by the strike in Toronto, says Maurice Mazerolle, a labour studies professor at Ryerson University. "There are outrageous things in some public sector contracts and people are wondering, 'What is this about? Why do you get this?' "

Much of what's driving government sector unions is the deeply ingrained belief that everyone else is way better off. It's not uncommon to hear the claim that government workers lag the private sector by 10 or even 20 per cent. "The private sector has been demonstrably ahead of the public sector," says Moist. For instance, he says, the government has had a terrible time hiring people in the trades because workers could make so much more elsewhere. Never mind the fact that at the time, Canada was in the middle of a phenomenal commodity and housing boom, which has since been followed by an equally spectacular bust that's hitting private sector construction workers particularly hard.

At one time, the unions' argument was justified. For decades many public sector workers lagged the private sector in pay. Until the 1960s most federal and provincial employees had no collective bargaining rights whatsoever, and they weren't allowed to go on strike. As recently as 1991, a report by the Pay Research Bureau found that average wages in the federal government trailed other employees by 8.3 per cent.

But there's been a dramatic shift since then. Stronger and better organized unions have virtually sealed the gap. At the same time, many labour disputes often end when legislators intervene and the matter gets sent to binding arbitration. The problem is, according to Mazerolle, arbitration typically adds between one and 1.5 per cent more to a wage increase than would have been negotiated otherwise. In this way and others, many unionized government employees have largely caught up to other workers.

This became evident last December, when the Canadian Federation of Independent Business published its most recent comparison of public and private sector wages, based on 2006 census data. The lobby group found public sector workers regularly enjoy double-digit premiums over those doing the same job outside of government. For instance, the CFIB looked at 199 federal government occupations where a comparison could be made to the private sector and found government employees earned 17.3 per cent more in salary on average. Workers for the City of Toronto, meanwhile, took home 11.6 per cent more. Unions slam the study, saying it compares "doctors to Wal-Mart greeters," but the CFIB's Mallett says comparisons were only made across like jobs, such as labourers and accountants. "These are massive differences in compensation that are not sustainable over the long term if you want the public to support government policy," he says.

It's not just pro-business groups that have concluded public sector workers are doing just fine. In 2006, the TREASURY BOARD OF CANADA released a 600-page analysis of federal employee compensation. It found that any lag federal employees once suffered has long since vanished. Between 1991 to 2003 the average public sector salary jumped by 15.8 per cent, compared to a 7.5 per cent jump among other unionized workers. In all but the most senior executive positions within the government, the report found, public sector workers enjoy equal or superior pay. Job growth in the public sector has been outpacing that of the private sector, too. Last year the gap widened further, with employment rising in the public sector by 4.3 per cent, compared to just 0.9 per cent in the private sector and among the self-employed.

The debate over who fares better is certain to rage on. One reason is the lack of detailed studies into public sector pay among all levels of government. Don't expect such probing self-analysis any time soon, says Malcolm Hamilton, an actuary with Mercer. Governments would rather not know how the salaries they pay stack up. "You seldom ask for your pay to be compared to others if you think your pay is high, and I suspect many of the treasury departments believe the pay is high and they'd rather not know." Another reason to keep their heads buried in the sand is the prospect of what such information would unleash. If a thorough study found total compensation in government exceeded that of other workers, there would be intense pressure to cut back on salaries and rich pensions. "There aren't many votes in that and there may be a lot of strikes," he says. "So it's not the kind of thing the government wants to deal with."

One tactic often used by union leaders to justify their demands is to highlight the outlandish pay packages of corporate executives in the private sector. But while they're right - CEO pay can be astoundingly high - when you go beyond those privileged few to look at the executives toiling away below them, the public sector is closing in fast. "It's just my intuitive feeling, but the gap has diminished," says Craig Alexander, deputy chief economist at TD Bank. "I'm not comparing CEOs to the head of government departments. But at most executive levels the gap between public and private sector executives has diminished over the years." Alexander has seen this within his own field. Senior government economists occasionally think of leaving the restrictive confines of the public sector for lush private sector salaries, until they sit down to calculate the value of their overall benefits and pensions, he says. In fact, Bay Street economists have a joke about those who have second thoughts about switching. "It's a test of the quality of the economist, whether they go through the exercise of including the benefits," says Alexander. The punchline: any economist worth his salt would realize the rich government pension and benefits are too good to leave behind.

The fact is, it's increasingly rare to find employers in the private sector willing to offer the types of pensions most government workers take for granted. Pensions basically come in two types, defined benefit and defined contribution plans. Defined benefit plans are the Cadillacs of the pension world because they guarantee a fixed payout in retirement. The retirement income from defined contribution plans, on the other hand, depends entirely on how much is contributed and how well the money is invested. Currently, roughly 80 per cent of public sector employees have the gold-plated plan, while barely 23 per cent of private sector workers have any employee-sponsored pension plan at all. Of those that do have a plan, more and more are only offered the defined contribution option.

The dwindling number of private sector workers with pension plans tells just a tiny part of the story. It's hard to convey just how lucrative a public sector pension is, because the tax and actuarial rules surrounding pensions are mind-numbingly complex. So last November, James Pierlot, a pension lawyer at Towers Perrin, set out to cut through the muddle. In his report Pierlot envisioned two couples: Angie and Brad, who have government jobs, and Courtney and Dave, who work in the private sector. All are the same age, and each person earns $50,000 at retirement. The results were shocking. By the time they retire, Angie and Brad will have amassed retirement savings amounting to $1.2 million between them, compared to just $240,000 for Courtney and Dave.

Why do Angie and Brad come out so far ahead, while Courtney and Dave must make do with retirement scraps? For one thing, most government pension funds are indexed to inflation, ensuring they aren't eroded by rising consumer prices. In most public sector pensions, retirement payments are also calculated based on an employee's peak earning years. But tax rules also give defined benefit plan members a staggering advantage over most other workers. In any given year a worker with a defined contribution plan and RRSPs can only put away a total of 18 per cent of his income. Yet the combined contributions of government workers and their employers can, by the end of a 35-year career, easily equal 30 per cent of an employee's salary. That means a 55-year-old government worker with three decades under his belt and a $60,000 salary would effectively have contribution room of more than $25,000. The same worker in the private sector would be restricted to an RRSP limit of just over $11,000. "I will never argue that public sector workers shouldn't have good pensions, but how is it fair that these rules have been structured from the beginning to give an opportunity to one class of worker that isn't available to another class?" Pierlot asks. "It's appalling and it's immoral."

Union leaders like Brown argue that any suggestion that government workers enjoy better pensions at the expense of taxpayers is unfounded because, he says, they pay dearly for their pensions. Put another way, Angie and Brad, for instance, may have to live on less while they're working because they're forced to save more. But even so, the standard of living that public sector employees now enjoy in retirement is absolutely lavish compared to other workers, and it's getting more and more so. The median retirement age for public sector workers, for instance, has fallen steadily since the late 1980s to 58. Not so with private sector workers, who typically tough it out to at least 62. With the obliteration of private retirement savings over the last year, experts say it's likely many workers will have to toil into their 70s - long after most public sector workers the same age will have settled into their cottages.

This problem will continue to grow, Pierlot says, unless government radically reforms the retirement system. He says the 18 per cent contribution limit should be scrapped, in favour of a lifetime tax-deferred savings limit of, say, $1.5 million, a move that Britain made in 2006. The rules that require pension plans to be sponsored by employers should also be tossed out, so workers can pool their retirement savings in large target benefit plans set up by trade associations, or financial institutions. For many workers it's already too late, but the changes would help ensure pension inequality doesn't become entrenched for generations to come.

As for the thorny issue of pay and perks like sick-day banks, Mazerolle says governments and Crown corporations have botched negotiations by springing their concession demands at the last minute. With numerous public sector contracts set to expire over the next couple of years, managers need to make it clear now that many of the perks that unions have cherished for 50 years have become anachronistic. "The way to do this is to put everybody on notice now and say, 'Look, things have changed,' " he says.

Of course, the ideal solution for most workers would be to raise private sector benefits to public sector levels, rather than reduce everyone to the lowest common denominator. Unfortunately, with the economy the way it is, that seems unlikely. The solution may lie in a happy medium instead - but one thing is clear: hiking taxes on already beleaguered private sector workers to pay for increasingly deluxe benefits for the public sector is not an option. With public tempers rising faster than the piles of garbage in Toronto and Windsor, it's a message that the public sector and their government employers can no longer ignore.

Maclean's July 20, 2009