Taxpayers to pick up tab of underfunded pensions

The announcement of the imminent retirement of a very senior civil servant offers a perfect opportunity to explain the gobbledegook stuff that Brian Duperreault’s SAGE Commission is concerned about, and that Bob Stewart has been banging about for fifteen years.

You’ll soon have a clear understanding of ‘underfunded pension obligations’ and ‘defined benefit’ pensions. When that retirement day arrives, you’ll understand what is happening and how it hits you and all your fellow Bermudians.

All the information is in the Public Service Superannuation Act 1981 (Sections 23 and 33); and in many blue ‘Budget Books’.

Current situation: The senior civil servant [SCS] has 34 years Government service. SCS is taking early retirement at age 60. At PS 50, SCS’s current annual salary [Budget Book] is $204,775 [$17,065 a month].

Section 23 of the Act says that on retirement a civil servant can collect a monthly pension that is up to 60 per cent of his last month’s salary. 

Section 33 of the Act says that the pension is calculated by giving 1/800 of that month’s salary for each month of service. 

The Middle School calculation goes like this: 34 years x 12 months in a year = 408 months total.  Divide 408 by 800. You get 51 per cent. This is known as the ‘defined benefit’.

On his planned November retirement, the SCS will be entitled to collect 51 per cent of his last monthly pay as his monthly pension. The Act makes this pension payable until death. 

The Act also provides that every two years, the SCS’s pension will be adjusted to reflect any rises in the cost of living of more than 0.5 per cent (one-half of one percent). These cost of living increases are called COLA adjustments.

Okay?  Now let’s run the numbers.

SCS end-service-pay is $204,775 a year/$17,065 a month. SCS is entitled to draw 51 per cent of that. So SCS will receive $104,435 a year/$8,703 a month — for life. Every two years, a COLA. 

A 60-year-old today can easily live past eighty. So work out what that pension aggregates to over 20 years.

Where does all that money come from? It is all supposed to come from the Public Service Superannuation Fund [PSSF].  

Will it all come from the PSSF? No! 

Why not? Because the PSSF does not have enough money in it to pay all the current and future pension obligations as they become due — just as this $104,435 a year is about to become due. 

That’s what Bob Stewart has been saying. More recently, the SAGE Commission is echoing it.

So who pays the difference? You, the ordinary taxpayer. Simply, if the PSSF can’t pay that $104,435; you have to make up the difference, whatever the difference is: $1, $100, $1,000, $10,000, or $100,000? Right now, your taxpayer obligation to make up the difference is unlimited.

How do I pay to make up the difference? It comes out of the Consolidated Fund which means payroll tax, customs duties, land tax, car licence fees, hotel occupancy tax, etc.

How much is in the PSSF? At last report, around $500m.  

How much should be in the PSSF? To meet known obligations, over $1,500m ($1.5bn). So the PSSF is short at least $1,000m ($bn). This is the “underfunded pension obligation”.

How did this happen? One: Bob Stewart reckons it was messed-up from the start. 

However since 2003, there has been a further significant fall-off in the level of contributions required (this is calculated by actuaries) along with increases in pay as civil servants re-graded themselves into higher and higher pay bands. For instance, in 2006, civil service pay step PS 50 paid $186,008.

 In 2013, the same pay step PS 50 pays $204,775. This is the 2010 PS rate, and it shows a 10 per cent increase between October 2006 and October 2010. 

How did this happen? Two: Because of the need to service the National Debt that mushroomed between 2004 and now, less and less money was left over from the ordinary flow of revenue. 

In addition, since 2009, Government’s net revenue has been declining. This meant the PSSF began falling even further behind.  

How did this happen? Three: pension contributions from Government workers were set and kept too low too long.

Who was supposed to be managing this? Dealing with pensions is part of the financial management duty of the Ministry of Finance and the Financial Secretary. It is the final responsibility of the Minister of Finance.

Who were they? The Seventh Minister for Finance. It is customary not to name senior civil servants. 

So I won’t name the senior civil servant who was the Financial Secretary from 2000 to 2010. 

Nor the one from 2010 to now. 

Note: In 1988, I began receiving a small military pension paid from the PSSF.