Teachers pay for their early retirement and cost of living benefits
Two of the most beneficial and controversial aspects of most public sector defined benefit pension plans are the provisions for early retirement and cost of living adjustment (COLA). These were the two provisions most affected by the province’s Bill 9, a public sector pension reform bill proposed last spring that would have resulted in reductions in these two provisions within the Local Authorities Pension Plan and Public Sector Pension Plan.
The normal age of retirement with an unreduced pension in the Alberta Teachers’ Pension Plan is 65, but teachers can collect a pension as early as age 55 as long as they have five years of pensionable service in the plan. A teacher with the minimum five years of service who retires at 55 would have a pension that’s reduced by 2 per cent per year that the teacher is younger than 65 (20 per cent reduction) or 2 per cent per year that the teacher’s age plus service don’t equal 85 (30 per cent reduction), whichever is less. These early retirement provisions allow for an unreduced pension before age 65 if the teacher’s age plus years of service equal 85. The 2 per cent reduction is a significant benefit for teachers because the actual cost to the plan of a teacher retiring early is between 5 and 6 per cent per year. Many teachers do take advantage of this provision, with the average retirement age being 59.
One reason this provision or benefit is targeted by pension reformers is because of its expense. Another is that Canadian taxpayers without pension plans often have inflated ideas about early retirement and “Freedom 55,” imagining retirees living out their dreams in better economic circumstances than they enjoyed while working. This, we know, is not true. While teachers in the plan can retire at age 55, that is the earliest age and not a reality for most teachers. Although teachers with enough service can retire prior to age 65 without a reduction to their pensions, the pension is still based on their amount of service. Teachers with 30 years of service will have made contributions enabling them to receive a pension of approximately half their pre-retirement income.
The cost of living adjustment is added to pensions that are being paid from the plan. The amount of the COLA applied during retirement depends on the length of service a teacher worked prior to and after 1992. Service prior to 1992 is subject to a retirement COLA that is 60 per cent of the Alberta Consumer Price Index (CPI). Service after 1992 is subject to a COLA that is 70 per cent of the index. Pension contributions from working teachers cover this 10 percentage point spread without matching contributions from government.
While the COLA does offer protection against inflation, teachers who retire with exactly enough pension to live comfortably could see the value of that pension decline in relation to inflation, particularly in periods of high inflation. This issue only compounds itself, as the average teacher lives 30 years after starting to receive a pension.
Several other teacher plans in Canada no longer have guaranteed COLA provisions. Instead, those funds pay COLA if the plan is funded to a targeted percentage. This means that teachers who retire with a pension cannot count on that pension maintaining even most of its value and have no guarantee that their pensions will not be eaten away by inflation. In these plans, risk is borne by teachers during their contributing years (they may need to pay higher contributions) and in their pension years.
Members of the public must remember that teachers share in the cost of both the early retiree benefit and the cost of living adjustment. These ancillary benefits do not come free — increased costs mean increased contribution rates for teachers. As with their basic pension, teachers pay for these benefits. ❚