There is no easy fix to PEI' s Public Sector Pension woes. Ethics, good will, trust in the end has nothing to do with the problem. The problem is structural and faces all governments and all citizens. In this short post I will show you the structural issues in play so that you can see what the real problem is. In part II, I will offer up some structural ideas about what might work.
I comment on this not just because I care and that this is important but because I also was once a manager of large pools of money and was also the policy person responsible for a pension fund much larger than PEI's.
This image shows the core problem. There are not enough tax payers to pay for the pensions in the future. For the first time in history, PEI, and all western states, have a population distribution that has more older people than young. On PEI this is more extreme than in many places.
PEI's Public Pension was never properly funded. In the early years, it relied on the pyramid on the left, which had lost of taxpayers in the base to pay for much of the few pensions. This is not a unique position, many pensions did this. All such schemes are in trouble. This is the fundamental flaw.
Issue #1 there is not the time or the money to fund the pension properly.
When last seen the unfunded liability was more than $400 million. To put this in perspective that is about 50% of the total PEI annual tax revenues. The issue that faces all Islanders now is time and risk. Many pensioners will be retired in the next 5 years. Most in the next 10 years. The Province said that it could afford to pay $20 million a year to close the gap. The math does not add up. The gap cannot be closed in time.
That then leaves the issue #2 of risk. There is not the time to take more risk as the pension has to be paying out now to many pensioners.
The fund managers cannot place the funds in assets that carry too much risk. The massive loss in 2008 suggests that the Province was already pushing the managers to be more aggressive than they should have been. The losses from 2008 were much larger than they should have been if the portfolio had had a more conservative policy. An additional risk now is that the Province will again push the managers to take a more risky position. The fundementals for the market are weaker today than they were in 2008. This is not a time to take more risk.
Issue #3, can PEI raise taxes?
As this graph shows, the answer is no to this. And it's worse.
Most of the talented young Islanders have had to leave PEI as there is not enough work. So not only does PEI have too few young but the best have to leave. Worse, many return when they are old!
There is simply not the tax base to call on to make up the difference. Unfortunately I have not shown you all the bad news that makes this worse. And here it is. The "Elephant" in the room.
PEI's health costs are a product of poverty, lack of control and an aging population. The all in cost of health care has risen as a percentage of PEI's own tax revenues excluding the Feds from 53% in 2000 to 78% in 2010 (Figures taken for CIHI and from the PEI Budget) By 2015, the health care costs will exceed the PEI core tax revenues. Because the growth is exponential, they will double the tax revenues by 2020.
There are 2 main drivers for this. The first is that PEI has more old than young. The second is that PEI has more chronic illness than most places.
These poor statistics do not show that Islanders over 60 will be 60% likely to have Type 2 Diabetes.
It's depressing isn't it?
There is no easy way out of this and there is no way that the money itself can be re arranged. It's way too late for that. One thing is for sure, what was promised to Pensioners will have to be pulled back from. PEI, and many provinces, cities and nations are all caught in the same jam. Pensions will have to be cut. I am not recommending this, I am simply stating a fact of life. There is not the money to pay them as promised.
So is there a way out?
I think that there is but it has to work on the fundamentals and not the figures. I will post at more length in a few days. But here are the highlights.
We have to work on the fundamentals. PEI has to have more young people living on PEI who can do the work and so pay taxes. To keep our young here and to attract more to the Island demands an employment strategy. This cannot be a traditional one of trying to attract employers to open a call centre or a plant.
PEI has to attract many young families to PEI to be part of the new food revolution that is tied into the health revolution. PEI itself has to lead in the health revolution too.
I will make the case that we are seeing a revolution in health and in food that will create a huge demand for Real Food. This can only be grown in small operations. PEI has a great start here and also has, relative to Ontario and Quebec, cheap land. We are already seeing a new kind of "Back to the Land" movement that is based on this new kind of food system. PEI is a long the way to identifying good food with PEI.
These people will not come here to get jobs but to own a small business. They too are fed up with being squeezed out of life in the big cities and want a real life. I will explain this more later.
To stop the health care costs from consuming all PEI's resources, PEI has to apply the principles of the new health revolution to itself. My regular readers will know what I am talking about. Bottom line most chronic illness can be prevented and also cured by better diet and some changes to how we live. It may be possible to reduce PEI's health costs back to pre 2000 levels in 10 years.
Making a big push in the food system needed to do this adds to the value. But I get ahead of myself.
Bottom line PEI has to
- Have 10,000 more young families here by 2020
- Have most Islanders eating real food as a matter of course
- Have a health coaching system set up to facilitate this difficult shift in culture
If PEI can do this, then maybe most of the pensions can be saved and PEI will move ahead to being a have province.