Dec. 13, 2011 - The federal government’s unfunded liabilities for its employee pension plans total $227 billion, far more than reported, according to a report released today by the C.D. Howe Institute. In “Ottawa’s Pension Gap: The Growing and Under-reported Cost of Federal Employee Pensions,” authors Alexandre Laurin and William Robson find that, using fair-value accounting like private-sector plans which value assets and liabilities using current market prices and interest rates, Ottawa’s unfunded employee pension obligations are $80 billion more than reported in the Public Accounts.
“Ottawa’s calculations do not reflect investment returns available in the real world,” notes Bill Robson. Ottawa arrives at the reported figure for its obligations, he explains, by discounting the future payments using notional interest rates. One of these – a legacy from the days when federal pensions were completely unfunded – is a moving average of past nominal yields on 20-year federal bonds. The other is an assumed return, currently about 4.2 percent in real terms, on fund assets for benefits earned since 2000. “Both these interest rates are well above anything currently available on any asset that matches the plans’ obligations,” says Robson. “Any Canadian who does not work for the federal government and wanted a tax-backed, inflation-indexed pension would need to save far more money than these plans hold for his or her federal-employee counterpart.”
These obligations are part of the federal government’s debt, so the fair-value calculation raises the debt by the same amount. Moreover, this restatement of the debt affects Ottawa’s annual budget balances in the past: the surpluses reported from 2001/02 to 2007/08 were smaller, or were deficits, and the deficits since then were much larger. In 2010/11 alone, the deficit would not have been the $31 billion reported, but half again larger: almost $47 billion.
These colossal numbers reflect a gross unfairness in Canada’s pension system, say the authors. The fair value of the typical federal employee’s pension entitlement is growing at more than 40 percent of pay annually– much faster than the contributions to fund it, and faster than tax rules permit other Canadians to contribute to RRSPs or defined-contribution pension plans. “Unhappily, those Canadians who must prepare for retirement in a much less congenial environment are also on the hook for the growing unfunded liability in the federal plans,” say the authors.
The authors recommend three types of reforms to address the problem: a revamping of the benefit-structure of public-sector, defined-benefit plans; increasing the tax-deferred saving room available to the rest of the population; and ensuring that actual money is flowing into the public-sector plans to match their pay-out promises.
Click here for the full report.
For more information contact: Alexandre Laurin, Associate Director of Research; William Robson, President and CEO, C.D. Howe Institute, 416-865-1904; email: cdhowe@cdhowe.org