“Our goal is twofold: to alert Canadians to the fiscal burdens and risks created by these plans and to prompt discussion of reforms that could produce more durable and affordable pensions for federal employees,” say the authors.
May 3, 2016 – Ottawa’s unfunded liabilities for employee pensions stood at $269 billion at the end of the 2015 fiscal year, far larger than reported, according to a new C.D. Howe Institute study. In “Worse Than It Looks: The True Burden and Risks of Federal Employee Pension Plans,” authors William B.P. Robson and Alexandre Laurin look through the federal government's opaque accounting, and reveal that the unfunded liabilities in federal employee pension plans are almost $118 billion worse than shown on the books.
“Our goal is twofold: to alert Canadians to the fiscal burdens and risks created by these plans and to prompt discussion of reforms that could produce more durable and affordable pensions for federal employees,” say the authors.
Using more economically meaningful “fair value” measures of the true costs of these plans and the risks they create for taxpayers, the authors estimate Ottawa’s unfunded pension liability at $269 billion at the end of 2014/15 – $118 billion higher than the reported number. Because the unfunded pension liability is part of Ottawa’s debt, the fair-value adjustment also raises the net public debt by $118 billion: from the $612 billion reported at the end 2014/15 to an adjusted $730 billion.
The authors note that recent reforms will raise the share of these plans’ costs their participants must fund, but object that the reported annual cost of new pension promises – which determine employee contributions – are too low. The fair-value approach, which uses actual yields on other federal debt rather than assumptions to calculate pension costs, reveals that taxpayers will keep paying more of Ottawa’s pension costs than intended.
More transparent reporting of Ottawa’s pension costs is a key step toward further reforms. Plan participants need to see the real cost of their plans, and taxpayers need to know the true burden and risks the current setup imposes on them.
The authors recommend that Ottawa switch to the shared-risk, target-benefit pension model already common in much of the provincial public sector, a fairer and more sustainable approach.
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The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.
For more information contact: William B.P. Robson, President and CEO, or Alexandre Laurin, Associate Director of Research, C.D. Howe Institute: 416-865-1904 or email: kmurphy@cdhowe.org.