May 11, 2017 – The cost of federal employees has risen rapidly, with total compensation per employee jumping nearly 5% per year on average over the past decade, says a new report from the C.D. Howe Institute. In “Premium Compensation: The Ballooning Cost of Federal Government Employees,” authors Alexandre Laurin and William B.P. Robson argue that containing these increases will be tough but vital in getting federal spending onto a sustainable track.
Laurin and Robson point out that employee compensation accounts for more than $50 billion of federal spending. Part of that is what people usually think of as regular payroll expenses: wages and salaries, plus current payments for health and dental benefits, pension contributions and social-security contributions – Employment Insurance (EI) and the Canada and Quebec Pension Plans (C/QPP). It has been growing around 3.0 percent annually – widening a long-standing premium of federal employees over Canadians working in the business sector. At $64 per hour, average payroll compensation in the federal government is higher than in professional, scientific and technical service jobs ($40 per hour) or finance and insurance jobs ($46 per hour).
The other is less front-of-mind: non-payroll expenses for the value of future benefits earned in a given year and accumulating mainly as unfunded liabilities. It has been rising dramatically – some 23 percent annually – meaning that federal employees earn far more than their private-sector counterparts.
Laurin and Robson argue that fiscal pressures will eventually require the federal government to tackle the cost of its employees. They make three recommendations:
- The federal government should recognize the full value of its employees’ deferred benefits using actual, not invented, discount rates, and include the annual changes in that value in its statement of operations.
- Ottawa should ensure that the total value of its compensation is competitive with the outside alternatives its employees face, understanding that the “right” level of compensation is one in which some departures do occur. In doing so, prolonged periods of departmental operating budget freezes, as occurred in the early 2010s, is one of the most likely methods to succeed with the least possible disruptions of essential public services.
- Finally, in managing total compensation costs, it should transition away from the pure defined-benefit pension model. In this regard, target-benefit plans are an attractive option because they allow more benefit flexibility for the sake of more stability in contribution rates.
“The federal government is paying more than necessary to attract and retain good workers,” say the authors. “Containing federal borrowing and avoiding future upward pressure to raise taxes will require Ottawa to curb the cost of its own employees,” they conclude.
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: Alexandre Laurin, Research Director; or Bill Robson, President and CEO, C.D. Howe Institute: 416-865-1904 or email: firstname.lastname@example.org