IDEAS home Printed from https://ideas.repec.org/a/cdh/commen/449.html
   My bibliography  Save this article

Worse Than It Looks: The True Burden and Risks of Federal Employee Pension Plans

Author

Listed:
  • William B.P. Robson

    (C.D. Howe Institute)

  • Alex Laurin

    (C.D. Howe Institute)

Abstract

Federal government employees enjoy pure defined-benefit pensions that promise relatively generous benefits to a large current and former workforce. Being largely unfunded, these plans impose on taxpayers obligations running into the hundreds of billions of dollars. What is worse, misleading accounting understates the true burden and risks these plans create for Canadian taxpayers. This Commentary provides more economically meaningful estimates of the value of federal employee pensions to their participants, and the cost to taxpayers. Its 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. Official figures on the current cost of these plans and their accumulated obligation use notional interest rates to calculate their value. Because their pension promises are guaranteed by taxpayers and indexed to inflation, the appropriate discount rate is the yield on federal-government real-return bonds (RRBs), which for years has been much lower than the assumed rate in official figures. Correcting this distortion produces a fair-value estimate for Ottawa’s unfunded pension liability of $269.3 billion at the end of 2014/15 – around $30,000 per family of four, and $117.9 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 $117.9 billion: from the $612.3 billion reported at the end 2014/15 to an adjusted $730.2 billion. The authors note that recent changes will raise the share of these plans’ costs that their participants must fund, but object that the reported current costs of these plans – and therefore the total contribution rates that determine employer and employee shares – are too low. With RRB yields at recent levels, even the higher employee contributions anticipated by the reforms would leave the taxpayers’ true share far above 50 percent. A fair-value approach to the current service cost can ensure that participants and taxpayers equally share the cost of accruing benefits. The authors further note, however, that even 50:50 sharing of the true current service cost of federal pensions would leave taxpayers exposed. This exposure would apply not only to fluctuations in the annual costs as interest rates, experience, and plan provisions changed but – far more important– to fluctuations in the value of previously earned benefits as well. Ottawa could protect taxpayers from this risk by capping employer contributions at a fixed share of pensionable pay. To relieve taxpayers of their current sole responsibility for risks in the federal plan, Ottawa would need to switch to a shared-risk, target-benefit model already common in much of the provincial public sector, which calculates benefits with reference not only to salary and years of service but also to the plans’ funded status.

Suggested Citation

  • William B.P. Robson & Alex Laurin, 2016. "Worse Than It Looks: The True Burden and Risks of Federal Employee Pension Plans," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 449, May.
  • Handle: RePEc:cdh:commen:449
    as

    Download full text from publisher

    File URL: https://www.cdhowe.org/public-policy-research/worse-it-looks-true-burden-and-risks-federal-employee-pension-plans
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. William B.P. Robson & Benjamin Dachis & Farah Omran, 2017. "Fuzzy Finances: Grading the Financial Reports of Canada’s Municipalities," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 496, November.
    2. William B. P. Robson & Alexandre Laurin & Rosalie Wyonch, 2017. "Getting Real: A Shadow Federal Budget for 2017," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 470, February.
    3. William B.P. Robson & Alexandre Laurin, 2017. "Premium Compensation: The Ballooning Cost of Federal Government Employees," e-briefs 258, C.D. Howe Institute.

    More about this item

    Keywords

    Retirement Income and Saving;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cdh:commen:449. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kristine Gray (email available below). General contact details of provider: https://edirc.repec.org/data/cdhowca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.