In 2011, a propaganda war was launched attacking the generous pensions paid to Canadian public sector workers. The attack was initiated by the Canadian Federation of Independent Business (CFIB) in its Pension Tension campaign. The campaign was then further bolstered by the release of the book Pension Ponzi by Bill Tufts and Lee Fairbanks (with a forward by Catherine Swift of the CFIB), and recently joined by the C.D. Howe Institute in its December 2011 paper, “Ottawa’s Pension Gap: The Growing and Under-reported Cost of Federal Employee Pensions.”
This propaganda war, as its core theme, suggests that the pension programs maintained for Canadian public sector employees place the country at risk of a Greece-style economic meltdown. Although there are kernels of truth that serve as foundation for some concerns, there are a number of “big lies” promoted in the propaganda that are worthy of some dispassionate analysis.
The core kernel of truth is that public sector DB pension plans carry financial risks, as all DB programs do for both employers and plan members, and it is important that those risks are prudently and effectively managed. Some of the big lies derived from this kernel are as follows.
Pension liabilities are most appropriately determined using current market bond yields. Consider a pension system that is designed to pay defined benefits at retirement that are based on final average earnings (to a maximum) for a five-year period prior to retirement, and that is fully funded by a set rate of contributions based on the employment earnings of members not yet eligible for a pension. (We could call it the Canada Pension Plan!) Do we need to estimate its liabilities and call it part of the public debt? What purpose would this serve? Of course, it would be prudent to regularly estimate/model future benefit payments and contributions to ensure that the system remains sustainable, but it certainly would be misleading to claim that the capitalized value of CPP pensions that may be paid sometime in the near or distant future represents a current government debt obligation.
There are many ways to estimate the value of future pension obligations, all of which involve making assumptions about the future—which, as many actuaries happily point out, will be wrong. The important point to keep in mind is that they are estimates, and the methods and assumptions used to make them must be appropriate to the purposes of the estimates, which themselves will vary according to stakeholders, their risk exposures and requirements for appropriate disclosure. Standards for estimating pension liabilities in Canada are set by governments in legislation applicable to most (but not all) workplace pension plans, the Canadian Institute of Actuaries and the Canadian Institute of Chartered Accountants, and many plans have to prepare separate estimates using a variety of economic assumptions sets (plus demographic and life contingency assumptions) for the purposes of differing stakeholder groups.
Public sector pensions are “out of control”; taxes will have to increase unless action is taken to reduce benefits. In Canada, there are examples of public sector pension plans that have significant funding challenges that might lead to tax increases, but the big lie is to generalize specific problems to all public sector programs. At the federal level, significant changes were made in 2000 to help the government manage risk exposures to taxpayers, and many provinces have similarly implemented changes to shift risk away from taxpayers over the past 25 years. For example, since 2001, funding of B.C.’s public sector plans (covering workers in provincial, municipal, teaching and college sectors) is based on contribution formulas that are fixed in relation to both pay and cost-sharing between employer and employees, and upward pressure on pension funding requirements can be mitigated at the collective bargaining table. Over the past decade, public sector workers have experienced erosion of their retirement benefits, particularly in relation to non-pension post-retirement benefits that are funded under the same formulas. Other provinces have implemented similar strategies, including Ontario, which reformed most of its plans prior to 1990.
It is true that current pension funding requirements pose significant fiscal challenges for governments. At the federal level and in many provinces, political mandates appear to clearly recognize the principle of minimizing, if not reducing, taxation. However, this may not be quite so apparent at the municipal level, where significant pension funding challenges are most frequently reported on.
Pension “featherbedding” abuse is rampant in the public sector. Pension Ponzi is full of examples of pension featherbedding that benefit senior officials in the public sector. The big lie is that such behaviour is unique to the public sector. I would suggest that public sector transparency requirements, coupled with the political nature of senior public sector appointments, simply make such incidences far more visible than similar behaviour in the private sector in the senior executive class.
The biggest pension issue in Canada is the lack of pension coverage for private sector workers. It is disturbing that some business leaders seem more focused on promoting propaganda that scapegoats public sector workers who benefit from generous pensions, rather than embracing the concept of providing access to pensions, even at a basic level, to all workers.