The federal government’s unfunded liabilities for its employee pension plans total $227 billion—far more than reported, according to a report 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 argue that Ottawa’s unfunded employee pension obligations are $80 billion more than reported in its Public Accounts.
“Ottawa’s calculations do not reflect investment returns available in the real world,” notes Bill Robson.
Ottawa arrives at its reported figure by discounting future payments using notional interest rates, explains Robson. 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% 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.”
The authors say these figures present a gross unfairness in Canada’s pension system. The fair value of the typical federal employee’s pension entitlement is growing at more than 40% of pay annually—much faster than the contributions to fund it, and faster than tax rules permit other Canadians to contribute to RRSPs or DC pension plans.
The authors recommend three reforms to address the problem: a revamping of the benefit structure of public sector DB plans; increasing the tax-deferred saving room available to the rest of the population; and ensuring that money is flowing into the public sector plans to match their pay-out promises.
The full report is available on the C.D. Howe website.