Ottawa’s Swelling Hidden Pension Deficit Adds $120 Billion to Federal Debt: C.D. Howe Institute
TORONTO, April 9, 2014 /CNW/ – Ottawa’s unfunded liabilities for
employee pension plans rose to $272 billion in 2013, far larger than
reported, according to a new C.D. Howe Institute study. In “Ottawa’s
Hidden Deficit: The Widening Gap between Federal Government Pension
Liabilities and Assets,” authors William B.P. Robson and Alex Laurin
find the value of federal employee pension promises is much larger than
shown on the books, and still growing.
“Using an economically meaningful fair market value estimate, Ottawa’s
unfunded liability at the end of the 2013 fiscal year was some $120
billion higher than reported,” said Robson. “Few taxpayers are aware of
this burden or the risks they bear in backstopping these plans.”
The authors note that defined-benefit (DB) pension plans like those for
federal employees have been in trouble in recent years, largely because
sponsors have tended to underestimate their liabilities. “Many DB plan
sponsors, including Ottawa, use inflated assumptions about returns -
effectively presuming that risky investments will unfailingly pay off -
that obscure the need for higher contributions,” said Laurin.
Robson and Laurin argue that the pension promises Ottawa has made to its
employees are like other federal debt, and that their value is
therefore related to federal bond yields – not assumed returns on
assets that may not even exist. Using market yields, they put the
annual cost of benefits accruing in the federal plans at between 45 and
60 percent of pay, more than twice as high as reported, and a far
higher rate of tax-deferred wealth accumulation than is available to
other Canadians. “Annual contributions to these plans, even after the
most recent reforms, come nowhere close to covering the rocketing cost
of their taxpayer-guaranteed promises,” said Robson.
The authors urge the federal government to incorporate these numbers in
the official measures of its net debt and annual budget balance to make
the full costs and risks of these plans more transparent to taxpayers.
They argue that transparency would foster reforms, such as benefit
flexibility under a shared risk model, or even a defined-contribution
plan, that would alleviate a burden few taxpayers know they bear.
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. It is Canada’s trusted source of
essential policy intelligence, distinguished by research that is
nonpartisan, evidence-based and subject to definitive expert review. It
is considered by many to be Canada’s most influential think tank.
SOURCE C.D. Howe Institute