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Ottawa's Pension Abyss: The Rapid Hidden Growth of Federal-Employee Retirement Liabilities

Author

Listed:
  • William Robson

    (C.D. Howe Institute)

Abstract

As Canadians saving for retirement are becoming painfully aware, rates of return on investment are much lower than they used to be. As a result, providing a given income in retirement now requires much more saving. Low returns are depressing incomes from RRSPs and defined-contribution pension plans, and causing target-benefit pension plans to reduce their promises. But defined-benefit pension plans cannot adjust their promises, and are showing large deficits. The largest and richest defined-benefit pensions in the country are those of federal government employees, and their situation is especially daunting. Despite recent high-profile changes to the pension plans of federal public servants, uniformed personnel and MPs, a critical flaw remains: the contributions to these plans, even after the changes, come nowhere close to covering the rocketing cost of their promises. Official figures on the current cost of these plans and their accumulated obligation use notional interest rates. 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, which is much lower than the assumed rate in official figures. A fair-value calculation shows that the values of different federal employee pension entitlements grow at rates from near 50 percent to more than 70 percent of pay annually. Even after the recent reforms, taxpayers will bear by far the greatest part of these costs. More startling yet is the accumulated unfunded liability of the plans, which at fair value stood at $267 billion at the end of March 2012, almost $118 billion worse than shown in the Public Accounts. The reforms did nothing to reduce the burden of this liability on taxpayers – who will have to fund most of these pensions as they become payable, even as they must save more to fund their own, less comfortable, retirements.

Suggested Citation

  • William Robson, 2012. "Ottawa's Pension Abyss: The Rapid Hidden Growth of Federal-Employee Retirement Liabilities," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 370, December.
  • Handle: RePEc:cdh:commen:370
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    File URL: https://www.cdhowe.org/public-policy-research/ottawa%E2%80%99s-pension-abyss-rapid-hidden-growth-federal-employee-retirement-liabilities
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    References listed on IDEAS

    as
    1. Alexandre Laurin & William B.P. Robson, 2009. "Supersized Superannuation: The Startling Fair-Value Cost of Federal Government Pensions," C.D. Howe Institute Backgrounder, C.D. Howe Institute, issue 122, December.
    2. Geoffrey Young, 2012. "Winners and Losers: The Inequities within Government-Sector, Defined-Benefit Pension Plans," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 347, April.
    3. James Pierlot & Faisal Siddiqi, 2011. "Legal for Life: Why Canadians Need a Lifetime Retirement Saving Limit," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 336, October.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. William Robson & Alex Laurin, 2014. "Ottawa’s Hidden Deficit: The Widening Gap between Federal Government Pension Liabilities and Assets," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 406, April.
    2. Benjamin Dachis & William B.P. Robson, 2014. "Baffling Budgets: The Sorry State of Municipal Fiscal Accountability in Canada," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 397, January.
    3. Alex Laurin & William B.P. Robson, 2014. "Equipping Canadians for Success: A Shadow Budget for 2014," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 399, January.
    4. Alex Laurin & William Robson, 2013. "Prudence and Opportunity: A Shadow Federal Budget for 2013," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 375, March.
    5. William B.P. Robson & Alexandre Laurin, 2015. "Ottawa's Secret Debt: The Burden and Risks of Federal Employee Pensions," e-briefs 208, C.D. Howe Institute.
    6. William B.P. Robson & Alex Laurin, 2016. "Where the Bucks Stop: A Shadow Federal Budget for 2016," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 447, March.
    7. Colin Busby & William Robson, 2013. "Canada's 2012 Fiscal Accountability Rankings," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 373, February.
    8. William B.P. Robson & Alexandre Laurin, 2018. "Retiring Employees, Unretired Debt: The Surprising Hidden Cost of Federal Employee Pensions," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 514, May.
    9. Finn Poschmann & Philippe Bergevin, 2013. "Reining in the Risks: Rethinking the Role of Crown Financial Corporations in Canada," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 372, February.

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    More about this item

    Keywords

    Governance and Public Institutions; Pension Papers; Canada; Employee Retirement;
    All these keywords.

    JEL classification:

    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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