Pension deficit adds $120B to national debt

Ottawa’s unfunded liabilities for employee pension plans rose to $272 billion in 2013, far larger than reported, according to a 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.

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“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.

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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% 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.

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Staff

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