Deep in the Red: Federal Pension Promises Still Badly Underfunded - C.D. Howe Institute
TORONTO, Dec. 18, 2012 /CNW/ - 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. In "Ottawa's Pension Abyss: The Rapid Hidden Growth of Federal-Employee Retirement Liabilities," author William B.P. Robson finds the accumulated unfunded liability of these plans, using fair value accounting, stood at $267 billion at the end of March 2012, almost $118 billion worse than shown in the Public Accounts.
"Rates of return on investment are much lower than they used to be," points out Robson, President and CEO of the C.D. Howe Institute. "So achieving a given income in retirement now requires much more saving. But while RRSPs and defined-contribution pension plans will pay whatever they can, and target-benefit pension plans can adjust benefits, defined-benefit pension plans have massive deficits. None are worse than the DB plans for federal employees," he says.
Robson emphasizes federal government financial reports do not use actual market yields to calculate their liabilities, but assume higher rates of return. Because federal pension promises are guaranteed by taxpayers and indexed to inflation, says Robson, the appropriate yield is the one available on federal-government real-return bonds - which has fallen far below the notional interest rate the government uses.
Robson finds, moreover, that a fair-value calculation of the current-service cost of these pensions shows the values of various federal employee pension entitlements growing at rates from near 50 percent to more than 70 percent of pay annually - also far higher than reported. As a result, recent moves to increase employee contributions will come nowhere close to covering even half of these costs.
"The recent reforms were a small step in the right direction," Robson says. "But they still leave taxpayers paying by far the greatest part of the annual cost of pensions. Worse, they did nothing to reduce the accumulated burden - the $267 billion liability - of these plans. Taxpayers will have to fund those pensions as they become payable, even as most of them struggle to fund their own, less comfortable, retirements," he concludes.
SOURCE C.D. Howe Institute