Last December, I wrote an op/ed article in the Financial Post asking CPP expansionists to “Dial down the rhetoric on pensions” (FP Comment, Dec. 22, 2010). In this article, I call upon the Canadian Federation of Independent Business (CFIB) to do the same.
The CFIB has recently launched an aggressive attack on public sector pensions. While I can agree with the opening paragraph on its “Pension Tension” website (cfib.ca/pension) concerning CPP expansion and observations concerning the gap between pension arrangements for public sector versus private sector workers, its rhetoric is unnecessarily inflammatory, and the solution of “putting new civil servants on a less costly defined contribution plan” could, in fact, be more burdensome for taxpayers.
In its Pension Tension literature, the CFIB makes the following claims:
- Federal public sector pensions are unfunded by more than $200 billion.
- Total public sector pension liabilities (from provinces, municipalities, crown corporations/agencies) are unknown, and common reporting standards do not exist.
- Federal public servants pay only one-third of their pension costs—taxpayers pay the other two-thirds.
Two of the claims above are verifiable facts, or at least reasonable approximations of facts. However, the claim regarding public sector pension liabilities is an argument layered on a fallacy: total public sector pension liabilities in Canada that taxpayers backstop (many public sector plans, notably those in Ontario and B.C., are not backstopped by taxpayers) are knowable, to the extent that governments in Canada comply with the Canadian Institute of Chartered Accountants (CICA) Public Sector Pension Accounting Standards. Similar CICA standards apply to the reporting of pension obligations of publicly traded private sector organizations.
With regard to the other two claims, American literary giant William Faulkner once said, “Facts and truth really don’t have much to do with each other.” The CFIB’s Pension Tension campaign’s $200-billion figure for unfunded public sector pensions serves as a good example.
According to the most recent actuarial reports published by the Office of the Chief Actuary, virtually all of the federal public sector plans were actually in surplus positions. The disconnect between the CFIB $200-billion unfunded liability figure and the Chief Actuary’s assessments lies in the “assets” of the “Superannuation Accounts,” which relate to pension benefits for service prior to April 1, 2000, and “Other employee and veteran future benefits” reported in the Public Accounts of Canada. The reports of the Chief Actuary describe assets of the Superannuation Account as follows:
“Assets in respect of the Superannuation Account consist essentially of the recorded balance of the Superannuation Account in the Public Accounts of Canada.”
Although the fact of the $200-billion unfunded liability is established, the whole truth is that the federal government took steps more than 10 years ago to reign in the growing value of the Superannuation Account and improve management of its unfunded pension obligations. Both employer and employee contributions for pensions in respect of service after March 31, 2000, are invested by the Public Sector Pension Investment Board, and the latest reports of the Chief Actuary show that those pension obligations are fully funded with modest surpluses. The federal government also set targets in 2000 for pension funding costs to be shared 60%/40% between employer/employees. Currently, funding is shared 65%/35% but is expected to change to 62%/38% by 2013. According to the actuarial reports, the new funding regime will ensure that unfunded pension obligations—as represented by the Superannuation Accounts—will start to decline around 2017 and should be less than 20% of the current levels by 2050. Furthermore, I note that they will be extinguished once the beneficiaries with pre-2000 service are gone (say, by 2080).
Thus, there is no crisis of unfunded pension obligations for the federal public service.
A shift to a DC design for new government employees as advocated by the CFIB, assuming no change to employee and employer contribution rates, would immediately add cost, as actuarial projections would have to be adjusted to eliminate the value of actuarial gains in DB pension funding that arise from workers who terminate employment prior to retirement. As well, the value of contributions for new workers that exceed the cost of pensions at younger ages would no longer be available to subsidize the costs of DB pensions that continue to accrue for older workers who remain entitled to a DB pension formula.
Addressing the issue of fairness between public sector and private sector pensions is a difficult matter. Tax rules would permit private sector organizations to offer pensions that are competitive with the public sector, but, in practice, this does not happen primarily because financial and competitive constraints that apply in the private sector (but not to governments) discourage employers from offering such plans. Happily, as I demonstrated in my last Online Expert Panel column (), DC plans can actually deliver better benefits than DB plans at similar contribution levels, if managed appropriately. The fairness issue, then, devolves down to the gap in contribution rates (employer and employee) to pension plans found between the public and private sectors.
Pensions, however, are only a part of total compensation (cash, current benefits and pensions and other future benefits). The real concern, I would suggest, should be around the question of whether public sector total compensation is unfair relative to the private sector, factoring in a value for job security that reflects higher-risk exposures to private sector workers who operate in competitive markets, but I will leave it to others to comment on this.
It may be that the CFIB’s Pension Tension campaign is simply intended to combat the continuing rhetoric of CPP expansionists (among the most vocal of which are public sector labour groups) by fighting fire with fire. However, although inflammatory rhetoric in the media may be entertaining, it seldom produces little more than “scorched earth” in relationships between the public and private sectors. Instead of demonizing public sector employees over a “problem” that does not really exist, I would call upon the CFIB to encourage its members to become part of a solution by improving pensions for private sector workers through support of the pooled registered pension plan proposal that federal and provincial governments are currently working to implement.