THE BLOG

The Trouble With Status Quo Defined Pension Plans For Government Employees

10/28/2014 01:03 EDT | Updated 12/28/2014 05:59 EST

Since the turn of the millennium, the ever-increasing cost to taxpayers of government sector pension plans has been made evident time and again. Contribution rates have been hiked, often doubling in one decade, or the plans have been partly bailed out by governments -- or both.

Any fruitful discussion about government pension plans must spotlight contribution hikes and subsidies from taxpayers. It is critical context. But that is exactly the context missing from a recent report by the Canadian Public Pension Leadership Council, a collective of government unions.

The paper's authors frankly note they did not address whether public sector pensions are "fair, adequate or too rich." They instead criticize defined contribution plans, a reform option where future retirement benefits are determined by a combination of contributions plus investment returns -- compared to defined benefit pensions where future benefits to retirees are guaranteed in advance.

The paper claims that defined benefit pension plans are superior to defined contribution pensions. The authors note several American examples where the former pay higher benefits than the latter. They thus unwittingly highlight one critical point: when defined benefit pension plans in the public sector face shortfalls, taxpayers pay the difference.

It's a marvelous deal, unavailable to most Canadians. In 2011, 83 per cent or workers in Canada's government sector possessed a defined benefit plan, compared with just 12.6 per cent of workers in the private sector.

It is understandable that government employees want to keep defined pension benefits; it is not clear this is in the interest of the employer and ultimately taxpayers. It is impossible for governments to guarantee everyone a guaranteed pension payout beyond what contributions plus investment returns produce. Such a guarantee can only be provided to a small cohort -- e.g., government employees, precisely because it is other taxpayers who act as the financial backstop. Any promise beyond a small cohort is a Ponzi scheme promise, not a realistic pension plan.

Perhaps aware of that reality, the union study claims that future taxpayers would be at risk if government employees switch to defined contribution plans. The authors raise the "real possibility" future generations of retired government workers would be forced to rely on government-assistance programs such as the Guaranteed Income Supplement.

But this is specious. Saskatchewan's civil servants have been in defined contribution plans for almost four decades. As that province's Public Employees Pension Plan points out, a 26-year old Saskatchewan civil servant who contributes at the required seven per cent rate (matched by taxpayers) will have an account balance of $881,230 at age 65 -- not a bad nest egg, and not one that will likely require post-retirement taxpayer assistance.

The claim future taxpayers might be negatively affected by reform to government employee pensions is curious in light of what the union-backed study omits: existing defined benefit plans already burden taxpayers.

For example, Newfoundland and Labrador's teacher pension plan was given a $2 billion cash infusion from the provincial treasury in 2006 (and this after that $2 billion was transferred from the federal government). Alberta's Teachers' Pension Plan was topped up with $1.2 billion from the province in 2007. In Ontario, British Columbia, and several other provinces, contribution rates have risen for government sector pensions, often dramatically. Federally, as the auditor general pointed out, special payments to cover actuarial deficiencies in federal pension plans amounted to $741 million in 2012/13 alone.

In other words, the union paper's claim that existing government sector defined benefit plans are superior to other pension possibilities ignore the extra billions injected by taxpayers into existing plans.

The authors also assert, however, that their work is not "an appeal for the status quo." Which brings us to this fundamental point: status quo defined benefit pensions are often based on outdated demographic and investment return assumptions, which explains the need to hike contributions and/or the bailouts.

As pointed out by Montreal Mayor Dennis Coderre, while dealing with pension reform for his own employees, governments in the 1960s chose to provide government workers "with advantageous pension plans, based on the demographic and financial facts of the era. Now, 50 years later, the foundations upon which we forged these arrangements with the unions have collapsed."

Without substantial reform, status quo defined benefit plans for government employees are akin to a blank cheque, awarded by governments decades in advance but signed by taxpayers every year. No wonder government employee unions, such as the ones who sponsored the Canadian Public Pension Leadership Council report, dislike reform.

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