THE BLOG

Controlling Soaring Public Sector Pension Costs: Lessons from the Saskatchewan NDP

09/24/2013 05:43 EDT | Updated 11/23/2013 05:12 EST

Canadians routinely hear about alleged growing divides in Canadian society. But here is one rift that often goes unmentioned: the divide between the pension benefits of public sector employees and everyone else.

Such inequality incurs real costs, where ordinary taxpayers pay ever more for above-market, guaranteed pension benefits that ever fewer in the private sector possess.

Consider some facts. In 2011, 87 per cent of public sector employees were enrolled in registered pension plans. That was up from 75 per cent in 1978 (the earliest year for which this statistic is available).

In comparison, just 24 per cent in the private sector had such plans, and that was down from 35 per cent in 1978.

That trend line reveals one divide. Here's another stark division: the type of pension plan offered to government/public sector employees and those in the private sector.

In 2011, of those in the public sector with a pension plan (i.e., most), 94 per cent were in a defined benefit plan. (Defined benefit plans promise certain retirement benefits regardless of the return on invested contributions.) That has barely changed from 99 per cent in 1974.

In the private sector, just 52 per cent of enrollees were in a defined benefit plan in 2011 (down from 88 per cent in 1974). The rest are in either defined contribution plans or in some hybrid combination.

Or look at the raw numbers: 3 million public sector workers were enrolled in defined benefit plans in 2011, a doubling from the 1.5 million workers who had such plans in 1974 (the lowest year). Meanwhile, the number of private sector enrollees in defined benefit plans sat at just 1.5 million in 2011, down from a high of 2.4 million in 1990. Talk about ships passing in the night.

The private sector has moved away from guaranteed levels of retirement benefits for a simple reason: it is impossible to guarantee exact benefits 30 or 50 years out. (Companies that try risk endangering their future: See the GM "legacy effect".)

That only continues in the public sector because the public treasury can be raided to make up shortfalls.

For example, in Newfoundland and Labrador in 2006, the provincial government topped up the Teachers' Pension Plan with a $2-billion cash injection; in 2007, it deposited $982 million in that province's Public Service Pension Plan.

In Alberta, the province placed a supposed one-time extra payment of $60 million in the Teachers' Pension Plan in 2002; in 2009, the province made another special deposit, of $1.2 billion.

Even where such extra payments from taxpayers have not occurred, such as in British Columbia, the contribution rates for public sector pension plans have continually risen over the past decade, this to pay for previously promised benefits, and the bill ends up with taxpayers.

In short, defined benefit plans pose a problem when the actuarial assumptions behind such plans are off. When that happens, taxpayers pay.

(Then there is this other problem: some provinces may not fully grasp their pension liabilities. Last year, in a report to Ontario's government, economist Don Drummond urged the province to "clarify who bears the ultimate responsibility for funding deficits of the public-sector pension plans as the [Drummond] Commission encountered considerable confusion on this issue.")

Is there a way to bridge this pension divide between the private and public sectors? The 1970s-era Saskatchewan NDP government under Premier Allan Blakeney did just that. In 1977, the NDP government thought it was a good idea to limit the risk delivered to future taxpayers courtesy of future pension liabilities.

As of 1977, the New Democrats grandfathered existing employees--they could keep their defined benefit plan or move into the new defined contribution plan. And new public sector employees were automatically enrolled in defined contribution plans that, by design, do not create unfunded liabilities, but which anyway deliver retirement income.

Such a reform was more than fair. It makes sense to ask the government sector to be content with the combination of pension contributions plus investment returns. That is how most of us will fund our retirement.

Decades later, here's the result of Saskatchewan's reforms: That province's auditor general has observed that future cash flows needed to fund defined benefit pension plans will continue to increase until 2021. Then, such needed cash flows will decline and be on a path to permanently extinguish Saskatchewan's obligations to long-ago closed public sector pension plans.

Allan Blakeney's NDP government was thoughtful, prudent, and far-sighted. Since 1977, Saskatchewan, has thus avoided the trap whereby imaginary gains and assumptions inherent in defined benefit plans force taxpayers to later make up for such early and often incorrect assumptions. The Saskatchewan NDP model of pension reform was a tremendous accomplishment. It is a model worthy of emulation by other governments.