The C.D. Howe Institute says the pension plan that secures retirement benefits for members of Parliament and senators is underfunded by up to $1 billion.
The report says the plan provides MPs with more than 50 per cent of their six-figure salary, but has no assets set aside to pay for those future benefits.
It says the funding shortfall is at odds with actuarial reports on the plan, which say it has an excess of $176 million.
The institute warns the deficit could expose taxpayers to greater financial risks if the pension plan ultimately fails.
It suggests the federal government address the problem by raising MP wages in exchange for lower retirement benefits.
"When the time comes to pay cash to retiring MPs, Ottawa has to raise it at that time – by taxing more, spending less elsewhere, or borrowing," the report said.
Such a fix, it continued, would allow MPs to set retirement funds aside in registered plans without delving as deeply into the public purse.
The institute's plea for reform echoed a similar call issued Wednesday by the Canadian Taxpayers Federation, which urged MPs to surrender their pension plan and adopt a more modest system.
The federation contends the existing plan is the best-funded in the world, but lamented that taxpayers foot the bill for most of its perks at a rate of $23.03 for every dollar contributed by an MP.
The federation called on MPs to set up a new program in which government matches their payments on a dollar-for-dollar basis.
"There's no way the prime minister and these MPs can do what they need to do to balance the budget and control spending if they've got their own snouts in the pension trough," said Gregory Thomas, the federation's federal director.
"They need to lead by example. They need to put Canada ahead of their own personal bank balance."