By Philip Cross, June 21, 2016
As the federal and provincial governments continue discussing changes to the Canada Pension Plan, it is worth recalling that there are no public discussions of the most important pension issue in Canada: The unsustainable gap between the pensions of public servants and most everyone else. In fact, some critics maintain that the push to expand the CPP is driven by an unspoken need to prop up public-sector pension plans a little longer. However, doing so will only delay the inevitable overhaul of both the benefits and the funding of public-sector pensions.
The key issues surrounding public-service pension-plan benefits are mostly unspoken, both to their members and to taxpayers. Public-sector unions allow their members to believe the fiction that members contribute a fair share of their own retirement benefits, when really, the vast majority is funded by taxpayers. Few people appreciate how the CPP is folded into public-sector pension benefits: since benefits are “defined” in advance, an increase in CPP benefits reduces the amount that a public-sector pension needs to pay out to retired workers (leaving unchanged the total benefit payout to public-sector retirees). Meanwhile, taxpayers are kept in the dark about the full measure of unfunded future benefits they will have to pay, even as they shoulder more of the burden for their own retirement.
According to Statcan’s Pension Satellite Account, in 2014, public-sector pension plans possessed $953 billion of financial assets, or two-thirds of all the assets held in employer pension plans. To put this in perspective, these public-sector pension assets nearly equalled the $1.1 trillion Canadians held in all registered pension plans and dwarfed the $292 billion held by the CPP and QPP. Conversely, only one-third of trusteed pension assets in this country will be available to the three-quarters of Canadians employed in the private sector. Asking these Canadians to continue to subsidize civil-service pensions is simply unfair and unsustainable. And there is no point in suggesting that benefits in the two sectors can be equalized by increasing pensions in the private sector; most firms would go bankrupt raising benefits to anywhere near public-sector levels. As it is, many private-sector pension funds are underfunded in the current environment of low interest rates.
Taxpayers are kept in the dark about the full measure of unfunded future benefits they will have to pay, even as they shoulder more of the burden for their own retirement.
The most revealing measure of the lavishness of public-sector pension benefits is that, even backed by $953 billion of invested assets, public-sector pension plans remain underfunded. The C.D. Howe Institute estimates that unfunded benefits stand at $269 billion just for federal employees. This costs governments now, as they put funds into these plans, with future shortfalls passed to future governments to pay out of general revenues, even as government budgets will be strained to the limit by our aging population’s health-care and old-age-benefit costs.
One bright spot, at least at the federal level, is that the government can change its pension benefits at any time without negotiating with its unions, which are indifferent to the public’s interest. The list of possible reforms is almost endless. Benefits could be based on lifetime earnings, like the CPP, not, as they are now, based on the five years of highest income. Fully indexing benefits to inflation is an unwarranted luxury, especially since it is widely known among experts that the Consumer Price Index has an upward bias. Incentives for early retirement could be further reduced, which would have the added benefit of keeping people active in the labour force as the population ages. Most fundamentally, pensions could be converted from defined benefit to defined contribution, limiting the future liability of taxpayers for unfunded benefits.
One bright spot, at least at the federal level, is that the government can change its pension benefits at any time without negotiating with its unions
Alternatively, pensions are so valuable to the civil service that the federal government could extract almost any concession on non-pension wages and benefits in return for not completely converting the pension system to defined contribution from defined benefit. That no government has ever proposed this shows what happens when negotiations with public service unions are entrusted to people who benefit from the current system.
From this point of view, it is not surprising that Saskatchewan is the most implacable foe of an expanded CPP. After converting most of its pensions to defined-contribution plans several decades ago, it is under no pressure to prop up its public-sector pensions with an expanded CPP. Finance ministers should look to Saskatchewan as a model of how to reform their pension system. This would be far better than increasing contribution rates in a weak economy. In the past, contribution rates for the CPP were only raised when the economy was booming, initially in the 1960s and then in the late 1990s. What is needed now is not higher contribution rates to fund an unnecessary increase in benefits paid out years in the future, but, rather, relieving the vast majority of Canadians working in the private sector from the growing burden of subsidizing public-sector pensions.
Philip Cross is a senior fellow at the Macdonald-Laurier Institute.