How not to reform government pensions

Printer-friendly version
Appeared in the Vancouver Sun

Imagine if governments engaged in a massive spending binge over the last decade, with the benefits falling to just a small part of the population and then hiked taxes four times to pay for it. Now imagine if they argued, in some Orwellian twist of illogic, that such excess generosity was fully funded, affordable, and sustainable this after the multiple tax hikes demonstrated they were not.

The reaction from reasonable people would be that such an assertion is nonsense: it ignores how the affordability claim always assumes taxpayers should be shanghaied into paying ever-more for a promised benefit.

Such reasoning was on display recently from British Columbia Finance Minister Mike De Jong who praised B.C.'s approach to public sector pensions. The finance minister argued that significant reforms made to public sector pension plans in the early 2000s made them fully funded, affordable and sustainable.

Some history: In British Columbia over the past decade, as soon as looming liabilities were spotted in public sector pension plans, contribution rates were raised by plan administrators. In defined benefit plans, that's what those who run such funds are supposed to do, or reduce the promised benefits, if they wish to avoid shortfalls.

Such British Columbia pension plans thus appear different, on the surface, from those in Ontario, Alberta, and Newfoundland where governments made upfront billion-dollar injections into their public sector pension plans.

But the B.C.-versus-everyone-else contrast is a distinction without a difference.

For taxpayers, it doesn't matter whether a government employees pension fund was specifically bailed out once in the last decade, or if contribution rates were regularly raised to ward off an unfunded liability (about four times in the case of each major B.C. public sector pension plan). Either way, taxpayers pay.

Put differently, the employer in public sector pension plans is most often the provincial government or some related government entity. That means when employer contributions are raised to ward off a pension shortfall, more money is diverted from the provincial treasury, i.e., from taxpayers and  from other possible uses, including better funding their own retirements.

Whether one-time bailouts or multiple hikes in pension contribution rates, tax dollars are still used to top up public sector plans, and this because plan members are guaranteed a certain level of benefits in retirement.

And that's the real problem: taxpayers, most of whom do not have a registered defined benefit plan, end up paying for pension promises to government employees unions.

In British Columbia, 365,222 people, 85.9 per cent of the public sector workforce, had defined benefit plans in 2011; in contrast, just 9.6 per cent of private sector employees (152,344 workers) had a defined benefit plan that year.

Oddly, the finance minister argues that suggestions of reform, such as moving new public sector workers to a defined contribution plan, something Saskatchewan New Democrats did in 1977 under Premier Allan Blakeney, amounts to a tearing down of public sector pensions. De Jong also quotes a Moody's report that notes Saskatchewan's pension liabilities are currently high.

Several points: Saskatchewan's liabilities relate to that province's now-closed defined benefit plans and reinforce the critical point about such plans: in the public sector, whether in one-time bailouts, contribution increases, or in payouts decades later, the burden for their rescue falls on taxpayers.

As for the tearing down assertion, at present, 25,930 public sector workers in Saskatchewan are enrolled in defined contribution plans. It is how they will fund their retirement. Such public sector workers are thus in the same position as much of the private sector (with or without a registered pension plan).

There, retirement income is determined by money saved/invested during one's working years plus the return on such investments.  There is no guaranteed level of payouts, but plenty of people do just fine so long as they save and invest during their working years.

After all, everyone except those in defined benefit plans lives with market returns on their investment be they on Warren Buffet's legendary  fund, or some index, mutual or bond fund, or returns on a rental property. Market returns are the only realistic returns that can be promised to everyone over time.

It is only in defined benefit plans, which have rapidly disappeared from the private sector but are still widely used in the public sector, that a very different expectation exists: a set pension payment built from pension contributions plus the return on investment plus extra money from taxpayers, if the first two parts of the equation do not deliver the promised pension benefits.

Of course, when politicians promise something more than market returns to one group, i.e., government employees unions, they make an implicit commitment that taxpayers will be forced to fill in any subsequent gap.

Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.