Feds underestimate pensions, leaving Canadians with extra $58 billion debt

Kathryn May, Canwest News ServiceJanuary 17, 2010

OTTAWA — The federal government has underestimated the pensions owed to civil servants, which would add about $58 billion to the federal debt, according to a new report. The study by C.D. Howe Institute on the “fair-value” costs of pensions for government, military and RCMP employees concluded the government’s estimates are so understated that most of the surpluses wracked up over the past decade should have been deficits. “Experience in steel, cars, telecoms and other mature industries has shown how understating the cost and volatility of defined benefit obligations can lead plans to run accumulated deficits larger than their sponsors can cover, leaving pensioners short and or taxpayers picking up the pieces,” said the report. “We need to get a better handle on public sector pensions before similar accidents happen on a more colossal scale.” To cover the real costs of federal pensions, think-tank president and report co-author Bill Robson said public servants should be contributing 34 per cent of their pay to the plan every year, while RCMP and military would have to fork over 41 per cent of pay.

The big difference in cost lies in the way pension liabilities and assets are accounted for, which is exposing Canadians to “underappreciated risks,” Robson said. Defined benefit plans are supposed to have enough assets to back the promised retirement income, but they aren’t always managed and accounted for that way. Officials typically “smooth” out the value of assets by using a combination of past and projected future prices. The liabilities are understated using discounted future payments, so pension obligations look smaller than they really are, the report said. Instead, Robson said the government should use “fair-value’ accounting, which uses current prices to value assets and liabilities. “It’s crazy to show promises on the books for less that it would cost to pay off that obligation,” he said.

For Canadians, the difference between the assets and liabilities recorded in the pension accounts is part of the national debt. And lowballing the government’s pension obligations, in turn means the national debt has been understated by $58 billion, said Robson. The government recorded liabilities of $140 billion last year compared to $198 billion using C.D. Howe’s fair value calculations. That means the debt is $522 billion, not the $464 billion recorded by Ottawa.