Tuesday, August 4, 2009

Public employees' pension debts exceed all other government debt

A recent report by the British North-American Committee concerning Canada's debts for federal and provincial employees' pension plans presents a shocking result. Based on the new IPSAS 25 accounting measures, the net pension liabilities - i.e. total plans' deficits - exceed the rest of the federal and provincial governments' debts. In other words, our governments owe more for their own employees' pension plans than they do for everything else. BNAC estimates net pension liabilities at 27% of GDP - compared to an OECD forecast of non-pension debt of 21%. These numbers exclude CPP, QPP and other social security benefits.

The BNAC looked at two measures of pension cost:

• The net present value of all accumulated pension obligations less any plan assets. These are called the ‘net pension liabilities’.
• The annual running cost to the employer and employee combined of new promises incurred in a year, expressed as a percentage of salary. The actuarial name for this concept is ‘current service cost’, and is the annual pension contribution required to cover future liabilities.

The federal pension plans include the public (or civil) service, the military and the RCMP. The provincial pension plans include general provincial employees and teachers.

The annual running costs are 27.5% for provincial plans and 45.5% for federal plans.

Unfunded public pension liabilities represent a transfer of spending power from a future generation of taxpayers to the current generation of public employees. This decision is made by the current generation, but paid for by future generations. However, it appears that the financial impact of these promises is not known, nor understood, by either those giving the promises or those who will have to pay for them.

The BNAC makes several recommendations:

• transparency of costs in public bodies’ reports to taxpayers should be the first aim of the governments.
• pension liabilities which are promised by a public body should be valued (and charged for) at sovereign market discount rates. Any other discount rate is likely to understate the true cost of pensions, and will distort reporting between unfunded and funded pension schemes. This recommendation is in line with IPSAS25.
• net public pension liabilities should be amortized or monetized so that costs are explicitly recognized.

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