There has been a lot of speculation or PMO leaks floating around the last few days that the next Harper Government Omnibus Bill will include a provision to reduce the employer contributions that government makes to public service employee pension plans. If this happens, it will mean the Government has bought into the myth that is peddled by the public service pension critics like the Canadian Federation of Independent Businesses, the C D Howe Institute, and others that government pays for 60% of public service pension costs and that this is too heavy a burden for the taxpayer.
The perception that the Government pays for 60% of public service pensions is widespread, BUT FALSE. The Government only pays about 15% of public service employee pension costs!
What the critics overlook is the fact that about 75% of public service pension costs are met by investment earnings and growth. The 60% government responsibility only applies to the 25% of costs that are covered by employer-employee contributions. 60% of 25%, therefore, leaves government with a 15% role in the financing of public service pensions.
This is not to suggest that government employer and employee contributions are unimportant. They are extremely important. Their importance, however, is much more due to WHEN they are made than their size.
Public service pension contributions generate investment earnings and growth throughout the working life and retirement years of each public servant---a period of up to 50 years or longer. This means that every single contribution dollar will, over a 50 year period, attain a value of about $7.00 if it earns and grows at a compound rate of 4% a year, and about $18.00 if it grows at a compound rate of 6% a year.
Does the magnitude of these figures ring a bell? They should, as they bear a striking resemblance to the examples cited by banks and other financial institutions when they tell Canadians that the secret to having an adequate income in retirement is to start saving for retirement at an early age, and to keep saving on a steady and regular basis. This is precisely what the Public Service has been doing since 1927. Perhaps, one day organizations like the C D Howe Institute will hold up the Public Service as a role model for what others should do.
The other major question requiring attention is the inter-relationship between financial markets and the public service pension program.
We all know that financial markets are prone to cyclical ups and downs. It should, therefore, not be surprising that periodically the public service program will temporarily enter a rough patch when markets are down. What is surprising, though, is to see and hear organizations like the C D Howe Institute sound the alarm bells over public service pension finances during financial market slumps, and then go into a “Chicken Little” act with shrill and strident calls for action with the situation.
If the critics were to set aside their ideological bias, they would soon conclude that the Government should be changing course when markets are on the rise---not when they are slumping.
Given the temporary and cyclical nature of financial market ups and downs, it would be prudent for the Government not to fritter away temporary surpluses on things that have nothing to do with pensions when markets are up. In such a situation it would make more sense for the Government to hold on to the temporary surpluses and treat them as rainy day reserves to combat the fallout effects of the markets when they enter the downward phase of their cycle. If such a common sense approach were adopted, it would virtually insulate the public service program from the boom and bust vagaries of the markets.
More to the point, how would an open-minded observer view the actions taken by Governments over the last 20 plus years when they helped themselves to over $30B of the pension program’s assets? What has been the fallout effect of these actions on the 2012 balance sheets of the Public Service pension program?
Equally important, how many billions in investment earnings and growth were lost during the last 20 plus years in the aftermath of successive Governments removing over $30B from the program during the deficit cutting crusades of the last 20 plus years?
This all comes down to the following fundamental questions: Who should be held accountable for the consequences arising from any rash, reckless, and short-sighted decisions and actions taken during the operation of the Public Service pension program over the last 20 odd years? How fair and even-handed have successive Governments been in discharging their responsibilities as the trustee of the Public Service pension program? And, how does the behaviour of Governments from the late 1980s on stack up against the standards of conduct mandated by law for pension plan trustees and administrators outside the public service?
Walter Kelm
September 2012
Walter Kelm retired from the federal Public Service in 1990. His 36 year career included stints as Director of Planning and Development for the Canada Pension Plan, and Director of Pensions and Benefits for the Treasury Board of Canada.