Imagine if governments engaged in a massive spending binge over the past 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.
Such reasoning was on display recently from B.C. 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.”
In B.C. 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 B.C., pension plans thus appear different, on the surface, from those in Ontario, Alberta and Newfoundland, where governments made up-front billion-dollar injections into their public-sector pension plans.
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.
Whether one-time bailouts or multiple hikes in pension contribution rates, tax dollars are still used to top up public-sector plans, because plan members are guaranteed a certain level of benefits in retirement.
In B.C., 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 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, amounts to “tearing down” public-sector pensions. De Jong also notes that Saskatchewan’s pension liabilities are currently high.
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, 25,930 public-sector workers in Saskatchewan are enrolled in defined-contribution plans. It is how they will fund their retirement. These 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 during 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.
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.
Mark Milke is a senior fellow at the Fraser Institute.
