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(Gunnar Pippel/Getty Images/iStockphoto)
(Gunnar Pippel/Getty Images/iStockphoto)

ROBSON and LAURIN

Ottawa must rein in its soaring pension costs Add to ...

Few expect much drama when federal Finance Minister Jim Flaherty delivers his Feb. 11 budget. Pundits predict a budget packed with goodies next year, ahead of an expected election. So the 2014 budget will be business as usual.

Which would be okay. Presumably “business as usual” means more of the past three years’ focus on squeezing operating spending to get back to surplus. That was a welcome change after the splurge that added $100-billion to federal program spending from fiscal years 2002-2003 to 2009-2010.

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Yet holding the line on Ottawa’s operating costs from here on requires more than just “business as usual.” Because the numbers Mr. Flaherty presents badly understate the tab federal employees are running up for Canadian taxpayers.

The reported numbers are startling enough. Over the entire decade since 2003, published figures show Ottawa’s average cost of employing a full-time worker, including wages and benefits, almost doubling – from $66,500 to $127,400. Meanwhile, average compensation in Canada’s business sector rose only about a third – from $38,600 to $52,100.

Federal employment costs rose faster partly because of wages, salaries, and current benefits: Cash compensation per employee grew half a per cent annually faster than in businesses over the decade. But most of the difference reflects ballooning costs of federal pensions and other postretirement benefits. The federal government reported spending just $3,200 per worker on postretirement benefits in 2003. By 2013, that number had soared to $38,600 – a 12-fold increase.

If a jump that big looks odd, it should. Governments everywhere tend to understate the cost of their pensions and other benefits. Others – Ottawa among them – record their postretirement obligations, but use arbitrary high interest rates to discount the payments they will have to make in the future, making the reported commitments misleadingly small.

That is why the number a decade ago was tiny. Over time, the reality of low interest rates has been dragging Ottawa’s discount rates down – a major reason why the reported costs have been going up. Fully reflecting current reality would make the numbers Mr. Flaherty reports in the budget still worse.

The federal debt at the end of 2012-2013 would have been fully $120-billion higher than reported. And the reported value of the annual benefits accruing to federal employees, already startlingly big, would be higher as well – around $3-billion more.

The federal government has recently taken some steps to recognize and curb these costs: showing the value of federal employees’ “banked” sick days last year, which added $1.5-billion to the federal debt; raising the age at which newly hired public servants will retire; legislating increases in the share of annual pension costs employees will bear themselves. So “business as usual” doesn’t mean ignoring postretirement benefits.

But if it means continuing to understate their true value to recipients, and their cost to taxpayers, business as usual won’t do. The increases in employee pension contributions purport to move them, by 2018, to roughly half the value of the accruing benefits – but only the understated value. Taxpayers will still bear far more than half their true cost. Mr. Flaherty needs to do more.

For example, in the C.D. Howe Institute’s shadow budget, we propose capping taxpayers’ contributions to federal-employee pensions to a fixed proportion of pensionable pay. We chose 9 per cent: along the lines of the 9 per cent other Canadians would get as a maximum under a 50-50 cost-sharing arrangement with employers in defined-contribution pension plans or RRSPs – in which contributions cannot exceed 18 per cent of earnings. That change would mitigate the impact of further escalation in federal pension costs on taxpayers.

As for other expensive postretirement benefits – which are still completely unfunded – we propose no more banking of unused sick days, and a move to 50-50 cost-sharing of federal postretirement health benefits.

These changes would be a step beyond business as usual. They would trim federal compensation expenses by about $5.2-billion in fiscal years 2014-2015 and 2015-2016 alone. They would accelerate Ottawa’s return to surpluses and bring promised tax relief closer. And they would put federal compensation on a more transparent and more sustainable track. Those would be welcome surprises in next week’s budget.

William Robson is president and CEO and Alexandre Laurin is associate director of research at the C.D. Howe Institute.

 

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