Why Canada’s public pension format is patently unfair

Analysis: If the markets don't perform well, public-sector pension funds get unfairly compensated by taxpayers

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By Mark Sutcliffe

Imagine if you and I each put our money in the stock market on the same day. We might choose different companies or funds, but let’s say for the moment that we both picked relatively safe investments and were looking for long-term results.

Each of us might expect a reasonable return on our investment in 10 or 20 years.

But — and I probably don’t have to remind you of this, given recent events — there would also be the risk that we’d lose some money.

Now, what if the market was structured in a way that if both our investments tanked, I was still guaranteed a reasonable return on mine but you were exposed to the loss? I still get my money, you get nothing. Would you consider that fair?

How about this: What if, in the event my investments didn’t grow at the rate I expected, the money to pay my guaranteed return came from none other than you?

So, on top of taking a hit on your portfolio, you’d have to cough up the cash to cover the shortfall in mine?


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Impossible terms, right? No one would ever agree to them.

Well, that’s basically the way things are structured if you’re saving for your retirement on your own and I have a public-sector pension. If the market doesn’t perform well, you take a hit and I don’t. Oh, and you also have to top up my fund.

Now that Finance Minister Jim Flaherty has hinted that there might be some tweaks coming to federal public service pensions, the plans are under intense scrutiny. Some columnists and taxpayers groups have pointed to many reasons why the plans are too rich, while unions have, naturally, rushed to their defence.

(Before the government does anything about its employees’ pensions, it will have to introduce dramatic reforms to the pensions of parliamentarians, which are exceedingly generous. But since there are only a few hundred MPs, the total cost isn’t as significant as the pensions of public servants.)

To the unions, of course, no changes are required to public-sector compensation whatsoever. All the government has to do to balance its books is increase taxes on corporations. The math on that doesn’t actually work, but that’s of no concern to union bosses.

The union also argues the security of a pension is part of what it takes to attract an employee to a government job, that it’s a trade-off in return for a lower salary. But there’s lots of evidence that public-sector workers are actually paid more than equivalents in the private sector.


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Some critics of government pensions point to the fact that pensions are based on the best five years of income, regardless of how much was contributed by employees in earlier years. Others raise the fact that the government contributes 60 per cent toward pensions, while the workers contribute 40 per cent.

Both these formulas could be adjusted, but even a different average income and a 50-50 contribution split wouldn’t fix what’s fundamentally wrong.

The central problem is this: the guaranteed, indexed, defined-benefit format is patently unfair. In a defined benefit pension plan, if the market doesn’t perform, the shortfall has to be made up by someone. In the case of public-sector pension plans, that someone is the taxpayer.

So the private-sector worker whose RRSPs or employee pension value takes a hit when the markets drop is then given a second hit: he or she has to chip in to prop up the pension of a retired government worker, who has no such liability.

Canadians without pensions or with plans that are susceptible to market conditions are effectively the insurance policy for the public-sector plan. And, thanks to the performance of the markets recently, there’s a huge shortfall right now.

The government can’t take away the risk of market performance for every Canadian. Even if it did, we fund the government, so it would have to raise our taxes with one hand and top up our investments with the other.

That’s the kind of investment scheme Bernie Madoff would design. Or maybe the government of Greece.


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If the government can’t provide guaranteed retirement income for all Canadians, why should it give it only to some, at the expense of the others?

Across the private sector, and even in government agencies like Export Development Canada, where defined benefit plans existed, they are being phased out in favour of defined-contribution pensions.

That’s the fundamental switch the government needs to take. They could phase in the changes for new government employees only.

But the bottom line is this: the government shouldn’t expect taxpayers without pensions or with retirement savings tied to market risk to insure the plans of others who have no risk whatsoever.

It’s incredibly unfair.

Ottawa Citizen