The inevitable assault on public service pensions appears to be underway. Many have assumed that the problems of private pension plans would not carry over to public pensions, but this is just wishful thinking. Just because governments can borrow hundreds of billions of dollars to cover promised pension payments doesn’t mean that they are willing to do so.
Superficially, the problems of both public and private sector pensions are similar. Too little money has been saved to cover future promises. If that money isn’t made up, then something has to give. If a plate has ten cookies, and ten people have been promised three cookies each, we may not know who will get their cookies, but we can be sure that not everyone will get all three.
An important difference between public and private sector pension plans is that the government has greater scope to lie to themselves about the real costs of future pension obligations. As explained in the C.D. Howe Institute’s backgrounder The Startling Fair-Value Cost of Federal Government Pensions, government plan valuations “often use aggressive assumptions about future returns on investments in their discount rates for liabilities.” This makes future costs look smaller than they really are.
I have no idea whether the current government is serious about dealing with this problem now. It’s always easier to leave huge problems like this to future governments. But we will have to face this issue at some point.
There are a number of ways of dealing with this issue:
1. Run huge deficits for many years to pay pensions with borrowed money.
2. Reduce benefits somehow, such as tinkering with the inflation indexing, or something more drastic like switching to a defined contribution plan.
3. Make plan participants pay a larger share of their salaries to save in the pension plan.
In the fullness of time, the government may do all three to some degree.