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Unfunded liabilities of government programs

Many programs in Canada--retirement income support plans (CPP/QPP and OAS), workers' compensation boards, the health-care system, and pension plans for civil-service employees--have unfunded liabilities. These programs are government obligations or promises to provide benefits in the future.

Funding structure

These programs are designed like insurance plans: individuals contribute to a program for a specified period of time, accumulating benefits that are to be received at a later date. Unfortunately, only the workers' compensation boards and pension plans for civil-service employees operate on an accumulated-benefit formula. The remaining programs are funded on a pay-as-you-go system. Rather than accumulate funds in individual personal accounts for future payment, current contributions are used to pay the benefits of current recipients.

The source of funds also varies among programs. The Canada and Quebec Pension Plans, the pension plans for civil-service employees, and the workers' compensation boards derive their funding from direct payroll deductions. Old Age Security and the health-care system are financed through general government tax revenues.

Analysis of unfunded liabilities

The essence of an analysis of unfunded liabilities is the actuarial valuation. This valuation assesses the ability of a program to finance the stated benefits for a specific time given the contribution rates, expected investment returns, and specific economic and demographic assumptions. For instance, the Ontario government currently has a large unfunded liability for its Teachers' Pension Plan. Actuarial calculations show that the Ontario government would have to add $8.4 billion to the fund today to cover all of its stated future pension obligations (see the box in Table 4).

TABLE 4: UNFUNDED LIABILITIES OF CIVIL SERVICE EMPLOYEE PENSION PLANS (in millions of dollars)

Valuation Date

Unfunded

Liabilities

FEDERAL GOVERNMENT

Public Service Pension Plan

March 31, 1996

(11,476)

Canadian Forces Pension Plan

December 31, 1993

(12,382)

Royal Canadian Mounted Police Pension Plan

March 31, 1996

(2,295)

Members of Parliament Retiring Allowance

March 31, 1995

(38)

Federally Appointed Judges

March 31, 1995

638

TOTAL

(25,553)

PROVINCIAL / TERRITORIAL GOVERNMENTS:

BRITISH COLUMBIA

Teachers' Pension Plan

December 31, 1993

1,780

Municipal Pension Plan

December 31, 1994

1,310

Public Service Pension Plan

March 31, 1996

(222)

College Pension Plan

August 31, 1994

28

TOTAL

2,896

ALBERTA

Teachers' Pension Plan

August 31, 1995

3,666

Public Service Pension Plan

December 31, 1995

280

Public Service Management Pension Plan

December 31, 1994

660

Local Authorities Pension Plan

December 31, 1995

84

Universities Academic Pension Plan

December 31, 1996

97

Special Forces Pension Plan

December 31, 1995

39

Management Employees Pension Plan

December 31, 1994

87

Members of the Legislative Assembly Pension Plan

December 31, 1994

57

TOTAL

4,969

SASKATCHEWAN

Teachers' Superannuation Fund

June 30, 1995

2,302

Public Service Superannuation Fund

December 31, 1996

1,175

Others

Various

54

TOTAL

3,530

MANITOBA

Teachers' Plan

January 1, 1996

1,313

Civil Service Plan

December 31, 1995

828

Members of the Legislative Assembly Plan

September, 1997

28

TOTAL

2,169

ONTARIO

Teachers' Pension Plan

December 31, 1996

8,400

Public Service Pension Plan

December 31, 1995

2,229

Other Plans

Various

324

TOTAL

10,953

TABLE 4 continued

Valuation Date

Unfunded

Liabilities

QUEBEC

RREGOP

March 31, 1997

15,892

TPP & PPCT

March 31, 1997

7,029

CSSP

March 31, 1997

1,418

Other

March 31, 1997

2,136

Total Reported by Provincial Government

26,475

Auditor General's Adjustment

March 31, 1997

12,458

TOTAL

38,933

NEW BRUNSWICK

Teachers' Pension Plan

April 1, 1993

756

Public Service Pension

April 1, 1993

420

Early Retirement

March 31, 1996

54

Other (Judges', Members', Hospitals & Schools)

Various

22

TOTAL

1,252

NOVA SCOTIA

Teachers' Pension Plan

July 31, 1994

824

Members Retiring Allowance

August 31, 1996

41

Early Retirement Incentive Program

March 31, 1997

115

War Service & Other Non-Contributory Service Plans

March 31, 1997

16

Public Service Superannuation Fund

March 31, 1995

135

Judges' Pension Supplement

March 31, 1997

8

Sysco Pension Plan

December 31, 1996

33

TOTAL

1,172

PRINCE EDWARD ISLAND

Teachers' Superannuation Fund

July 1, 1996

79

Civil Service Superannuation Fund

April 1, 1996

31

MLA Pension Fund (Combined)

April 1, 1997

(3)

TOTAL

107

NEWFOUNDLAND & LABRADOR

Teachers' Plan

August 31, 1996

1,491

Public Service Plan

December 31, 1994

1,242

Uniformed Services Plan

December 31, 1993

171

MHA Plan

December 31, 1994

39

TOTAL

2,943

YUKON TERRITORY*

Legislative Assembly Retirement Allowance Plan

March 31, 1996

(754)

TOTAL

(754)

NORTHWEST TERRITORIES*

Legislative Assembly Supplementary Allowance

March 31, 1997

14,626

Judges' Supplemental Pension Plan

March 31, 1997

623

TOTAL

15,249

* NOTE: Territorial assessments are expressed in thousands rather than in millions of dollars.

Sources: Federal and provincial Public Accounts; various Departments of Finance.

Actuarial valuations are extremely sensitive to their underlying assumptions. For this report, the assumptions for most program valuations are: inflation 3.5 percent, wage growth 4.5 percent, and interest rate 6.0 percent. Changes in these assumptions can cause significant deviations in the results. The purpose of the valuation is to determine the current long-term deficit or surplus. Actuaries normally conduct valuations every three years to modify assumptions based on new economic conditions. All past and current unfunded liability figures in this report make use of consistent assumptions.

Pension plans for government employees

The federal and provincial governments have benefit funds for their pension plans for government employees and the workers' compensation programs. Table 4 summarizes the most recently available actuarial valuations for the provincial and federal governments' pension plans. Most provincial governments have committed themselves to the elimination of the actuarial deficits by a set deadline, and the federal government currently maintains a surplus of about $25.6 billion.

Workers' compensation boards

There is a wide disparity in the liability status of workers' compensation boards within Canada. Five of the 12 boards currently possess a surplus. Four regions have removed the workers' compensation boards from government control and have established an arms-length management approach.

Retirement income support programs and the health-care system

The unfunded liabilities of most pressing concern are the retirement programs and the health-care system. At their inception, both programs were based upon similar assumptions and philosophies. It was assumed that the population demographics, rate of economic growth, and wage increases of the 1960s would continue indefinitely. It was considered favourable social and economic policy to transfer a small amount of money from a large group of younger workers to benefit a small group of relatively poor retirees.

These assumptions were wrong. Birth rates have declined, income growth has stagnated, and mortality rates have decreased. In 1966, the ratio of Canadians under 20 to Canadians over 65 was 5.5 to 1. This ratio decreased to 2.3 by 1995 and is expected to decline further to 1.1 by the year 2030 (Canadian Institute of Actuaries 1995: 2). A more alarming trend is the relationship between workers and retirees. In 1995, seniors represented 19.8 percent of the working age population but this figure is expected to increase dramatically to 38.9 percent by 2030 (Canadian Institute of Actuaries 1995: 2). These demographic changes have undermined the ability of the retirement programs and the health-care system to provide the intended level of benefits; and will continue do so.

Because of these demographic changes, the policy of transferring a small amount of money from a large group of younger workers to benefit a small group of relatively poor retirees has become, in fact, a policy of using large deductions from a small group of workers with stagnant incomes to sustain a large group of relatively wealthy retirees. The Fraser Institute's study on inter-generational accounts (Good 1995) shows that the tax rates implied by all of the different transfers that we expect to get from our working population by the time the last of the ``baby boomers'' retires in 2030 is simply unsustainable.

Table 5 shows a summary of the unfunded liabilities from 1991 to 1997 of the various retirement income support programs and the health-care system. This section considers health care along with retirement income support programs since seniors currently consume approximately 50 percent of all health care expenditures. This rate is expected to increase to almost 67 percent by 2030 (Good 1995: 16).

Table 5: Summary of Unfunded Liabilities ($billions)

Year

CPP*

OAS

Medicare

Total

1991

420.4

445.0

867.0

1,732.4

1992

454.0

470.0

917.0

1,841.0

1993

487.5

488.0

969.0

1,944.5

1994

527.3

515.0

1,024.0

2,066.3

1995

555.5

544.0

1,082.0

2,181.5

1996

600.1

576.0

1,144.0

2,320.1

1997

485.0

609.0

1,209.0

2,303.0

Average Annual Growth

3.0%

5.4%

5.7%

4.9%

* The 1997 value reflects the changes in Bill C-2.

Source: Special Report for The Fraser Institute, June 1996 and January 1998, Actuarial Services Division, Office of the Superintendent of Financial Institutions Canada, Ottawa, Canada.

These unfunded liabilities are enormous obligations. Current estimates of the unfunded liabilities of the federal retirement income support programs and the health-care system exceed 293 percent of the total direct debt of all governments in Canada and 289 percent of GDP. The actuarial valuations for these programs may be overstated because taxes used to finance expenditures are not fully incorporated into the valuation process. For example, income taxes collected from seniors in 1992 covered about 25 percent of the cost of their OAS and health care benefits. If we use an assumption from Troubled Tomorrows (Canadian Institute of Actuaries 1995: C2), namely, that other taxes paid by seniors cover the cost of the other benefits they receive, we could reduce the estimated accrued OAS and health care liabilities by 25 percent. This would more accurately reflect the unfunded OAS and health-care liabilities that must be borne by future generations. The adjustment is not reflected in this years' calculations as further research is necessary to determine precisely how much of the cost of OAS and health care is covered by taxes paid by seniors.

Even if the unfunded liabilities can legitimately be reduced by 25 percent, they are still an enormous burden. Restructuring retirement income support programs should be initiated immediately to eliminate the inter-generational wealth transfer and to ensure that needy seniors do not suffer for the policy mistakes of government. Health-care funding is primarily provided through general tax revenue even though it is consumed according to a normal insurance pattern. There continues to be lengthy waiting lists for a wide range of procedures in every province and an aging population will place tremendous pressures on the health-care system. Unless governments make changes soon, these pressures will inevitably lead to higher general tax rates or a further reduction in services.





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