Unfunded Liabilities and the Need for Reform

There is a major economic issue emerging in Canada: unfunded liabilities. Government and media often focus on economic issues like budgetary deficits, slow economic growth, and unemployment, and though these issues are paramount, unfunded liabilities are a stark reality that every level of government must accept in the coming years.

Unfunded liabilities are exactly what they seem: that is, liabilities (or financial obligations) for which there is a lack of funding. In the context of government, the issue encompasses pension plans and the large shortfalls in funding them.

Canada Post is the most recent to have announced problems funding pension liabilities. The National Post reported in December 2013 that the crown corporation has a $6.5 billion pension shortfall, which requires major changes in the company’s structure, such ending urban door-to-door delivery, layoffs, an increase in the price of stamps, and monetary relief from the federal government. As a result, it will either need to seek concessions from pensioners, perhaps via higher premiums.

The National Post reported further that Canada Post’s pension shortfall is part of a larger problem. The federal government, for instance, holds nearly $150 billion in unfunded liabilities. For instance, C.D. Howe Institute’s Alexander Laurin noted that the number is actually closer to $219 billion after accounting for future veteran and other employees, which will require surpluses in the future. This will require either spending cuts or tax increases, both of which are politically difficult decisions. The difficulty associated with unfunded liabilities is likely why there has been little-to-no action from government on the issue.

These shortfalls make it clear that there is need for reform in the public pension system: it is evidently unsustainable. The only jurisdiction considering reform is the Province of New Brunswick, which recently switched to shared-risk pension plans from the former defined-benefit pension plans. New Brunswick’s provincial government asserts the new plan changes cost of living increases to a conditional state based on performance. When the plan generates an annual surplus, however, “There is an opportunity to reinstate for years when cost of living increases were not provided.” The province chose this plan in hope of finding a long-term solution that is financially sustainable without cutting retiree pensions.

Ultimately, solutions to the looming pension crisis are necessary and require serious attention. Detroit’s bankruptcy last year was, in part, largely attributed to unfunded liabilities and, therefore, government at all levels need to consider similar actions to those taken in New Brunswick.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

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