Should We Claw Back Government Pensions?

In a recent article in the Toronto Globe and Mail newspaper, CD Howe President Bill Robson makes the case for reining in the cost of government pension costs.  Here is the article.

Bill makes some excellent points. I would only add that there is an accounting side to this issue: pension costs are extraordinarily sensitive to changes in interest rates. A decrease in rates not only reduces the current investment income of the pension fund, but it also magnifies the plan liabilities that stretch indefinitely into the future.

We have seen this recently in defined benefit plans (including many government plans) as the reduced interest rates sent their deficits soaring, only to recover last year with the small increase in interest rates.

Accounting policies for pensions used to let the funds “smooth” these changes over time, making for a more accurate long term valuation. The recent changes in accounting principles have seriously impacted the apparent volatility of pensions.

So, let’s take a hard look at government pension plans, but let’s not jump to any hasty conclusions. The numbers are complex.

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