Business

What’s good for Ottawa bureaucrats is good for everybody-until the bills start coming in

Peter Brimelow November 15 1976
Business

What’s good for Ottawa bureaucrats is good for everybody-until the bills start coming in

Peter Brimelow November 15 1976

What’s good for Ottawa bureaucrats is good for everybody-until the bills start coming in

Peter Brimelow

When the federal government adopted the principle of indexing civil service pensions so that they automatically increase to compensate for each successive year’s inflation, it lit a small flame of pure hatred in the hearts of all Canadian businessmen that is eating its way remorselessly toward some ultimate explosion. The problem is not just that corporate executives believe it’s “mathematically impossible,” as Steel Company of Canada chairman Peter Gordon puts it, for them to offer their employees similar benefits. (It’s not even clear that Ottawa could allow them to, since the required additional pension contributions from each employer would dramatically reduce corporate income available for taxing.) What really bums them up, as managers rather than owners of the companies they run, is that senior civil servants of their own age will do much better financially than they themselves will—and they also can retire early and never have to worry about being fired. To the businessmen, the whole idea of indexed civil service pensions symbolizes who runs Canada now: Ottawa is dancing on their grave— and they don’t even feel dead yet. It brings home what their personnel directors keep moaning about: being unable to compete with the civil service for recruits. It rankles even more when they look at the example of Simon Reisman, who quit as deputy finance minister when he was 55 and eligible for an indexed $30,000 a year, and is now flourishing happily as a private consultant.

But it’s not only businessmen who are getting annoyed about the pensions Ottawa is paying itself. Members of the arcane and somewhat priestly actuarial profession are holding earnest conclaves about it. Actuaries wade through years of a particularly grueling type of higher mathematics which qualifies them to assess how much will probably be needed to pay off the obligations of insurance companies, and, by extension, pension funds. Pensions do not fall like manna from heaven: they have to be paid for. The actuaries want to know who is going to do it. They point out that the cost of providing an indexed pension doubles if the inflation rate is 6%, which completely swamps the rather large contributions civil servants make from their pay. Corporations have to set money aside each year under stringent conditions to pay their future pensioners. But the federal government in effect spends the money it receives from its employees, and simply relies blindly on the willingness of the next generation of taxpayers to support this generation of civil servants. There is

literally no limit to the fiscal demands that might be made, since the inflation rate could reach any height. New York City’s commitment to pay indexed pensions to its retired public employees during the recent inflationary surge was largely responsible for its financial collapse.

These points are made with singular eloquence and erudition by Geoffrey Calvert in his book Pensions And Survival, which is being published later this year by Financial Post Books. A fierce New Zealander, Calvert has spent 47 years in pension work in his native land, in the United States, and now in British Columbia, where he has re-

tired, after a fashion. His book was sponsored by members of the Canadian Pension Conference, and its emphasis is actually the Canada Pension Plan and its Quebec equivalent. He regards both as being without adequate reserves to meet their obligations.

The economic implications of government pension plans are as disturbing as their financial peculiarities. Private plans require a pool of funds, which are invested in the economy through the financial markets to earn the return to meet the plan’s obligations. In recent years, this has been the main source of capital for industry, and it’s estimated that more than 70% of Canada’s capital needs in the future will have to come from private pension plans. The funds generated by the government plans, however, go mainly to financing government’s immediate needs, and have no financial return. So the total impact of government plans as they are now financed

has been to reduce the capital available to the economy—the product of which is what ultimately pays pensions. This paradox makes extension of government pen. sion plans particularly questionable. It’s like sawing off the branch you’re sitting on.

Official Ottawa has been watching this unrest among the peasants with care. On October 18, the Treasury Board issued a document on civil service pensions, obviously intending to quell discontent by means of a number of arguments (which one critic described as “extraordinarily ingenious and cunning”) about such issues as the true nature of funding. The land has been filled with the hum of actuaries thoughtfully digesting them, and it seems that most of the arguments will be eventually denounced as specious. (For example, the report asserts that indexing can be partly financed through the increase in interest rates often accompanying inflation. But pension funds are generally locked into their investments, and can only take advantage of higher rates with new money.) The view that civil service is some sort of Machiavellian succubus on the Canadian economy sometimes looks plausible, but in another province of Ottawa’s chaotic empire, Judd Buchanan, Minister of Public Works and a member of the Treasury Board, says earnestly that the government’s position on civil service indexing is not fixed. “We want outside assurances the scheme is properly funded.” An inquiry is proceeding under David Brown of the consulting actuaries Eckler, Brown, Segal & Company Ltd-of Toronto.

The debate on civil service pension indexing is a bitter clash between vested interests, and even the elementary terms are battlegrounds. But the disquiet among disinterested professionals is alarming, and Calvert’s analysis of the financial and economic implications of the government plans must be answered in a reasoned way by policy makers. It is further evidence of the mortal threat that inflation poses to our institutions, although currently Canadian civil servants have less reason than anyone to worry about it, at least until their own pension scheme is finally undermined. The success of the Registered Retirement Savings Plan offers a possible solution to the problems of funding and portability from job to job. However, it is hard to see this method being expanded unless it is somehow reconciled with the prevailing view that individuals cannot be trusted to look after themselves, but must be forced to save and be virtuous according to fashionable prejudices.