A closer look at pension envy: Mayers

Critics say public sector pension plans are unaffordable and unfair and should be wound up. But would it really be cheaper and fairer to do so?

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Billionaire investor Warren Buffett said this spring that public pension plans threaten the financial health of U.S. cities and states.

Robert Brown, a retired professor of actuarial science at the University of Waterloo, told the conference that pension envy aside, it’s a bad, bad idea to wind up these public sector plans. Brown co-wrote a paper with colleague Craig McInnes that looked at the cost of conversion.

Brown summarized the finding by saying it will cost us a lot of money to cap the plans. Going forward, retirees would end up with a smaller pension and at the end of the day taxpayers would foot the difference with income supplements.

“It is a lose-lose,” Brown said.

Here are some of Brown’s other conclusions:

Private and public sector goals are different. It’s in the best interests of companies to cut costs and focus on profits. But when they off-load costs, they don’t care who picks them up. When the public sector does it, they offload the costs onto themselves, or another government.

Large, well-run defined benefit plans are efficient. They keep fees low and reduce risk by spreading their costs over a large number of plan members. They have a long time horizon which smoothes out market ups and downs. These things help a defined benefit plan produce up to 77 per cent more income than a defined contribution plan with equal contributions, Browns said.

The risk of a public pension failing is far less likely than a private one.

The only way a defined contribution plan can lower costs is by decreasing benefits. In Nebraska and West Virginia where state plans were converted, they’ve partially switched back.

If public sector funds are capped and new ones set up, governments will have to run two funds in parallel for decades. If a legacy plan is underfunded the government is on the hook to cover the gap.

The conversions would carry a big political risk for governments in the form of job action and legal challenges. They would be seen as breaking contracts negotiated in good faith.