Under the Rug: The Pitfalls of an “Operating Balance” Approach for Reporting Federal Employee Pension Obligations
10 Pages Posted: 2 May 2022
Date Written: November 24, 2020
Abstract
The federal Department of Finance has proposed a new presentation of the federal statement of operations that would highlight an “operating balance” in addition to the annual surplus or deficit and the resulting change in the government’s accumulated deficit. This presentation would exclude changes in pension valuations from the costs of federal employees that appear in the new operating balance, and show those changes below it. This treatment is not appropriate, because those pension revaluations are the result of the federal government’s systematically under-recording the costs of its pensions. The federal government records the costs of employees in its major funded pension plans using a high discount rate that understates today’s value of the benefits they will receive tomorrow. Over time, it adjusts this discount rate downward, which reveals the costs of federal employees to be higher than initially reported – and adds to its annual deficit and the net federal debt. An “operating balance” that excludes these pension expenses will present a misleadingly positive picture. The government’s annual operating expenses will look smaller than they should, and the operating balance line more positive than it should. The proposed presentation would sweep these expenses under the rug. Before it adopts the proposed operational balance concept, Ottawa should record the value of its obligations in its funded pension plans using discount rates based on yields on other federal government debt – as is already done for unfunded obligations. Only then could the operating balance improve the transparency and usefulness of the federal government’s budgets and financial statements.
Keywords: Retirement Saving and Income; Federal Budgets
JEL Classification: H83
Suggested Citation: Suggested Citation