Battle lines drawn between public servants, taxpayers over public service pension surplus

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The federal government could tap into a more than $9.3-billion surplus in the public-service pension plan over the next four years to ease mounting fiscal pressures – a move that could spark a showdown with workers who say they deserve a share.

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A newly released special report by Canada’s chief actuary confirms widespread speculation that the public-service pension plan now exceeds legal limits and is projected to reach similar levels through 2028 after years of running a surplus.

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The report sets the stage for a clash between public servants and taxpayers. Public servants see part of the surplus as theirs. Taxpayers fund the government’s contributions. In an era of fiscal restraint, the balance between the two appears to be shifting in favour of taxpayers.

The surplus could become a crucial source of funds for the Liberals and the next government, said Sahir Khan, executive vice-president of the Institute of Fiscal Studies and Democracy (ISFD) at University of Ottawa.

It offers a potential cushion for a slowing economy and rising fiscal pressures, particularly from the incoming Trump administration, he said.

“In the face of competing and increasingly urgent pressures, do you really think increasing public-service compensation will take priority over a soft economy, tariffs dragging the economy, defense spending, and other pressing macro issues?”

A $38.8-billion surplus

Treasury Board President Anita Anand commissioned the report to assess the plan’s finances and projections. It revealed a $38.8-billion surplus, with $1.9 billion as of May 2024, exceeding the allowable limit under the law.

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Anand tabled the report in Parliament this week and immediately announced that she was transferring the $1.9 billion to the consolidated revenue fund – the government’s bank account – “where it will be held while next steps are considered.”

The same report also forecasts that the “non-permitted” surplus will continue to grow over the next four years and projects that the government could eliminate it by halting its contributions to the plan, saving up to $9.3 billion.

In that scenario, the government could partly pause its contributions for a few months in 2025, stop them completely in the following two years and take another pause in 2028, the report shows, with the surplus returning to an allowable level by 2029.

Anand said nothing about taking a contribution holiday in her announcement. The unions, however, have come out swinging.

A one-sided break?

The Public Service Alliance of Canada, which hired its own actuaries to study the report, said the report shows the government plans to pocket another $7.4 billion “to give itself a pay holiday.”

It argues the government must have requested a forecast on the impact of a contribution holiday, a sign it interprets as an intention to scoop the surplus.

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“Workers and employer contribute together to this fund, so why should only the boss get a break? This is about fairness plain and simple,” said PSAC President Sharon DeSousa. “The government flat-out lied to us. No wonder. It turns out the biggest holiday present the government is giving this year is to itself.”

De Sousa called the move a betrayal. Unions see the surplus as deferred wages that should be shared with workers, not used as a “financial windfall” for the government.

“The decision by the government to put itself ahead of workers is wrong. They’re suspending employer contributions to the plan but not investing in fairer pensions or a contribution break for workers,” said DeSousa. “This is a disappointment but not a surprise.”

It’s kind of like a gift card

Treasury Board officials don’t see a windfall. They see the surplus as an asset on the books and argue removing it will only weaken the government’s overall fiscal position. Same for the freezing of any future contributions.

Yes, technically there will be a hit to the balance sheet, ISFD’s Khan says. But the move frees up cash for short-term spending that would otherwise remain trapped in the pension fund.

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“It’s like the pension money is a gift card for Tim Hortons,” quipped one senior financial bureaucrat. “You can only spend it at Tim Hortons. And now they’ve given you cash and you can spend it wherever you want.”

But over the long term, the fund could fall back into deficit as markets shift, Khan notes, and the government could be forced to inject money back into it.

The chief actuary’s projections will be reviewed annually to see if surpluses even materialize, a Treasury Board official said. Lower market returns, rising public-service salaries, or a pay-equity settlement could shrink any future surplus.

There are no plans to take a contribution holiday, a TBS official said. Projections for them were done because the law mandates the government take such a holiday in the event of a non-permitted surplus.

DeSousa argues the government should be offering employees a contribution holiday too or using some of the surplus to improve benefits for workers.

The push for a single-tier pension

PSAC has long lobbied for a reversal of Harper-era pension reforms that created a two-tier system: those who joined before 2013 can retire at 55 with 30 years of service. Those hired after 2013 must wait until age 60.

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PSAC wants to go back to a single-tier pension with retirement possible at age 55.

Treasury Board says the reversal would increase costs, as tier-two members have been paying less for their pension benefits. This means taxpayers and public servants would face higher contribution costs indefinitely, even after the surplus funds are exhausted.

And so the battle lines are drawn.

The government’s defined-benefit pension plan is public servants’ most prized asset, offering benefits superior to what most Canadians have.

The latest clash echoes a historic battle led by unions and retirees 25 years ago over a pension surplus that reached the Supreme Court. The unions lost that fight. It ultimately led to the creation of the pension fund now holding the surplus in question.

It is also bringing up many of the issues that were raised then.

The plan isn’t jointly managed with employees. Public servants have zero investment risk. Their pensions are guaranteed by statute, regardless of how the pension fund performs or if it runs a deficit. The government is on the hook for any deficit, so it claims it is entitled to the surplus.

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In the end, Anand has the final say on any surplus, with decisions informed by a pension advisory committee that includes union, retiree, and government representatives.

Under the plan’s funding policy, the government is only required to address the non-permitted surplus. The rest of the surplus is supposed to remain in the plan as a cushion. Anand, however, can override this policy.

This article first appeared in Policy Options.

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