Bill Robson and the Future of Capitalism
On the eve of the Whitehorse meeting of Finance Ministers in December, the Howe released a report co-authored by Bill Robson which charged that the federal government’s pension plan liabilities on behalf of its own employees are greatly under-stated – to the tune of $58 billion. This sumÂ should, he argued, be added to the federal public debt.
As was, no doubt, intended, this intervention set off alarm bells about taxpayers being on the hook for supposedly over generous pension plans for public sector workers, and distracted attention from how to fix the major problems in the private part of our pension system.
It turns out that the main difference between Robson and federal government actuaries and accountants is the assumption about future real rates of return on invested assets. The current assumption is a 4.2% real rate of return (identical to the assumption of the Canada Pension Plan and many private sector plans), while Robson says it should be the rate of return on inflation indexed long term government bonds, currently less than 2%.
Robson argues that “theory and evidence have discredited a widespread view that long-term investors can count on equity instruments yielding a sizeable premium over lower risk debt instruments.”
It is true that rates of return on investment have fallen in recent years and have, in combination with very low interest rates, caused funding problems for all kinds of pension plans. Some actuaries have, as a result,Â become a rather gloomy lot.
Still, it is somewhat surprising that Bill Robson, who can I think be fairly described as a fan of free market capitalism,Â would endorse the view that we live in a world where rates of return on private capital will be nothing short of dismal for the foreseeable future. If he is is right, we surely face much bigger problems than unfunded pension liabilities.