The Economic Benefits of Canada's Public Sector Pensions

The Canadian Public Pension Leadership Council (CPPLC) put out a press release stating research shows Canada's public sector pension spending contributes $82 billion annually to the Canadian economy: 

Research released by the Canadian Centre for Economic Analysis highlights the unique value provided by Canada's public sector pension plans across the country. The economic activity from the operations of pension plans and retirees spending their income supports 877,100 jobs and 55,500 businesses across Canada, supporting $33.1 billion in annual wages and $21.4 billion in tax revenue.

The report was commissioned by the Canadian Public Pension Leadership Council (CPPLC) to understand how public pension plans contribute to the Canadian economy. It shows that nationwide every $10 of pension payments generates $16.70 of economic activity and makes a total contribution of $82 billion (3.6%) to Canada's economy annually.

Canada's public sector pension plans provide retirement security to 1.85 million retired nurses, teachers, firefighters, bus drivers, social workers, janitors, and other public servants. The report finds that the $49 billion paid annually in pensions provides broad-based benefits spread across Canada geographically and demographically. In total, 39% of the 877,100 jobs supported go to people under 35; 797,900 children live in households where income originates from public pension plan activity; rural communities benefit by 6.4% more per capita than urban communities; and 72% of the businesses supported employ less than ten people. 

The findings of the report highlight how public sector pension plans provide stability to regions across Canada through retiree spending and demonstrates how provinces benefit in different ways. Atlantic Canada has the highest percentage economic contribution; Ontario receives the biggest economic benefit per $10 of pension payment; and Alberta has the highest proportion of jobs generated for people under 35.

The CPPLC is sharing the report to help inform discussion about the economic contribution of public sector pension plans in Canada.

"Canada's public sector pension plans were set up to provide a stable retirement income for public servants, but this research speaks to a much broader impact. Four million Canadians of different ages in all regions benefit directly or indirectly from the economic activity generated from pension operations and retirement spending. This speaks to the value our public pension plans provide as a unique asset for the country in supporting jobs, households, and communities." Derek Dobson, Co-Chair, CPPLC

More details on the economic impacts of Canadian public pension plans can be found in the report Economic Benefits of Canadian Public Sector Pension Plans: https://cpplc.ca/economic-benefits-of-canadian-public-sector-pension-plans/

About The Canadian Public Pension Leadership Council (CPPLC):

The CPPLC is a non-partisan group of senior public sector pension plan leaders from across Canada. Established in 2013, the CPPLC is dedicated to informing the evolving discussions about retirement income security for working Canadians. The CPPLC is composed of 13 public sector pension plans from across Canada representing over 1.6 million active and retired members.

CAAT Pension Plan; College Pension Plan; Government of Canada Pension Centre; LAPP; Municipal Pension Plan; NS Pension Services Corporation; OMERS; Provident 10; Public Service Pension Plan; Saskatchewan Healthcare Employees Pension Plan; Saskatchewan Teachers' Retirement Plan; Teachers' Pension Plan; Winnipeg Civic Employees' Benefits Program

About the Canadian Centre for Economic Analysis (CANCEA):

CANCEA is a socio-economic research, analysis and data firm using uses industry-leading techniques in data science, including agent-based modelling. CANCEA provides objective, independent and evidence-based analysis and is dedicated to a comprehensive, collaborative, and quantitative understanding of the short- and long-term risks and returns behind market changes, policy decisions and economic behaviour. 

On its website, the CPPLC put out these charts with highlights:

As an organization dedicated to engaging dialogue on public pension plans in Canada, we’re always looking for new ways to fill retirement research gaps. For our latest report, we thought long and hard about what kind of research would lead to better fact-based decisions that benefit Canada and Canadians. We commissioned the Canadian Centre for Economic Analysis to study the economic contribution public sector pension plans bring to the economy – the first research of its kind to analyze this contribution from all Canadian public sector pension plans.

What the report by the Canadian Centre for Economic Analysis reveals

The economy of every community in Canada is positively impacted by public sector pension plan activity, whether through the work of active members and their employers, retired members’ pension-related spending, or through the local investment activities that pension plans perform on behalf of their members.

Report highlights

 

 

 

Read the full report

The full report provides additional information to highlight the value provided by public sector pension plans. Take a look at the full report here: Economic Benefits of Canadian Public Sector Pension Plans.

You can read the backgrounder here and the full report here. 

The Executive Summary states this:

This study quantifies and describes the economic benefits of Canada’s public sector pension plan (CPSPP) activities to Canada’s economy and at the provincial level. These benefits focus on the economic activity generated from the following sources:

1. Pension plan members spending their retirement benefits payments in Canada.
2. Pension plan operations in Canada, including salaries and wages to employees residing in Canada.

These economic activities support demand for labour and subsequent spending, which ripples through the economy. Throughout the report, contributions are grouped by the source of CPSPP driven economic activity. “Contribution from pension spending” includes all economic activity supported by CPSPP retirees when they spend their retirement benefits payments, and “contribution from operations” includes the economic activity driven by CPSPP operations.

The report does not cover the role of Canadian CPSPP investments within Canada, which have a substantial impact in terms of economic benefit and jobs created across Canada. CPSPPs have $1.27 trillion invested in assets around the world, with a good proportion of that invested in Canada. These investments are in public markets, as well as in private markets (such as direct investments in established companies and start-ups), infrastructure, and real estate such as offices, housing, and shopping malls.

Benefits are reported in terms of Gross Domestic Product (GDP), wages and jobs, private business investment and government revenue supported in Canada and provincially. The number of people, households and businesses sharing in the economic benefits are statistical estimates of person, household or business equivalents. This means that a benefit that is partially split over many people or households will be added together to form one person, household or business equivalent. For example, if 10% of the incomes of ten individual households are supported by Canadian CPSPPs, this is reported as one household equivalent

Here are the results at a glance:

• With over 5.26 million active and retired members, the membership of CPSPPs is equivalent to the population of British Columbia. There are over 3.41 million active members and 1.85 million pension recipients in Canada. Members serve their communities working as nurses, bus drivers, janitors, paramedics, firefighters, police, teachers, and social workers, to name a few.
• Member and employer contributions are invested in Canada and around the world by the plans to provide a stable and secure retirement income, thereby helping employers save costs through enhanced attraction, retention, and engagement. Plans invest in buildings, infrastructure, companies, markets, and start-ups, managing a total of over $1.27 trillion in assets.
• These investments have generated $92 billion annually over the last five years in returns from those investments. About $49 billion is paid annually to retirees living around Canada, primarily derived through investment income. Around 65% of retirees in public sector plans are female.
• CPSPPs benefit all Canadians through the wider impacts of pension recipient spending and the activities of pension plan’ employees. For every $10 of public sector pension paid to a retired member, $16.72 of economic activity is generated. In total, Canada’s GDP benefited by about $82 billion in 2019. This supports 877,100 jobs and $33 billion in wages for Canadians, and provides $21 billion in federal and provincial government revenue.
• The impact on Canada’s population is widespread. Retirees receive income and their activities support jobs, and this benefits people with whom they share households. Over four million Canadians, equivalent to 11% of the population, benefit from CPSPP activities. This includes those living in households with a person whose wage is supported by plans and recipients of retirement benefits payments.

As you can read, the economic benefits of Canada’s public sector pension plan (CPSPP) are vast and keep in mind, this report does not cover their investments within Canada which are also an important source of economic activity.

For example, private equity investments within Canada support businesses, support jobs, economic activity, etc.

The report focuses on members spending their retirement income in Canada and pension plan operations in Canada, including salaries and wages to employees residing in Canada.

Canada's large pensions pay their employees very well (based on long-term results), especially at a managing director level and up and all those big salaries, vested bonuses and yes, defined-benefit pensions, work their way back into the economy.

But even more crucially, retiree members who enjoy a stable and secure pension for life because our large public pensions are among the best, if not the best in the world, and that economic activity is far more important to the overall economy.

People with defined benefit pensions don't have to worry about the daily, monthly or annual gyrations of global stock markets, they can plan their spending knowing full well their benefits are coming in every month.

In total, over four million Canadians, equivalent to 11% of the population, benefit from CPSPP activities.

That's over 1 in 10, so you can easily measure the importance of CPSPP activities and again, the report understates it because if you include all the publicly traded and privately held  businesses, it's a lot more.

So, the next time someone asks you "what's the use of having large Canadian pensions?", please remember this report and this blog post.

Below, Susan Daley explains the Canada Pension Plan which is the foundation of many Canadians’ retirement. Take the time to watch this, she does a great job explaining it. 

Update: Malcolm Hamilton, a retired actuary and former SVP at Mercer, sent me his thoughts after reading this comment:

According to Statscan, in 2020 Canadian public sector trusteed pension plans collected $46 billion in contributions, earned $75 billion in investment income, paid $47 billion in pensions and paid $5 billion in administrative expenses.

This report, if I understand it correctly, looks at the economic activity generated by the pensions and the administrative expenses (presumably salaries paid to Canadians for services provided to public sector pension plans). The conclusion (with some rounding)... $50 billion injected into the Canadian economy generating $80 billion of economic activity. I am not competent to comment on the multiplier, but this all seems reasonable to me.

But what about the $46 billion contributed to the pension plans? Are these not funds extracted from the economy - funds that might otherwise have been spent by plan members, or their employers, or taxpayers - funds that could have created a large amount of economic activity but didn't because they went into pension funds where they were invested? Also, might the pensions and salaries paid from investment income be viewed as money that might otherwise have been available for future spending that generates future economic activity?

It is wonderful that retired public employees and those who work for public sector pension plans have money to spend in communities all across Canada. We all benefit from the spending of others. Still, I wonder if we are being told the whole story.

I replied to Malcom:

I believe this report understates the true economic benefits of Canada's large public pensions because it only looks at salaries at these pensions and retirement income members enjoy for life. 

Importantly, it doesn't look at private equity investment and other investments in the economy. 

For example, take CDPQ's massive investments in the province of Quebec across public and private markets, there's a huge mutliplier there.

Also, I wouldn't jump to say the $46 billion contributed to pension plans is "extracted" from the economy. That's a very crude cost/ benefit analysis as a lot of that money comes right back into the economy in the form of pension benefits.

Malcolm responded:

I think that you are missing my point. The benefits from pensions going into the economy are included in the $80 billion. The "cost" of pension contributions coming out of the economy is ignored. You don't get to count what you like and ignore what you don't.

Also you are sucking and blowing on investment. If contributions going into pension funds are great for the economy because they are productively invested, then pensions coming out of pension funds are bad for the economy because they reduce the amounts that are productively invested.

The bottom line, with $46 billion going into public sector pension funds and $52 billion coming out, the net increase in spending looks more like $6 billion than $52 billion and the boost to the economy looks more like $10 billion than $80 billion.  

I think Malcolm is overstating the "cost of pension contributions coming out of the economy" and it is my belief that it's better the money is invested wisely over many generations by professional pension fund managers than left in the hands of Canadians to waste on useless goods and services (my opinion, most Canadians waste money on frivolous things).

Lastly, CAAT Pension Plan's CEO Derek Dobson put me in touch with Paul Smetamin, president of CANCEA and lead author of this study who had this to say on Malcolm's comments above:

Malcolm is referring to an impact study. The study was scoped by CPPLC as an economic contribution analysis, not an economic impact analysis or a savings cost-benefit analysis. 

As an aside, an impact or cost-benefit analysis wouldn’t be possible using usual economic metrics such as GDP as it is deliberately blind to utility and sustainability. This is a part of the reason why markets are slowly moving towards ESG themes. A proper cost-benefit analysis of a pension plan would have to take into account, inter alia, the characteristics of the plan and its utility for its members. This would require a social value analysis for retirees. We have recently performed such a study.

I thank Paul for his comments and look forward to reading his upcoming research where they perform a social value analysis for retirees.