| || ||Prince Owusu |
| || ||Brent Dowdall |
Forecasting and Analysis Division
New Brunswick is facing a difficult fiscal situation, compared with other provinces. But in one area, it is ahead of its provincial counterparts. New Brunswick introduced a new shared-risk pension model in 2012. Under the former public service pension plan, retired civil servants got automatic cost-of-living increases (up to a maximum of 5 per cent a year), and the government—therefore, the taxpayers—bore the sole responsibility for the benefit. Under the reform, base benefits are not guaranteed, and the risk is spread among the taxpayers, employees, and retirees.
While the new model has roiled retired public servants, New Brunswick taxpayers will no longer be called on to fully fund the liabilities of the public pension plan during times when it is underfunded. The reforms were enacted by the previous Progressive Conservative government, following consultation with most of the province’s public sector labour unions. In April, the current Liberal government proposed changes to aspects of the legislation in an effort to reach agreement with public servants who retired in 2014 and are now bearing the brunt of the reforms for the first time.
The impetus for reform was the highly underfunded nature of the provincial defined-benefit pension plan. The public pension fund faced a shortfall of $1 billion as of April 2012. And in the 2013–14 fiscal year, the provincial government made a one-time special payment of $110 million to the fund, which accounted for a whopping 20 per cent of the $538‑million deficit projected for that fiscal year. The provincial fiscal picture is still challenging, with the deficit expected to be $476 million in 2015–16. Clearly, without changes, the provincial government will be forced to top up the fund every year to ensure its solvency.
According to latest estimates from Statistics Canada, New Brunswick residents who retire at age 65 will live on average another 20 years—13 years longer than what they could expect in the 1960s and longer still than when public pensions were first formulated and put in place about six decades ago. In fact, life expectancy at 65 has been increasing by, on average, two months every year over the last decade. The proportion of those aged 65 and older, which currently accounts for 18 per cent of New Brunswick’s population, is projected to rise to 31 per cent by 2035 (the second highest among the provinces and territories). As a result, the elderly dependency ratio1 will more than double in the province, going from 30 per cent today to 61 per cent by 2035. (See Chart 1.)
The implications of the increase in the share of the population 65 and over are wide ranging. On top of people drawing public pensions longer than originally anticipated, the aging of the population will lower the province’s productive capacity and shave, on average, 0.2 per cent from the province’s potential economic growth each year from 2020 to 2035. With the economy failing to generate enough revenues through economic growth, the provincial government will be forced to raise tax rates (the burden of which will likely fall disproportionally on the dwindling working-age group) to finance higher government spending on pensions and health care.
New Brunswick’s risk-sharing system will require public sector workers to assume some of the risk that had been carried by the taxpayers alone. This will help reduce the pressure on the public purse, leaving room for the government to fund other programs.
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