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What happened was this: beforehand, the government was calculating the net present value (NPV) of its pension obligations using a historical interest rate — specifically, a weighted average of what it received from its long-term bonds over the past 20 years. This is a backward-looking measure, and in this case it captured years of higher interest rates than the ones lenders will be able to obtain if you believe the futures markets.

This 'accounting change' isn't just an idle theoretical matter

As a guess at future returns on bonds, this historical average has the alleged advantage of being quite stable; because there are two decades of data captured in the number, it doesn’t change much from year to year. This is a nice feature for a government budget to incorporate, from the particular point of view of someone making a government budget.

The problem is that history is literally history. Other users of the budget might reasonably wonder why we should, in principle, completely ignore forward-looking price estimates provided by the “yield curve” of the government’s bonds. The bond market has the same information about past yields that we were already using to calculate pension NPVs, so even if history is a very trustworthy guide, as opponents of the accounting change are insisting, using the yield curve (as the government is now) should still be better in principle. Otherwise, we are throwing out information.

The problem is a practical one: the yield curve wiggles around a lot more vigorously than a weighted average of historic rates will. And when interest rates are low, as they are now, small changes, or ones that appear small, can have enormous effects on NPVs. Someone in favour of the “mark-to-market” change that Finance made might say that this is perfectly appropriate. Because the unfunded pension liabilities of Ottawa are cosmically vast — we’re talking about a total NPV of roughly $200 billion, calculated by the new method — the medium-term fiscal balance really should be seen to whip around wildly when there are small interest-rate fluctuations.