Thursday, June 4, 2009

Puzzling Pensions

As I compile information for my blog I am seeing a very big trend towards pension reform. Many organizations are calling for a government run Supplemental Retirement Plan. This is an idea put forth by Canada's leading pension expert in a report from CD Howe Institute. Available in this PDF file.

There are some merits to the plan but I think out weighed by the inability of the government to run these types of plans efficiently.

I think the debate takes away from the real crisis that Canada's pension system is facing. That is the huge disparity between the public sector gold-plated pension and the average Canadian's pension. We have funneled billions into pension plans as Canadians but most has gone into the public employee plans.

Part of the problem is the huge contributions required to fund pensions to the level of the public sector plans. About 30% of payroll is needed. For example, employee contributions into the PSP pension plan, the federal employees plan, are set at a rate of 4.9% of annual salary up to $46,300 and 8.4% of annual salary above this amount. This guarantees the employee 70% of the final 5 years of salary in pension income.

The Ontario teachers average pension income is en excess of $40,000 per year.

In contrast, a self employed person pays 9.9% into CPP to get a $10,800 pension. A private citizen pays into CPP a higher rate but gets pension that is 75% lower than the typical public employee pension. For employees the contribution is 4.95% for employer and the same for employees.

How can private citizens and companies afford any more in contributions when combined they fund 9.9% to get a measly $10,000. There is no justification for additional contributions into these type of plans. This is what a supplementary plan would be. Just like the CPP but only voluntary.

It comes down to a cost benefit comparison. However, from the public employees point of view a 4.9% contribution guarantees 70% of final salary. Which would you prefer?

The need to fund these public sector plans is why we have seen a huge torrent of taxpayers money into them. The PSP plan in 2002 had $5.6Billion in assets but by 2009 taxpayers had upped the value of the plan to $38Billion . Thats about $4.5 B a year of your money. The total budget of the RCMP is only$4B per year.

Even these enormous contributions are inadequate. This year for example Canadian public sector plans are suffering shortfalls in excess of $100 Billion.

The plan trustees themselves estimated a total contribution requirement of 30% was required into the plan. The employee pays 4.9%. Where do you think the other 25% comes from.

Now if all Canadians were getting 25% pumped into their pension plans and they had to fund 4.95% I would say, bring on the supplementary plans!

It may be naive but if we did not have to fund tens of billions into these public servant pension plans every year, maybe our taxes would come down. This would leave us a little extra to save.

A solution need to be found. It might be in some form of supplementary pension plan but lets investigate all of the options first. See Superfunds

Let's fund both the private and public sector employee plans at the same rates. The public sector plans need to be converted into the type of plans most Canadians have that is; contributory. This way we will all be in the same boat together.

Why should the taxpayer have to pick up the tab for the gold-plated public employee pension plan?

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