Pensions

BC's Legislators cried crocodile tears over not having a pension plan during their aborted attempt to rob the public purse. Judging from remarks made during debate on the repeal of Bill 17 both in the House and to the news media, many of the MLAs still don't get it.

Revenue Canada's interpretation bulletin IT-124R6 on contributions to RRSPs describes the current rules as part of the federal government's "pension reform", i.e. an RRSP is a pension plan. There are two types of pension plans, money purchase (sometimes called defined contribution) and defined benefit. As investment returns have fluctuated over the decades enthusiasm for each type of plan has grown and waned. When interest rates were double digit many people who participated in defined benefit plans, the kind that give you a percentage of your final years' pay based on how many year you serve, wanted to switch to money purchase plans. When investment returns exceed the actuarial assumptions for defined benefit plans a surplus is created which stimulates a debate over who owns the surplus and whether contributions can be reduced. The courts have ruled in favour of employees owning such surpluses which irks some employers who feel that is not fair since they hold the liability if there is a shortfall. Those issues don't exist for money purchase plans where people get exactly what they see in their investment account, and which gives beneficiaries the ability to make their own investment decisions. Some people think of defined benefit plans as the only "real" pension plans while money purchase plans are described as glorified savings accounts, but few Canadians have defined benefit plans. Statistics Canada reports that about 5.5 million workers belong to all types of employer pension plans. "At the end of 2002, there were just over 4.5 million members covered in 6,777 defined benefit plans, or 82% of RPP members of all types of RPPs. The majority of the members of defined benefit plans are employed in the public sector." Data by province are not reported, but assuming BC accounts for 12% of the total would imply that 540,000 British Columbians enjoy defined benefit pension plans (roughly 25% of the workforce).

A typical public sector defined benefit pension plan pays 2% per year of service of the average of the best five year average of final earnings (the MLAs wanted best three years). Tying the pension to final earnings is particularly important since that is when earnings are typically highest. It is no wonder that MLAs wanted that type of plan. It takes a civil servant over 32 years to qualify for 65% of final earnings; the MLAs proposed to become entitled to the same benefit in just 12 years.

Revenue Canada publishes data based on income tax returns. The most recent data are for the tax year 2002; they show that out of 2,929,240 tax returns for BC, 470,330 claimed deductions for registered pension plans and 776,470 claimed deductions for RRSPs; only 1,790,900 reported employment income that would have made them eligible for making a RRSP contribution. Only 25% of British Columbians who reported employment income, had employment income in excess of $50,000, yet some MLAs feel hard done by with their indexed $75,400 per year; 71% of those who reported employment income in excess of $50,000 also made deductions for RRSP contributions but only 34% of those making less than $50,000 in employment income made a RRSP contribution. It's safe to say that most folks would consider it a good deal to get an employer paid RRSP contribution of $6,786 as is the minimum enjoyed by MLAs.

At a 5% rate of investment return, an MLA who matched the public contribution of $6,786, so as to take full advantage of the tax deduction and ability to save for retirement, would have $217,027 in an RRSP after 12 years - in addition to anything contributed before being elected. Most people build up their retirement income over a lifetime of working, not with one stroke of the legislative pen and just 12 years of service. Not allowing for inflation, in current dollars, at 5% interest the minimum an MLA would accumulate in an RRSP over 32 years in this example of matching $6,786 contributions would be $1,021,996; combined with Canada Pension and OAS most British Columbians would consider that a very good pension.