Posted by Tim Stobbs on June 24, 2009
I amazed to some degree how this issue has been basically on the back burner for years until the boomers are finally close to retirement and are now getting pension envy for those civil servants that have defined benefit pension plans.
I suppose the issue only has recently come to a head after the market crash where those in defined contribution plans lost a lot while those in defined benefit will still have the exact same pension. Yet those same defined benefit plans also have a major issue: huge make up payments funded by the taxpayer.
This blog post does describe the situation fairly well and I have to agree that there is a longer term legacy cost issue here for all levels of government. In fact the true costs of these plans is why they have vanished from the private sector and perhaps it is time to do the same in governments as well. My own employer, a crown corporation, wised up to this issue decades ago and switched all the new employees over to the defined contribution plan to cut down the costs involved in running the company.
The reality is that despite the fact the payouts of defined benifit plans are generous, there is a price to be paid for them. They are really like golden handcuffs. You have to work for that employer for so many years in order to get the full pension amount. This is something I’m personally not interested in so in my mind I prefer the defined contribution plans, but I imagine there is a number of people looking at their retirement savings right now and who would be happy to put on some golden handcuffs.
So perhaps the key to this mess is two fold. Start closing down those defined benefit plans for civil servants and switch the new people over to defined contribution and then open up a voluntary extension to the Canada Pension Plan (CPP) which would allow people to choose to contribute more in order to double their payments from CPP. That way we could give people an option to have a more secure income for there retirement if they choose to do it. I disagree with making everyone do it, as I don’t feel the need to fund the boomers retirement any more than I already will be via taxes for the next few decades.
Just my thoughts. So do you have pension envy or are you happier in a defined contribution plan?