Pension Envy

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?

11 thoughts on “Pension Envy”

  1. I work for a broader public sector institution with a ‘cadillac’ defined benefit pension plan. But I have no interest in committing to be here for the next 30+ years so all it’s really done for me is lower my salary (the pension is so great that salaries aren’t competitive) and eat up all my RRSP room. I’ll be lucky to get back 2x my contributions, and those will probably be locked in until I’m 60. Defined benefit pensions are great if you want to be a lifer at one workplace. Not so great for the rest of us.

  2. I’m currently wearing the golden handcuffs with just over 6 years in to service. I can’t imagine sticking around for another 25 doing the same thing. That’s why I’m saving my own 10% on top of the pension to hopefully get away sooner.

  3. My work had a DB, but then switched so that new employee’s to a DC plan and offered existing employee’s an option to switch to the DC.

    I took the option, only time will tell if it will be better. I have 8 years of DB pension and the rest will be in DC.

    It was a hard decision but knowing that I want to retire no later than at 55 years of age, losing 6% a year under the DB plan for early retirement pretty much made my decision for me.

  4. DB plan member here (crown corp). I completely agree with the term “golden handcuffs”. The point made by Julie about eating up RRSP room strikes a chord with me as well. Don’t get me wrong, I feel really lucky to be a part of a DB plan especially given recent market fluctuations. However, the penalties and restrictions built into the DB can make one feel “locked in” to one employer. Some people I work with hate their jobs and continue to work because they are chasing an extra couple percentage points on the pension. I hope never to be that person.

  5. I’ve got a DB plan as well…from the comments so far it doesn’t seem that rare!
    Regardless, I can appreciate the downsides noted above, decreased RRSP room, need to stay with an employer long term.
    I do, however take issue with the term “golden handcuffs”. If you hate the job, staying for the pension is a fool’s play – much like saving every penny for retirement, even if it means eating dogfood and being miserable.
    Fortunately for me, I love my job, have some advancement prospects (I’ve been promoted 2 times in the last 4 years) and worked at 9 different offices within my regional area. I’ve got just 23 years to go until I have a full pension and my retirement worries are taken care of.

  6. i had a defined pension with canada biggest courier company and its so underfunds its not even funny.I transfered out to a Lira and it cost me a lot in a rrsp pension adjusment.I know I’m getting a better return and that the money is going to be there.Defined pension not so peace of mind all depends who its with and a lot of things can change.

  7. I’ve got a db plan, which is pretty rare in the industry I work in. However, it totally sucks unless you’re at the firm for at least 10 years, which I totally cannot see myself doing. My plan is for when I quit that I’ll take the commuted value and add it to my locked in plan. I’m hoping the commuted value will be half way decent.

  8. Interesting that most people who commented don’t really like their DB plans all that much. I suppose that shouldn’t be all that surprising given this blog is partly dedicated to early retirement.

    Tim

  9. My defined benefit plan allowed me to retire as early as age 55. I left at 56 and my pension drops down at age 65 by about the same amount as I will get from CPP.

    Another thought..Is the CPP a defined plan?

    CM

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