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DB vs. DC Pensions

72881 Views 183 Replies 37 Participants Last post by  Eclectic12
The series of articles in the Globe and Mail about the growing problem of underfunded public and private pensions has got me thinking.

Are DB really that good? I know from some of MDJ's posts that Federal Government Employees can get 70% of their average salary from their last few years of service, but I think that's rare. In my public pension plan, it appears that % of salary paid out are about 55%, 47%, 39% for 35yrs, 30yrs, and 25yrs of service respectively.

Given that my contribution rates keep going up (20% next year - half from employer), I was wondering whether I'd be better off with my employer simply giving me that money.

I made some preliminary models, and I'm actually finding it difficult to see an obvious benefit to the DB model. My rates of returns over the years of service were very modest (4-5%) - and considering many DB pension plans have severe penalties for early retirement, I'm starting to think I wish I had a DC plan (with similar rates of employer matching funds).

Taxes obviously play a major role, but lets assume all the money goes into an RRSP so is not taxed in either the pension, or in my own hands.

I'm I way off base here? Thoughts? :confused:
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It's interesting that those in DB plans think DC is better and those in DC plans think DB is better. Isn't the grass always greener on the other side?

I work in the private sector and would not be very comfortable being in a DB plan because we are seeing what's happening to pensioners at Nortel, GM and other troubled companies. I'd rather be in a DC plan and assume the risk of a shortfall.

Even before we get to the risks that MoneyGal is talking about, there are 2 risks with DC plans: (1) Saving risk and (2) Investment risk. Employees in DC plans may not be saving enough for their retirement and typically they are on their own when it comes to managing their portfolios.

Despite these risks, I don't see how the private sector will go back to DB plans. So many have been burned as these plans turned out to be far more expensive than initial estimates.
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Yes, but:

1. public sector workers do not contribute 15% of the totals required to fund their pensions (because of the last-best earnings issue I described earlier) and

2. what 55-year-old female private sector worker earning $60-$65K do you know who has been able to build up a lump sum of $1M by making maximum RRSP and TFSA contributions?
A worker retiring at 55, with a $50K full pension from the Federal Govt.,would have worked for 35 years since age 20. How many such workers do you know?

Regardless, let's compare apples-to-apples. Federal Govt. employees do not collect CPP. Private sector employees do. Another worker who worked the same length of time in the private sector will probably collect full CPP, which will pay benefits of $10K per year from age 65. So, a private sector worker retiring at 55, should have a lump sum that is less than $1 million, say $850K or so.

I ran a quick calculation. A worker starting off at $30K and ending with $65K over 35 years, contributing 18% of her salary to a RRSP and earning 3% on her investments (all real dollars), will be left with $460K in her account. So, yes, even if you make adjustments, public sector pensions come out as quite generous for those retiring very early.

MoneyGal, where do you find returns for inflation-adjusted annuities. I'd like to play around with different retirement ages.
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With all due respect, I don't think the C. D. Howe is comparing apples to apples. One cannot simply compare a public sector $50K salary + DB with a $50K private sector salary. IMO the comparison should be between what the same job would pay in the public sector and the private sector to figure out whether we have a fairness issue. If the same job paid $60K and one can save 9% of the salary in a RRSP plus receive CPP benefits, the numbers will likely show the difference isn't very much.
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