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Discussion Starter #1
I was reading this article in the National Post which seems to indicate that members of public service pensions are able to put away 34% of their income tax-free into RRSPs and their pension.

The article say:

The pre-budget recommendations from C.D. Howe president and CEO William Robson is to raise RRSP limits from the current 18% of earned income to 34% and bump the maximum dollar amount proportionally, from $22,000 to $42,000. The 34% is the amount of pay employees in the federal Public Service Plan enjoy.
Can anyone figure out where this 34% figure came from? I'm a member of the Public Service Pension Plan and the amount I can put into my RRSP each year combined with the amount put away in my pension does not come close to 34%.

Our pension plan is currently split with about 30 to 35% of contributions being made by employees, but that is being gradually increased to 40%. Once we're at that point in a couple of years I'll be contributing $4647 per year based on my current income and my employer will be contributing $6971 per year. My pension adjustment will be about $8727, leaving RRSP contribution room of about $3254. Adding up those RRSP and pension contributions and dividing by the total of my salary plus my employer's pension contribution equals 20.22%.

The 34% figure seems to have been pulled out of thin air to support the propositions of groups like CARP. Then again, maybe I'm missing something here, but I know my calculations are rock solid.

Comments?
 

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My guess would be the 34% is the amount you would have to contribute to an RRSP to get a roughly equal pension, taking into consideration what the federal government is contributing to the PSSP. However I would take anything coming out of the CD Howe Inst. (or published in the National Post) with a great heaping of salt. Their recent attacks on public pensions are disguised lobbying to raise RRSP contribution limits for the wealthy. Canadians have billions of dollars of unused contribution room now, so it isn't the 18% limit that is preventing them from saving for retirement, it's lack of disposible income, perhaps coupled with a lack of financial planning foresight..

Increasing the RRSP limit will principally benefit the wealthy. But it would be difficult for the C.D. Howe Institute to produce any convincing arguments as to why the rich should be granted a larger tax shelter than they have at present. Consequently they must disguise their true purpose by making invidious comparisons to public service pensions.
 

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I was reading this article in the National Post which seems to indicate that members of public service pensions are able to put away 34% of their income tax-free into RRSPs and their pension.

The article say:



Can anyone figure out where this 34% figure came from? I'm a member of the Public Service Pension Plan and the amount I can put into my RRSP each year combined with the amount put away in my pension does not come close to 34%.

Our pension plan is currently split with about 30 to 35% of contributions being made by employees, but that is being gradually increased to 40%. Once we're at that point in a couple of years I'll be contributing $4647 per year based on my current income and my employer will be contributing $6971 per year. My pension adjustment will be about $8727, leaving RRSP contribution room of about $3254. Adding up those RRSP and pension contributions and dividing by the total of my salary plus my employer's pension contribution equals 20.22%.

The 34% figure seems to have been pulled out of thin air to support the propositions of groups like CARP. Then again, maybe I'm missing something here, but I know my calculations are rock solid.

Comments?
The article quotes a CD Howe report that criticizes tax unfairness. Private individuals would have to save approximately 34% of their income to equal the payout of gov't defined benefit plans. There are other examples of tax inequality. For example, recipients of DB plans can income split with a spouse starting at age 55 while recipients of RRIF funds must wait until 65. Also, DB plans can inject more cash if they fall short of their actuarial-set goals. People who lose mony in RRSPs cannot. The 34% isn't what employees with a DB plan can save in an RRSP. It's what private individuals would need to save to accumulate an amount eqivalent to a gov't defined benefit pension plan.
 

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Increasing the RRSP limit will principally benefit the wealthy. But it would be difficult for the C.D. Howe Institute to produce any convincing arguments as to why the rich should be granted a larger tax shelter than they have at present. Consequently they must disguise their true purpose by making invidious comparisons to public service pensions.
What's invidious about the comparison? Public pension plans are exceptionally generous compared to pensions plans available to private individuals - perhaps too generous. After all, those public plans are paid for by the tax-payer, most of whom do not have defined-benefit plans.

I agree that raising RRSP limits alone will not solve the problem, but simple fairness dictate that we do so. Yes, it would benefit the wealthy, but the wealthy already pay higher taxes because of our progressive tax system. Denying them the opportunity to save as much as civil servants smacks of the politics of envy, not rational decision making.

I believe that Canadians need a top-up to the CPP, the so-called UPP (universal pension plan). The report also mentioned the tax rules that discriminate against RRSPs. Did you read the report? I actually found it well-balanced and thoughtful, not biased. If you declared the report biased without reading it, then I would question your objectivity.
 

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The DC Howe Institute's main thesis is that the RRSP limits need to be increased because the current limits are preventing private sector workers from saving sufficiently for retirement, particularly in comparison to workers such as federal public servants who belong to a DB pension plan.

According to a publication I found on the net in about 45 seconds:
• The median 2008 RRSP contribution was $2,700 vs. the $20,000 contribution limit
• As of 2008, cumulative Unused RRSP Contribution Limits in Canada exceeded
$600 billion.

So, raising RRSP limits is not going to help "average Canadians" save more for retirement because that isn't what's preventing them now. And the wealthy are not prevented from saving for retirement now, they are simply limited in how much they can save in a tax-sheltered account.

Unlike ~65% of Canadians, public servants actually have a pension plan; it is compulsory; they pay ~8.5% of their salary to it & CPP combined; the employer contributes to it substantially; and they don't have the choice of saying "Gee, do I buy the HDTV or contribute to my RRSP this year? So it not appropriate to claim their pension benefits are "unfair" in comparison to those of people who don't have mandatory retirement savings plans and whose employers don't contribute to a retirement plan as part of their compensation package.

PS. The current 18%/$22,000 annual limit equates to an annual income of $122K. I think the CD Howe Institute (or any other interested party) could make a reasonable case that, with inflationary increases in professional salaries, the $22,000 annual limit, and the lifetime limit, should be increased. It would be harder to make a public-policy case for putting more than 18% of one's annual income into a tax-deferred account. But this has nothing to do with public service compensation.
 

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Discussion Starter #6
After all, those public plans are paid for by the tax-payer, most of whom do not have defined-benefit plans.
Partly correct, but only because the taxpayer is the employer. I pay thousands of dollars each year into my pension and the remainder that gets contributed by my employer directly is nothing more than deferred compensation. I've posted about this before and continue to believe that I would be better off without a pension and without CPP. If I didn't have to contribute to either plan and my salary was increased to account for the contributions my employer no longer had to make, I'd be happy with that. But because other people would rather spend their money on the latest gadget and cars they can't afford rather than saving for retirement, I don't get that option.
 

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Partly correct, but only because the taxpayer is the employer. I pay thousands of dollars each year into my pension and the remainder that gets contributed by my employer directly is nothing more than deferred compensation.
Nonsense. If you truly believe that then why don't you quit your job and go into private industry? Taxpayers pay through the nose for defined benefit pension plans for the civil service. As the CD Howe report mentions, you would have to save 34% of your income to match the benefits from DB plans. The maximum you can save under present rules is 18%. And it still wouldn't be as good as a DB plan. A DB plan comes with longevity insurance; you draw it as long as you live. If you tried to buy an annuity with an RRSP you would need far more to match the longevity insurance of a DB plan than you would need to save within a DB plan.

I'll give examples. If you contribute to a RRSP or DC (defined contribution) plan, and the market tanks then you cannot make up your losses through extra contributions. In a DB plan, the employer i.e the taxpayers must contribute more. The income tax act discriminates against RRSPs and favours DB plans.
 

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According to a publication I found on the net in about 45 seconds:
• The median 2008 RRSP contribution was $2,700 vs. the $20,000 contribution limit
• As of 2008, cumulative Unused RRSP Contribution Limits in Canada exceeded
$600 billion.

So, raising RRSP limits is not going to help "average Canadians" save more for retirement because that isn't what's preventing them now. And the wealthy are not prevented from saving for retirement now, they are simply limited in how much they can save in a tax-sheltered account.
I'm glad you found the information so quickly. Of course, it helps to look for the right information. You're trying to debunk an argument that I never made. I never claimed that raising the RRSP contribution limit to $42,000 would help "average" Canadians. In fact, I said that it would benefit only wealthy Canadians. I also said it was the fair thing to do. What I did say was that a top-up to the CPP would help average Canadians, and I fully support that.

Have you read the report yet? If you haven't - and it certainly sound as if you haven't - then you shouldn't make assumptions about it. What the report does say is that the tax system discriminates against RRSP/DC plans and favours DB plans. It does not say that higher RRSP contribution rates are a cure-all, and neither do I.

For example, losses in a RRSP don't give one extra contribution room. Losses in a DB plan mandate extra contributions (from the employer). Employer contributions to RRSPs are subject to EI and CPP premiums while DB contributions are not. Group RRSPs must pay administrative fees from the RRSP while DB plans allow the deduction of expenses. Pension credits apply to DB plans at any age while income from an RRSP/RRIF can receive the credit only when recipient is 65 or older. Income from a DB can be split between spouses at age 55 while those using a RRIF must wait to 65 to do so. Also, RRIF rules force holders to take out large amounts. which limits their ability to defer tax.
 

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I've posted about this before and continue to believe that I would be better off without a pension and without CPP. If I didn't have to contribute to either plan and my salary was increased to account for the contributions my employer no longer had to make, I'd be happy with that. .
That is because you would be "overpaid" at that time. That is the complaint tax payers have with this plan. It is too rich and only available because the people that enforce the decisions, receive the benefits personally, as well.
 

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Milevsky would argue that public sector workers in DB pension plans are effectively participating in the staggered purchase of fixed income strips, with an embedded option to annuitize at retirement (by NOT taking a lump sum), plus mortality call options. Interesting way to think about it.

(See pages 7-8 of the linked article for the reference)
 

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I'll give examples. If you contribute to a RRSP or DC (defined contribution) plan, and the market tanks then you cannot make up your losses through extra contributions. In a DB plan, the employer i.e the taxpayers must contribute more. The income tax act discriminates against RRSPs and favours DB plans.

Private sector people also don't have "surpluses" in their RRSP's stolen to pay off the national debt.
 

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The article doesn't take into account the impact of the TFSA $5000 on ones retirement income.

However I would love to have some extra RRSP contribution room, even if the gov't eliminated the ability to contribute for past years.
 

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OGG said:
• The median 2008 RRSP contribution was $2,700 vs. the $20,000 contribution limit
The median income is far less than $111,000, I’m afraid … therefore, that is a meaningless comparison … though certainly misleading, perhaps even invidious???

I agree, though, that raising RRSP contribution limits would only help the tiny minority who actually use their full allowances now ... since I'm among that tiny minority, I would welcome any such increase ... doubt I'll see it, though.
 

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The median income is far less than $111,000, I’m afraid … therefore, that is a meaningless comparison … though certainly misleading, perhaps even invidious???

I agree, though, that raising RRSP contribution limits would only help the tiny minority who actually use their full allowances now ... since I'm among that tiny minority, I would welcome any such increase ... doubt I'll see it, though.
While the maxing out number of $20,000 implies a high income, it's the other numbers that are more interesting. An average contribution of $2,700 implies an average income of $15,000 if you are maxing out. The median income is more around the $40K level. The other number of $600 billion in unused contribution simply points out the fact that a large majority are not taking the opportunity to max out their RRSP contribution. For these people, changing RRSP limits will do little.

Oddly enough, the average contribution is about all I can contribute due to my pension adjustment.
 

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My point was meant to illustrate the irony ... someone who accuses the CDHowe of misleading arguments, then lobs out an equally misleading argument in response.

The $600 billion is also a somewhat misleading figure ... how much of that belongs to ...
• people who are already retired?* ...
• people who are otherwise out of the workforce and have no income against which to deduct? ...
• people with low income who may be better off with other methods?
• DB pension members who don't contribute because they already have a pension?
• people who won’t use RRSP because of misguided suspicions, but nevertheless are still saving money.

In many of these cases, the fact that the contribution room goes unused does not necessarily mean people will be destitute, even though they may not be making the best decisions.


* Anyone know what happens to a person's accumulated, carried-forward contribution room when they reach age 71? ... is it taken off the books?
 

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Who says the pensioners own the surplus?

Private sector people also don't have "surpluses" in their RRSP's stolen to pay off the national debt.
If a defined-benefit pension plan has an actuarial surplus, to whom does the surplus belong? My understanding is that the answer is complex and depends on the structure of the DBP. In some cases the sponsor/ employer can legally withdraw a surplus. In fact, the sponsor can, in case of a surplus, simply decline to contribute to bring the surplus down. If the money doesn't belong to the pensioners in the first place, then the money can't be "stolen" from them. Practically speaking, most DBPs are in deficit, so "stealing" surpluses is less frequent simply because there's little to take. Can you cite an example in Canada in which a surplus was "stolen" i.e. taken ilegally from a public DBP?

The point of my post wasn't to imply that DBPs are perfect - far from it. DBPs have serious drawbacks including insolvency of the sponsor. What I was stating is that Canadians who invest in RRSPs have less opportunity to save than the Canadians who invest in DBPs.
 

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If a defined-benefit pension plan has an actuarial surplus, to whom does the surplus belong? My understanding is that the answer is complex and depends on the structure of the DBP. In some cases the sponsor/ employer can legally withdraw a surplus. In fact, the sponsor can, in case of a surplus, simply decline to contribute to bring the surplus down. If the money doesn't belong to the pensioners in the first place, then the money can't be "stolen" from them. Practically speaking, most DBPs are in deficit, so "stealing" surpluses is less frequent simply because there's little to take. Can you cite an example in Canada in which a surplus was "stolen" i.e. taken ilegally from a public DBP?

Whether it was done legally or not, the pension legislation should be changed so that supluses stay in the pension. Whether that pension is for public or private sector employees.

It seems "unseemly" to strip out a surplus to pay off national debt, then complain that the employer is paying more than 50% share of contributions. The surplus could had stayed in, and the employer (the gov't) could have taken a "contribution holiday" and reduced their level of contributions.

It also seems a bit dishonest for certain "think tanks" to say nothing when that surplus was taken out, and then turn around and whine that the pension is "underfunded".


The point of my post wasn't to imply that DBPs are perfect - far from it. DBPs have serious drawbacks including insolvency of the sponsor. What I was stating is that Canadians who invest in RRSPs have less opportunity to save than the Canadians who invest in DBPs.
But how true is that assertion? If someone in the private sector makes more in salary/wages during their working life than their public counterpart, while the public sector person gets a better pension, who is better off?

If the private person simply took some (or all) of that higher compensation and saved/invested it, wouldn't they also have a similar retirement?

Isn't this why RRSP's were created in the first place? to provide a means for people without pensions to save/invest for retirement in a tax-deferred manner? People (public or private) who have DB or DC plans don't get to contribute as much (if any) to an RRSP.

Most DB pensions are "co-ordinated" with CPP so when the pensioner starts collecting CPP, their pension is clawed back by that amount. Someone with an RRSP/RRIF does not face that.

Someone with a RRSP has more volatility than DB, so that means they have to face the increased risk of loss, but also benefit on the upside. DB people get what they get. No upside, no downside.


Why are public sector employees called "greedy" for asking for 4% increases when private sector wages are rising at 9%? Then of course they are called "spoiled" and should accept pay freezes or cuts when economic times are not as good.

I have worked in both pubic and private sector so I have seen things from both sides. I don't think one is better than the other. They each have their upsides and disadvantages.
 

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Whether it was done legally or not, the pension legislation should be changed so that supluses stay in the pension. Whether that pension is for public or private sector employees.

That's your opinion, which seems to have shifted. Initially you had claimed that DBPs were subject to having surpluses "stolen" to pay off the national debt. Have you retracted that statement? If a DBP guarantees a certain level of benefits, why should those pensioners also be allowed to take more than they are entitled to? One could argue that those using DBPs sacrifice something for certainty of benefits; that's the choice they've made. Don't get me wrong, although you seem determined to do so. DBP surpluses are often subject to court battles and negotiations. I believe people are entitled to what they contributed and what they were promised, unless the benefits are re-negotiated. I just think the system is unfair to the sponsor. The sponsor is forced to make extra contributions if the DBP performs poorly, but has difficulty withdrawing the surplus when the DBP does well. That, along with future liability, is why DBPs are becoming rare in the private sector.
 

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But how true is that assertion? If someone in the private sector makes more in salary/wages during their working life than their public counterpart, while the public sector person gets a better pension, who is better off?
That's an...unusual argument. If I won the lottery, then I wouldn't have to worry either. I guess if I could score 50 goals per season in the NHL, then I wouldn't have to worry either. The report that this thread is based on (from the CD Howe) looked at savings opportunities for public vs private individuals with similar incomes. Obviously, someone making $200,000 per year can save more than someone making $40,000 per year. The real question is: how much money can someone making $40,000 in the public save vs someone making $40,000 in private industry.
If the private person simply took some (or all) of that higher compensation and saved/invested it, wouldn't they also have a similar retirement?
No, that's the whole point of the report

Isn't this why RRSP's were created in the first place? to provide a means for people without pensions to save/invest for retirement in a tax-deferred manner? People (public or private) who have DB or DC plans don't get to contribute as much (if any) to an RRSP.
Again the advantages and favourable tax treatment of DBPs outweigh the lower RRSP room




Why are public sector employees called "greedy" for asking for 4% increases when private sector wages are rising at 9%? Then of course they are called "spoiled" and should accept pay freezes or cuts when economic times are not as good.
At no time have I called public servants "greedy." Also, what's your source when you claim that private sector wages are rising by 9%? Even during the boom times in Alberta that didn't happen except for a few select sectors.

I have worked in both pubic and private sector so I have seen things from both sides. I don't think one is better than the other. They each have their upsides and disadvantages.
You need to look harder. The public sector is definitely better off when it comes to pensions.
 
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