Taxpayers are paying too much for MP Pensions
Recently I was on Alberta Primetime talking about a recent report issued by the Canadian Taxpayers Federation that shocked me.
Defined Benefit Pensions are expensive
It’s very common for those that make high income and get good benefits to be targets for media and the average Canadians. Being a bit of a capitalist, I recognize that sometimes success comes from hard work and effort but there are times when the criticism is justified as in the case of MP Pensions. I work with Government employees a lot through my financial education programs in the workplace and have a good understanding of defined benefit pensions offered by both the Federal Government and the provincial governments (LAPP, PSPP and MEPP) but I was shocked to read about how lucrative the MP pensions were.
Defined Benefit Pensions are becoming extinct
The future of defined benefit pensions is on shaky ground as it is. Most companies have killed their defined benefit pensions and replaced them with either defined contribution pensions or group RRSP plans. Only governments and unions continue to support these types of benefits because they are costly to fund.
Typically the benefit is based on a formula that includes years of service and average salary. To get the maximum pension in the best defined benefit pension, you need 35 years of service and a pension factor of 2%. That means you can replace 70% of your pre-retirement income with that pension. Many pensions do not have a pension factor of 2% because it’s too expensive to fund those plans.
To pay for that, 35 years of service you need contributions of about 19% to 25% of your annual income to fund each year of service with lifetime income. Generally these contributions are shared by the employer and the employee. For every dollar the employee contributes, the employer contributes a dollar to a tow dollars depending on the employer. If the employer did not help fund these plans it would too painful for most people to fund these pensions on their own.
MP Benefits are ridiculously high
The benefit of the MP pension starts at 3% and can grow the factor based on additional roles like party leader or speaker of the house. Although the pension is still capped at 75% of salary, a MP can grow their pension 50 to 150 times faster that someone with a great defined benefit pension.
The ridiculous part of the MP Pension is the funding. The MP contributes 7% of salary and the rest is funded by the taxpayers. According to the Canadian Taxpayers Federation, for every dollar the MP contributes, taxpayers are contributing $10 to $25 (remember employers of regular defined benefit pension are contributing $1 for every $1 contributed by the employee).
My two cents
This is ridiculous. Something is not right when an MP works for 6 years and gets the equivalent pension of a Canadian worker who works for 30 years.
The Harper Government just release new proposed legislation on Pooled Registered Pension Plans, which tries to address the retirement gap problem in Canada. If these plans are so great, they should give up their overly rich pensions and fund their pension plans just like other Canadians.
The reality is this is just not going to happen but they should change their defined benefit pension to be in line with other defined benefit pensions at a minimum. In fact, Federal government employees have about a 60/40 split when it comes to funding their pension (employee puts in 40% and the employer puts in 60%). The employee contribution is 5.8% up to the YMPE and 8.4% thereafter. The employer contribution is 8.7% up to the YMPE and 12.6% thereafter.
The math on the MP pensions is not fair for Canadians. I can accept that MPs should get some retirement benefit but they must respect that their employer contributions are really the taxpayers money. No other employer would ever provide this rich of a pension because it is just too costly to put in $10 to $25 for every dollar contributed to the pension by the employee.
Help spread the word. If you disagree with these lucrative pensions, say so below.