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.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

11 Responses to Taxpayers are paying too much for MP Pensions

  1. Maybe they are too high but in reality there aren’t that many members of parliament. They’re also representing the highest political offices in Canada and maybe should receive a better pension.

    • who gives a damn that they are representing the highest political offices in canada, they receive much more than they are worth, there are too many of them, they get paid too much for what they do. and they can retire early, they should take a 68 percent pay cut and all canadian tax payers should stick together and get this change to take place, your comment is so stupid, and you should be ashamed of yourself

  2. I think it is ridiculous to expect the average Canadian
    that cannot even think of retiring at 65 to pay an MP
    pension after only 6 years of work,considering that most
    of that money comes from the taxpayers pockets.
    Politicians need to lead by example,not by promises that
    are never kept.
    If the existing government reforms pension with no changes
    to their own,we need a revolution.

  3. The government wants to get rid of defined pension plans for all federal crown corporations because these defined pension plans they say are underfunded, yet, the government took money from these plans in the 80’s to pay down the country’s deficit as though the deficit belonged only to the gov’t employees and not to every citizen.

    I am a retiree of a crown corporation. At the crown corporation where I worked, the employees paid 60 percent of the pension and the government paid 40 percent of the pension. The reverse was true in the 70’s. It changed to 50/50 around the 80’s and changed again to 40 percent gov’t paid sometime thereafter.

    Many defined pension plans such as the big 3 have are 100 percent company paid for. Our gov’t bails those companies out when they are in trouble but takes money from its own federal workforce pensions when the country is in trouble. Nice !

  4. @JODI
    regardless of the split, the government contribution is our money, so we are contributing for your retirement. I worked for a private corporation who contributed to my retirement. They contributed out of THEIR revenues/profits, not the taxpayers pockets.

    And the article is about MP’s. Six years working and you get a pension. If you are only in office for 6 years and then don’t get reelected, you got fired. Who rewards a poor employee?

    • I agree I think MP’s pension plans are too rich. I think their pension plans should work the same way an average person’s does. It’s not fair to expect the average taxpayer to shoulder the major part of their pension contributions, after all many of these taxpayers do not have the benefit of company pensions themselves.

  5. I agree with your comments on Government pensions why should we the tax payers the people keeping this country afloat pay such a outrageous amount to MPs that make the money they make and look at ways to cut the amount the seniors make which are just getting by.Where is the justice in this.If any one needs their income reviewed it is MPs

  6. Hi Jim,

    Thanks for the insightful article – I couldn’t agree more. Hopefully you still respond to comments on older posts.

    I’ll paraphrase but you say ‘..The reality is this is just not going to happen..’ in regards to changing MP DB plans – why is this true? I feel this is the inherent issue, we let these elected folks dictate the terms and run on platforms to garner as much votes as possible.

    As a capitalist at heart, I have lost faith in the system and refuse to support it any further. If you are young and capable, there are plenty of opportunities internationally where you’re not taxed heavily to support the system.

    We’ll see what happens in 20 years when it’s my turn to think about retirement.

  7. If you can’t beat them join them. One needs to be an MP, a Hydro worker (any field, even the janitor) or a teacher to enjoy a more than generous retirement.

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