I keep thinking that both of these plans are a wonderful idea, even as my left-wing in-laws keep ranting on how it will just benefit "the rich". Meanwhile, they are all government employees with defined benefit pensions and an ability to retire at age 60 for which, if I wanted an equivalent annuity that would pay to age 90, would have to shell out between $1.5-2.0 million. It has always been a pet peeve of mine that to save the equivalent of a civil service pension I have to set aside at least $50,000 a year over an equivalent career span yet RRSPs only allow me to put in half that amount. As such, for those of us in the private sector, these two budget additions are a welcome additional opportunity to save for retirement.
As for the family tax cut, I have never understood why there is so much resistance to it in this country. All benefits (child-care, GST rebate, etc.) are based on household income, not individual income, yet all income tax is levied solely on individual income up to this point. Let's be consistent and choose one of the other. A partial income split is finally a step in the right direction.
I'm really quite ignorant about this (but trying to learn!) and I'm hoping you could shed some light. I have a civil service defined benefit pension plan and I thought my contributions were deducted from the amount I could put into my RRSP. Am I wrong? Are they deducted at a different rate? Is there something else in the pension plan that makes it a better deal than RRSP contributions?
For me, the down side is that the very earliest I can access most of that money I've contributed is at age 50, and that's only if I take a lump sum when I retire. The bulk of it will be put in a LIRA and a small portion will be taxed and available. If I wait to get the pension benefit I need to be 55 for a reduced pension, or 65 with a full pension. Not an issue for those planning on working that long. But I'm not.
Pension contributions are deducted from the RRSP limits through something called an RRSP adjustment. In my province, civil servants have approximately 10% of their earnings withheld, the idea being that half of their pension is through their own contributions, the other half through government.
Here is where a defined benefit pension really shines, and a lot of civil servants do not appear to realize this:
Statistically, if you are a man, you will likely die at age 78. That is what actuarial tables will tell you. Your pension contributions are based on these actuarial table, i.e., they assume that if you retire at 60, you will live for another 18 years. However, if you live to 122 years old, you will still be covered and receive your pension. The longevity risk is taken by government.
If you are in the private sector, you cannot assume that you will die at 78 because actuarial principles do not apply at the individual level. Let's say you play it safe and assume you will live until 90. The equivalent RRSP savings to a civil service pension in that case is one that pays for 30 years, not 18 years. To obtain an annuity (an insurance product that offers a guaranteed monthly payout until death) that does not expire until age 90 will cost a lot more than the actuarially determined pension contributions. That issue is further compounded by the low interest rate environment we are currently in.
Accordingly, the "commuted value" of a government pension that pays around $50,000 a year at age 60 may only be about $350,000, but it is really the equivalent of a $1.5 million annuity, because the significant impact of longevity risk is not calculated into the commuted value.
For that reason, I have never understood civil servants that take the commuted value option upon retirement. My mother-in-law did so, and when my wife told me she was surprised when I recoiled in absolute horror, thinking my mother-in-law had just voluntarily signed away at least a million dollars. If I was a civil servant, I would defend my defined pension benefit entitlement to the death.
The other significant advantage of a government pension is that it is based on the five highest-paying earning years. This means that the optimal strategy for a civil service career is to keep a relatively low profile with minimal responsibility while the kids are young and you want work-life balance, but aggressively push for promotions to the director or senior manager level around age 50 to get in a few high-paying years to up the pension entitlement. That strategy does not work in the private sector, because the worth of your RRSPs is not based on your highest-earning years, but based on the cumulative total of all years. In other words, to have a high RRSP, you have to save aggressively every year, while to get a high pension, you can get 20 years of "slack" time followed by a few years of aggressive hustling. The smartest civil servants I have met understand this dynamic and transition from relatively meek officials who are out the door at 4:00 PM while they have families to aggressively maneuvering for promotions a few years before they retire. The 20 years of slack time usually provide sufficient learning time to understand the politics involved in getting these promotions and build networks with the right people.
