Retirees who receive a guaranteed pension from their employer until their death are enough to arouse the jealousy of those who were forced to save without really knowing what the future held for them. But before you get carried away by bad feelings, you should know that this type of retirement plan is far from only benefiting seniors. In reality, all of society benefits from it.
Defined benefit (DB) plans keep the economy going by supporting consumption, they increase government revenues, improve business productivity, stabilize financial markets and even encourage volunteering and charitable giving. These positive effects and many others are amply documented in Canada and elsewhere in the world in a host of studies recently compiled by the Retirement Observatory1.
It is easy to imagine that retirees who enjoy guaranteed and indexed income are more satisfied with their retirement and less stressed than those who are struggling to make ends meet.
But it is interesting to discover all these other positive impacts of a guaranteed annuity that do not spontaneously come to mind.
In Ontario, for example, pensions paid to municipal retirees (public transit, electricity, police services) by OMERS generate annual revenues of $3.3 billion for the government in taxes. In Alberta, every $10 of pension generates economic spinoffs of $14.40. In the United States, pensions are found to be “particularly vital for small and rural communities” whose economies lack diversity. In all, 6.8 million jobs depend on monthly pensions.
This is without taking into account the fact that retirees who benefit from stable and predictable income have less recourse to the State’s social safety net.
“It is absolutely clear that we are saving ourselves a lot of socio-economic expenses,” says François L’Italien, coordinator of the Observatory and deputy director of the Institute for Research in Contemporary Economics. When a retiree can afford care, he or she alleviates the strain on public services.
“The Bank of Canada is sticking to its guns. DB plans contribute to the efficiency of our financial markets. They also help make our economy more resilient and optimal, because the funds invest over the long term in various sectors of the economy such as real estate and infrastructure,” adds Pierre Bergeron, actuary, retirement expert and partner at PBI. Conversely, mutual funds that small savers like contribute to market volatility given their search for short-term performance, according to a study of 47 countries.
Since the 2008 financial crisis, many private companies have abandoned their DB plans to improve the predictability of their expenses. Since then, the defined contribution plans and group RRSPs that replaced them do not allow future retirees to know with much precision the income they will have.
This is unfortunate, because a DB plan provides about 30% more money in retirement than an individual account, “even if you invested everything perfectly during your career,” Pierre Bergeron calculates, assuming identical savings amounts. This “efficiency” comes from the financial advantages of pooling and the investment expertise of pension funds.
We won’t put the toothpaste back in the tube. But there are solutions. Private companies can set up fixed-cost plans such as the Target Benefit (TB) and the Employee-Funded Pension Plan (EFPP). These pay pensions whose amount is determined in advance, without putting a restrictive and variable burden on the finances of private companies. The government should promote them.
“There is a fairly significant gap between the facts and the directions taken by Retraite Québec, which only cares about financial literacy,” laments François L’Italien.
In his opinion, the role of the State is to counterbalance this trend towards corporate irresponsibility and to speak of the “general interest” in the context where employers are part of the three pillars of our pension system.
The collective benefits of DB plans will not move employers, but studies on the subject have the merit of legitimizing the maintenance of these plans in the public service, an issue that occasionally raises criticism, notes Pierre Bergeron. Thanks to the data, a leveling down would be more difficult to justify.
In Canada, 26% of workers contribute to a DB plan. In the public service, the proportion climbs to 80%, according to Statistics Canada (2021). This brings me to the subject of public service salaries. In recent months, the unemployment rate has climbed and GDP growth has slowed. However, salaries have continued to increase. This curious situation led Desjardins to examine the data for the month of May to understand what is happening.
Conclusion: “The public sector is a disproportionate contributor to wage growth,” writes Randall Bartlett, senior director, Canadian economics at the Co-op.2.
In short, “already high” hourly wages in the public sector have “increased considerably” following recent negotiations with unions and hiring is “increasing significantly.” Moreover, public sector compensation “stands out particularly well” when compared to that offered by other levels of government and the private sector.
This is another reason to envy civil servants that is likely to spark debate.
1. Read the literature review of the Retirement Observatory
2. Read the Desjardins study