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Retirement Caps



May 02, 2009 – Comments (1)

I am still looking at pension issues.  Obviously I am thinking they are going to play out huge in the economy.

I was reviewing a benefit review initiative in California.  It still does not seem sustainable but it is enormously better then what's out there now.  It includes social security payments as part of the calculation of the maxium benefit of 67%.

Currently what we have in Canada is the Canadian Pension is independent of an employer pension so typically the pension plans promise 2% per year for a maximum of 70%, but then you get the Canada Pension on top of that which depending on your income could put a person over their pre-retirement income.  Additionally there is the Old Age Security which does not have contributions made to it.  With thesethe maximum benefit is $1426 per month, or about $17k per year.  There is a claw-back on the OAS , but you have to be making well over 66k before it starts.  So people making under $57k per year could find themselves with more income in retirement then when they were working.  And actually, with the increased tax deductions Canada gives senior more stays in their pocket.  Seniors get an age exemption on personal income tax and on property tax.  Pension amounts do not increase after 35 years of work, so no wonder so many in Canada retire before age 65.

The initiative proposes the following rates:

New Limits on Pension Benefits

The maximum defined benefit pension formulas have to be recalculated to provide, when combined with any Social Security payments, a 60-67% replacement income for new government employees who spend their entire career working for government or education agencies. The formulas used to calculate pension payments are as follows:

Police Officers and Firefighters
Other Safety
All other Non-Social Security
All other Social Security 2.2% x highest ave salary x years of service @55
1.8% x highest ave salary x years of service @60
1.5% highest ave salary x years of service @SS Age
1.0% highest ave salary x years of service @SS Age

So it looks like you would get your social security, which would make up 20-25% of income and then the worker pension would make up the rest, but it does not look like it would ever be expected to pay more then about 40% of the highest wage.

I completely disagree with the degree of the premium given to the first two on the list.  The police and firefighters are getting more then double the rate and they get to collect for an extra 10 years.  The cost of these services to the public because of pension funding ends up working out in the range of double what people think they cost.

Certainly in my assessment when I look at the numbers pensions I keep coming up with about 1% per year as a sustainable and affordable pension providing the employee and employer are making combined contributions in the 15-20% of salary range.

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