BC Federation of Labour Pension Forum 2007

Transcription

1 BC Federation of Labour Pension Forum 2007 Income Replacement & Income Adequacy Paul Martin, BCGEU

2 Income Adequacy Why does it matter? Maintain a standard of living Provide lifetime income Provide economic security to those likely too old to work

3 Income Replacement How do we do it? Disciplined methodical saving arrangement Tax assisted for retirement purposes RPPs and RRSPs) Professional assistance required for investment policy Private Savings Definition of pension a sum of money paid regularly as retirement benefit or by way of patronage. (When used as a transitory verb usually used with off.)

4 Income Replacement (cont d) How much income is enough? Some consensus that 70% of pre-retirement income is sufficient Depends on desired standard of living Hence 2% plan design (2% times 35 years = 70%/year)

5 Maximum CPP (25%) and OAS (15%) benefits equals approximately 40% of the Year s Maximum Pensionable Earnings YMPE 2007 = $43,700 Income Replacement (cont d) What is the Public/Universal Program contribution to this objective? 40% of $43,700 = $17,480/year ($1,457/month) Two legs of a four-legged stool, not a bad start

6 RPP/Occupational pension plan RPPs are generally a defined benefit plan (formula based on replacing a % of salary) Tremendous challenge for the 60% of Canadian workers who aren t covered by an occupational pension plan RRSPs and private savings Income Replacement (cont d) How are you going to make up the difference?

7 Income Replacement (cont d) Will your pension make up the 30% difference? In two large public sector pension plans in BC, the average length of service at retirement is 17 years, which replaces about 23% after age 65 Therefore 40% (max CPP/OAS) + 23% = 63% Less attainable for members with short service and particularly women

8 Income Replacement (cont d) How are you going to make up the difference? (cont d) Rely on the pension More than half of Canadian workers don t have pension coverage over and above CPP/OAS Only through sheer determination and the patience of Job* will the objective be achieved *Definition of Job according to the Old Testament an upright (character) whose faith in God survived the test of repeated calamities

9 Income Replacement (cont d) What amount of funding is required? Pension Plans deal with this through a complex set of factors and assumptions i.e. age, salary, contribution rates, investment returns, disability and mortality rates RRSPs and private savings what contribution would they make to replace income? Are they based on reality or fantasy?

10 Income Replacement (cont d) What would the street pay you? age 65 Lifetime annuity Male $310 - $330/month Female $280 - $300/month

11 Income Replacement (cont d) What would the street pay you? (cont d) Industry would say you need $8-10 on deposit to give you $1/year of income for life (obviously that was when interest rates were higher) Is there an answer? Yes, it depends?

12 Two Observations 1. Individuals grossly underestimate how much is required to fund a flow of income at retirement (or for purchasing pensionable service) and its mirror image, 2. individuals overestimate how much a stream of income can be generated from a given amount of dollars

13 Impact of Inflation Imposes a burden on pensioners with fixed income Described as a monster that dines on your future Today s experience more moderate (in the 2 3% range) However, in the past it has been severe, peaked in 1980 at about 12.5%, precipitated by an oil shock

14 Diminishing Purchasing Power Rate of Inflation 3% 5% 10% 5 years years years

15 Conclusions Recognizing these factors earlier is preferable to later in terms of retirement planning No easy or cheap solutions Public Plans play a critical role and can expect to in the future given coverage rates Increasing life expectancy and early retirement aspirations pose an additional challenge Volatile investment markets pose challenges for all investors