By Sheryl Smolkin
Read this article and comments at Moneyville.ca
The federal election results were barely in before the Canadian Taxpayers Federation began calling for an end to lavish severance payments and pensions payable to retiring and defeated MPs.
To understand what the fuss is about, I asked pension consultant and financial planner Marilyn Lurz (Lynmar Associates) to help me with numbers. Here’s what I learned:
– Defeated MPs get a severance package equal to $78,886 (half of an MPs starting salary of $157,731).- Any MP for six years or longer who was defeated or did not run in the most recent election is entitled an unreduced pension at age 55 of 3 percent of the average of their highest five years of salary times total years of service.- The pension is indexed by after retirement.- MPs contribute about one dollar for every four dollars funded by the government.
That means that an MP with an average salary of $150,000 and six years of service will get a pension of $27,000 at age 55, increasing by 3.3 percent a year after retirement. However, Income Tax rules provide that the rest of us cannot receive a pension equal to more than 2 per cent of final average earnings per years of service. In addition, that pension must be reduced by 3 per cent a year from age 55 to 60 unless age plus service equals 80 (i.e. age 55 + 25 years of service).
Therefore, if you or I had final average earnings of $150,000 and six years of service when we left a public or private sector organization with a pension plan, the most we could receive is a pension of $15,300 at age 55($18,000 reduced by three per cent a year from age 55 to 60). Furthermore, not all public sector and few private sector defined benefit pension plans are indexed.
So even if his employer offers a top drawer defined benefit pension plan (which very few private sector organizations do) at best, our pension can be no more than 56 per cent of the pension available to retiring or defeated MPs.
As Lurz pointed out, when MPs are elected they may be in parliament for up to 10 or 12 years if they are really lucky, but packed around that on either side are other careers where they are going to be accruing pensions and saving in RRSPs.
The Canadian Taxpayer’s Federation advocates that the MPs defined benefit pension plan be converted to a defined contribution plan where the federal government matches contributions dollar for dollar, but I think that’s going too far.
If we want to attract quality people to government and we are asking them to put their personal and professional lives on hold to do so, we need to compensate them fairly. A race to the lowest common denominator is not the answer.
However, it seems to me that pensions for MPs should be consistent with the same tax rules that govern the rest of us. Here’s what I think would be a good idea:
- Defeated MPs continue to receive severance equal to six months for up to six years of service.
- They receive an additional month’s pay per year of service up to a maximum of 24 months.
- Drop the maximum pension formula from three per cent to two per cent of final average earnings times years of service, reduced if the member retires before age 60.
The net result would be that defeated longer serving MPs who may experience a higher level of career dislocation will have a larger cushion to fall back on when they return to the private sector but all MPs will still get a fair pension for their tenure in the House of Commons.