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Winners and Losers: The Inequities within Government-Sector, Defined-Benefit Pension Plans

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  • Geoffrey Young

    (Discovery Economic Consulting)

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    Abstract

    There are little-acknowledged yet striking inequities built into the payout formulas of defined-benefit (DB) pension plans, which are typically provided to government employees across Canada. An analysis of representative DB plans shows they systematically transfer income away from groups of employees in occupations with slow wage growth to employees in occupations or careers with higher wage growth rates; this often means from low-income clerks to high-income deputy ministers. The winners are “high-flying” employees who are likely to enjoy pensions that exceed the value of the accumulated employee and employer contributions in their “accounts” at retirement, while the losers are those who would be better off if they simply received the value of their contributions plus interest rather than rely on future payments from a discounted pension. However, public-sector DB plans could be redesigned to retain much of their appealing certainty and efficiency without redistributing retirement income among members to the extent that they now do.

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    Bibliographic Info

    Article provided by C.D. Howe Institute in its journal C.D. Howe Institute Commentary.

    Volume (Year): (2012)
    Issue (Month): 347 (April)
    Pages:

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    Handle: RePEc:cdh:commen:347

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    Related research

    Keywords: Pension Papers; Governance & Public Institutions; Canada; defined-benefit (DB) pension plans; public sector;

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    1. James E. Pesando, 2008. "Risky Assumptions: A closer Look at the Bearing of Investment Risk in Defined-Benefit Pension Plans," C.D. Howe Institute Commentary, C.D. Howe Institute, C.D. Howe Institute, issue 266, June.
    2. Casey B Mulligan, 1999. "Gerontocracy, Retirement, and Social Security," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 154, Chicago - Center for Study of Economy and State.
    3. Charles Sutcliffe, 2007. "Should Defined Benefit Pension Schemes be Career Average or Final Salary?," ICMA Centre Discussion Papers in Finance, Henley Business School, Reading University icma-dp2007-06, Henley Business School, Reading University.
    4. Tammy Schirle, 2008. "Greener Pastures: Understanding the Impact of Retirement Incentives in Defined-benefit Pension Plans," C.D. Howe Institute Commentary, C.D. Howe Institute, C.D. Howe Institute, issue 262, May.
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