hwarkentyne@watdragon.waterloo.edu (Kenneth Warkentyne) (03/03/88)
In article <15561@onfcanim.UUCP> dave@onfcanim.UUCP (Dave Martindale) writes:
=[RRSP rules are] still not fair.
=Under the current rules, if I contribute $2000 to the pension plan I
=can put another $1500 into an RRSP. That plus the $2000 my employer
=contributed makes $5500, $2000 short of the $7500 I could have
=stashed away without the company plan. Is there any rationale for
=this inequality?
=
=And some of us have no choice about contributing to the "company" pension
=plan - we have to belong, and the level of contributions is fixed.
=(My "company" is the federal government.)
I think this comparison is somewhat inaccurate. If I put $7,500 into
an RRSP, when I retire I get $7,500 plus however much that sum earned
as an investment. When Mr. Martindale retires, he will get a retirement
income based on his salary that is indexed to inflation. In most
cases (especially if you work for the government) the total benefits of
this package are better than what he would get if he withdrew from the
pension plan and contributed his money to an RRSP.
Ken Warkentynedave@onfcanim.UUCP (Dave Martindale) (03/03/88)
In article <5464@watdragon.waterloo.edu> hwarkentyne@watdragon.waterloo.edu (Kenneth Warkentyne) writes: >When Mr. Martindale retires, he will get a retirement >income based on his salary that is indexed to inflation. In most >cases (especially if you work for the government) the total benefits of >this package are better than what he would get if he withdrew from the >pension plan and contributed his money to an RRSP. Assuming that I work for the federal government for the next 33 years, and that the pension plan is still indexed to inflation when I retire. But, it just coincidental and perhaps ironic that I work for the government. My main comment applies to anyone who is required to belong to a company pension plan, where the payback at retirement is probably not indexed to inflation but rather bears at least some resemblance to money that was invested many years previously.
hwarkentyne@watdragon.waterloo.edu (Kenneth Warkentyne) (03/04/88)
I was just trying to point out that there are some extra benefits to belonging to a company pension plan that could conceivably make up for the apparent unfairness of the current RRSP contribution limits. I think the pertinent questions are: How much less tax would you pay if you could contribute up to the full $7,500/20% limit? Does this offset the amount of money that the company is paying towards your pension? How do the pension benefits look in comparison to the actual amount of money you contribute? And how does the return look in comparison to the ways in which you could invest the money on your own remembering that interest rates are low these days and the stock market quite erratic? Ken Warkentyne
doug@edson.UUCP (Doug Konrad) (03/04/88)
In article <15565@onfcanim.UUCP>, dave@onfcanim.UUCP (Dave Martindale) writes: > In article <5464@watdragon.waterloo.edu> hwarkentyne@watdragon.waterloo.edu (Kenneth Warkentyne) writes: > > >When Mr. Martindale retires, he will get a retirement > >income based on his salary that is indexed to inflation. In most [ text deleted ] > > But, it just coincidental and perhaps ironic that I work for the > government. My main comment applies to anyone who is required to > belong to a company pension plan, where the payback at retirement is > probably not indexed to inflation but rather bears at least some > resemblance to money that was invested many years previously. You have hit upon two issues here. First, a few (mostly government) pension plans are indexed to inflation. This means that if, when you retire, it is determined that you will receive a pension of $30,000 per year, and inflation turns out to be running at, say, 5%, you will receive a 5% increase in your pension. But this is not what most of the discussion is really about... There are two types of pension plan. I'm not sure of the exact names, but here's how they operated: 1) Deferred Benefit Plans: You contribute, and your company contributes. When you retire, you pension reflects your income during your last 5 years (typically) of employment. Your pension is NOT really linked to how much you contribute. If there is a shortage in the plan, your employer has to pay. 2) Money Purchase Plans: You contribute, and your company contributes. When you retire, the trustees of the pension plan take this pot of money which has accumulated over your employment, and buy an annuity. The annuity income is your pension. Now to the tax law... If you are a member of a deferred benefit plan, the lower RRSP contribution limit applies. Presumably, this is because deferred benefit plans give you inherent protection from inflation until retirement (and occaisonally, after). If you are a member of a money purchase plan, the $7,500 limit applies, less the contributions you make to the plan. Money purchase plans are definitely poorer than deferred benefit plans (unless you expect 40 years of deflation). This higher limit helps to compensate. It appears that what the government wants to do is to encourage people to provide for their own retirement. They want to do this equitably. If you chose to work for an employer with the more desirable deferred benefit plan, you need less help than the person with a money purchase plan. Hope this helps... Doug