The following is a post by staff writer Teacher Man. This is his first post for Invest It Wisely; please join me in welcoming him to the site!
International Money Pile in Cash and Coins (Photo credit: epSos.de)
There has recently been a spate of articles on the internet about how jealous people are of public sector “gold-plated pensions” in Canada. I’m fairly certain that my teacher’s pension would fit that bill pretty well. In return for taking a pretty sizable chunk of money off of our cheques every month we get a pretty nice pension we can start receiving at 55 if we so choose (which most teachers do). I recently wrote a pretty thorough argument about why people have no reason to be jealous of my pension, but now I’m actually going to take the next step and say that I wish I could trade places with some of you defined contribution plan-types!
I simply hate the idea that I have to give up so much of my money. I don’t understand how it’s legal for a union to effectively say, “We know how to handle your money better than you do, you have NO CHOICE but to let us handle your pension, oh and we’ll be taking over 3% of your gross income in union dues as well.” Now the funny part is that my particular pension fund (Manitoba Teachers) actually does pretty well in terms of investment results. It trails its benchmark by about .5% over the last ten years, and consequently it is superior to about 95% of mutual funds.
Most pension funds aren’t nearly this well managed, yet it is still inferior to the results I would get if I had the exposure to equities that I should have in my retirement fund at my age, and if I merely invested through low-cost indexes and ETFs. Furthermore, I would save a ton of money on administrative and investment fees that are not shown in the investment return statistics.
All of the comparison about returns is irrelevant to the overall point that MY MONEY is being taken from me by my union without my permission. When you take a step back from the situation it’s easy to see that this should obviously be illegal. It is true that the pension plan I have will be better for the vast majority if people than if they had full control of their own retirement savings, but how does this justify taking the fruits of my labour from me without any choice involved. Shouldn’t we be encouraging people to understand their own personal financial situation and “teaching them to fish” instead of doing it for them? Wouldn’t we all be better off if our retirements were self-sustainable?
Besides the obvious moral issue I have with someone being allowed to steal my money from me on a monthly basis, I also have a couple of specific objections to defined benefit plans in general. The first one is that with so many baby boomers retiring, I have little faith that my contributions will equal what I eventually receive. I’m sure there will be something left in the kitty and that it will be politically spun in order to convince most people that everyone did their best, but I would be much more comfortable with my own money sitting in my own accounts.
The second objection is to the fact that if I am a single person and pass away suddenly, all of MY MONEY that was contributed to the fund just gets dispersed. Most plans have protocols in place to transfer your pension to your partner should you pass away, but there are obvious circumstances where a huge amount of assets that should have been under your control are never given to those whom you would want to have them.
Finally, in this day and age, where most people will go through more careers than they have fingers to count them on, defined benefit plans are much more cumbersome to deal with than a defined contribution plan is. My pension is not transferable to many other jobs, and so if I change positions I know have to worry about two pensions, and the benefits do not accumulate like they would if I was merely able to do what I wanted with the compensation I received for my labour (I know, it is a radical thought).
I want the freedom that comes with making my own investment choices. If others don’t want that freedom and the responsibility that goes with it then I think they should have the option to opt into the current pension plan. I just don’t understand how it’s legal to force me to blindly trust a third party with something as important as my retirement income. Gold-Plated pension fund? Ah, so that’s where my fees go, to pay for the gold plating… now I understand!
I’m 37 and have never worked at a company where I’ve been able to even consider being in a pension plan. And for only about a two year stretch did I even qualify for a matching 401(k). Point being that more and more companies are basically leaving it on the employee to save 100% toward retirement. I guess I can’t relate.
Well written points! Our family also has to deal with a pension and I feel very strongly the same way you do about it. Why do you HAVE to contribute? Who are they to say they can do a better job? I don’t mean to sound negative, but part of me will not be surprised the day we retire and the pension fund is unable to pay out what it should due to mismanagement or lack of funds. Although a 401k is not perfect, it still allows me to choose my own destiny – for good or for bad. And it follows me wherever I go!
I don’t know too many people who have the freedom to make their own investments chocies. It happens all the time, people invest their hard earned money right back to where it came from! Their company.
Meh – agree to disagree. The majority of people out there aren’t disciplined enough to save for their own retirement: many of your co-workers, young and old, included.
The pension is one small part of the union. Most consider it a perk and most would think you to be somewhat selfish, if not irrational, to not wan a DBP. Sure, you might switch jobs. I don’t know many teachers who do however.
Your union provides a mechanism to provide you a healthy retirement income. Sure, you might be able to do the same (or better) – but you may not do as well, or better too.
I love our DBP (Mrs. SPF and I each have one). We are not the best savers and certainly not savvy investors (we opt for self traded ETFs and major dividend paying companies). My DBP does for me what I should be doing if I do not have a DBP – taking a chunk of my salary and putting it toward the “golden” years. Heaven forbid I have/want to rely on OAS, right? 😉
I know that Ontario teachers have a great pension… but they certainly pay for it! Last I checked they were paying somewhere in the neighbourhood of 10% of their earnings towards their pension (a mandatory contribution as you said). In comparission, I contribute 3.5% of my salary towards my company pension. Literally peanuts in comparisson.
@MB – That really sucks man, I can understand why someone in your position (who hasn’t had a company match options) wouldn’t be all that empathetic. In Canada, this is almost unheard of. Admittedly, that is a much worse position than mine.
@MMD – Yes, this exactly sums up my feelings. How can I be told what to do with my money, and I would also be interested in knowing what sort of liability issues surround paying out what I was promised at each stage of my career.
@FMT – Investing right back into your company can be lucrative, but it can also be a serious mismanagement of a financial situation. Think about what happens if the company goes through tough times – you could loose your job and a major investment position all at the same time.
@SPF – HAHA, love the OAS comment. Just out of curiousity, do you know what sort of returns your DBP generates? My guess would be that your “we don’t know anything” investment plan probably beats the returns that other one generates. I agree that a DBP is preferable for the vast majority of people, but I dislike not having any choice – it doesn’t feel democratic or free.
The private sector has moved on from pensions…I hope that the public sector will. I doubt it. In some places, public pensions are boondoggles. Some workers qualify for pensions for working, say a year. It’s corrupt.
Pensions aren’t dead in the private sector, they have been transformed. If you haven’t seen them they are called cash balance accounts. I have two of these from companies I worked for. They work great. They have all the benefits of 401(k)s and pensions wrapped into one.
The company contributes towards it and it earns a standard rate of return. If you die, the money is left to your estate you don’t lose it. Once you leave the company, you have the option to leave it as a pension or to roll it over into an IRA of your own choosing. So, you can have it either way.
Great point on what happens to the money in a pension vs your own accounts if you pass away SFI.
I think your pension is wonderful, and personally, I wouldn’t want that money for investment purposes myself.
You and I are, of course, very different, but I would ask myself this:
Can I beat this benchmark over my lifetime as an investor? You mentioned this:
“It [your pension] trails its benchmark by about .5% over the last ten years, and consequently it is superior to about 95% of mutual funds.”
Such a pension, also, is as close to a guarantee as you’re going to get, right? At least, the B.C. teacher’s pension would fall under that notion. Don’t you receive a percentage of your income upon retirement?
If you have been able to do the same (beat your benchmark) with your RSP money over the last decade or so, then you likely have the discipline to rebalance low cost asset classes. But very few people have the ability to do this when markets go haywire.
If you are one of those people, I think you are very rare indeed. If you haven’t done it, but think you can do it, then you haven’t been tested as an investor yet, and it could end up being a lot tougher than you think.
Having said that, perhaps you really should have a choice to exercise that rare ability. But the pension, I believe, would be something that Dr. Spock would tout (you remember Star Trek) “The good of the many outweigh the good of the few.” If you wanted to control your pension, then others would too. And we know how well the average teacher would do. The average teacher would vastly underperform the benchmark. And that would be a shame. An expensive shame.
Incidentally, I am a teacher without a pension. And I would gladly give up a portion of my salary for the privilege of something similar to the B.C. Teacher’s Pension that I relinquished when I moved overseas.
When I lived in B.C., I invested on my own and I contributed to my pension as well. I think that’s a wonderful one-two combo. And I wouldn’t want all of my income (and no pension potential for an upcoming pension) if I lived in B.C. But I’m a bit of a wimp, I’ll freely admit.
Wow, honoured to have the famous, “Millionaire Teacher” himself comment on my post! Here is why we disagree Andrew. I don’t think I can beat the index or certain benchmarks during my time as an investor; however, my benchmark and the one that your pension is relative to are very different. Our pension funds invest in a much lower risk of assets than I would at this stage in my life, so my low-cost ETF portfolio should easily outperform my pension fund over time. Also, what if I would like to use that money to start a side business or buy lucrative real estate in a developing area? If you include investment options like this into the mix, I think it actually is possible to beat the stock market average over time. The basic principle that my money is MY MONEY and shouldn’t automatically go to a pension fund is just not negotiable for me.
You are almost certainly right that the vast majority of teachers would underperform the index, but I don’t see this as my problem. If you don’t know investing, than please feel free to stay with a pretty decent option in the teacher’s pension fund, it just feels wrong to force someone to give up their own money.
Hopefully we can agree on the next topic, I don’t feel good about semi-disagreeing with someone who has reached all the goals I’ve set for myself!
We haven’t disagreed, just defined a different option that each of us would take. If we were teaching in the same school, with a defined benefit option, I would take the DB option and you would take the cash to invest it. Having the option would make each of us happy. But for the greater good of the teachers (I know this sounds snobby but) I’m glad there’s no such option in Canada. I live where there’s a higher salary and no pension. And the financial train wrecks I see (teachers) everyday inspired me to write Millionaire Teacher in the first place. Out of nearly 100 teacher investment portfolios that I have seen over the past ten years, roughly two of them (in my estimation) are on track to have net worths that are somewhat close to what the average Canadian teacher has, upon retirement.
That is a very interesting set of data. Did you find teachers had the common problems most investors have where they didn’t invest for the long run, and got killed by brokerage and management fees?
It’s even simpler than that. Remove the pension from teachers, add 30% to their salary, and most won’t save the extra 30%. It’s the saving part that most people struggle with. Just last night, one of my colleagues was telling me about her spring break vacation (upcoming). She’s going to Bhutan, which costs less than $1000 to fly to from Singapore but her total package cost will be $7000. That might not be a typical level of extravagance (although 7 other teachers will go with her and shell out the same amount) but when more water flows into the bucket, most people prefer to spill it. Our (non pension) teachers at my school, on the whole, would be wealthier if somebody scooped a percentage of our earnings and put it towards a pension.
Wow… Very interesting. Can’t you pretty much by a tenth of Bhutan for $7,000? I though I read that they measure their GDP in happiness. There is a “survival of the fittest” part of me that then believes that these teachers don’t deserve to retire early! But your obviously right about having to protect those people from themselves.
I’m a teacher in the US. Instead of social security being withdrawn from my pay check, my pension plan withdraws the money instead. As far as I know, I have no other choice. Now, some people would say the pension is safer than social security. And I’d have to agree that it will be worth more than SS when I retire. However, my pension is not a government backed retirement plan, so there is more of a chance of it “disappearing” before I retire. Actually, the pension I have no other choice but to contribute to is suffering financial woes right now and I’m a little concerned. Of course, I have the option to invest in a 403(b) and an IRA (which are on my list to do this year), but all that money I’ve invested into my pension may disappear in the future. So, there’s really no need to be jealous of pension plans. It’s not like it’s a pot of gold waiting at the end of the rainbow.
Actually, I take another stance.
I like the fact I have a DB pension because a) it’s great and b) I turn off part of my brain for that part of my retirement plan…I don’t have to worry about it.
I’m 11 years into my DB plan, which is not gold-plated but it’s close. I like the security that comes with that. If I choose to work another 20 years, if they’ll have me here, then I’ll be “set” as long as my mortgage is paid off before I retire. Nothing in life is ever guaranteed though.
I agree with SPF – the majority of people “out there” aren’t disciplined enough to save for their own retirement. Case in point. Most Canadians own mutual funds and are happy paying 2-3% fees for them.
Without DB plans, many Canadians would be in a serious financial mess.
I’m not relying on the government for any OAS, GIS or CPP. We’re going to be in a huge financial crisis in another 20 years (just my guess) when we have more people wanting to retire or are retired, than working. You’ll be thankful for that plated-pension then 🙂
Thoughts my friend?
Interesting response MOA. I would have thought that someone of your investing acumen would like to control your own cash. I definitely agree with you and Andrew that DB plans are the far better option for most people (and I think your mutual fund example is a great support for the argument), but I don’t understand why in a free-market democracy, where choice is paramount, my union can unilaterally decided to take my money from me? I’m not sure how thankful for my gold-plated pension I will be. Are these funds really that much more solvent/safe than CPP itself? I have the most faith in being able to collect my money if it stays my money, in an account controlled by the entity with the biggest interest in my personal well-being – Me!
I know what you mean – I’d like at least the option to take over my pension plan, but then again if everyone does this at your firm and a bunch of people pick losers, what do you do then?
Hey Teacher Man,
I wonder if your pension is different to the one I gave up. I don’t think I ever thought of its performance, or even knew that it was relevant. All I knew was that (supposedly) if I was 58 years old, with 32 years of service, I would receive 70% of my salary (my average salary over the previous five years) for the rest of my life. It sounds like your pension and the one I relinquished are quite different. I would actually pay a lot of money for a pension, such as the one I gave up. But….I’m on my own now, as a private school teacher.
Our pensions are very similar Andrew, we have the same 70% figure, but I looked into the returns last year when I read some information about how the fund might be underfunded. Check out what benchmark your old pension fund is using, and what their targeted return is. You’re right that on some level it doesn’t really matter since it shouldn’t affect the returns to individual teachers, but I think the point is relevant to my overall argument.
I guess the grass is always greener on the other side LOL
Hey TM,
It’s good to read your thoughts, as well as everyone else’s. I do agree that it’s good to have the choice. What if the pension wasn’t so well managed? What if the managers were squandering the money, and you had no choice nor say in the matter? Also, some people just value spending more money in the present, and while we can inform them that it goes against their goals of having a good retirement, we can’t judge them if they truly do prefer taking that expensive vacation, today. I believe in saving more for tomorrow, but others believe in saving less to enjoy more, today. That is their choice.
I also agree that having additional funds to start your own business would be a great option.
My personal experience is a bit different, since I don’t have a pension and though I was very lucky to enjoy a RRSP match previously, I am pretty much responsible for securing my own retirement. That knowledge forces me to save more in the present, since I don’t fully expect the government plans to be there when it’s my turn to withdraw. By the time I get to the 60s, OAS or whatever succeeds it may very well be pushed to the 80s, and so might be the CPP!
If you increase your savings rate you can simply consider the pension as a bond-like portion of your portfolio and put more into stocks or private investments on your own. As much as people like their big pensions they would scream if the deductions were at the kind of savings rate that will really get you somewhere fast!
In fact if you believe that you have good job security and pension security you could take the Moshe Milevsky approach and use leverage so you can invest more outside your pension without impacting your cashflow as much. Of course this is an advanced move but if you prefer to go it on your own I’m guess you’re comfortable with the risks.
When I was a state employee we had a pension plan. They took out 9% of my paycheck pre-tax and matched it with 13%. However, you had absolutely no say in what your investments were in. You did get a defined benefit when you retired depending upon how long you worked and how high your salary is. Now that I am federal, I like their plan more. You can contribute as much or as little as you want (up to 17,000) and you have several funds to choose from.
I think everyone is forgetting here that you have a choice here….you don’t have to work at a place that has a union to fight for you, you can find a place to work that has no pension plan, which is now becoming the norm or better yet, go to work for yourself and you can control your own money. It really makes me sad that no one ever seems content with what they have, or better, been blessed with…..the grass is always greener (until you get to the other side).
Count your blessings that you have a secure pension to count on and with the money I know you’re making employed as a teacher in Canada, invest it as you see fit. And that’s another blessing to count…..but that’s a thought for another day.
And just to clarify things, yes, I live in Canada.