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Hello Oliver and all, just a quick response to Oliver's comments. I agree with everything you (and others) say regarding the risk element inherent in our current DC system. Just to be fair, there are options for anybody to alleviate this
risk, for example, shifting towards a more 'conservative'
portfolio once you get closer to retirement (of course, this eats
into expected returns, but there is no free lunch). DB also has
its own risks, especially, whe you don't outlive your retirement
date for very long. DC is immune to this type of risk since your
remaining capital balance will simply be passed on to spouse or
the next generation. In the interest of an informed discussion, though, I feel that
Oliver's numbers paint a picture of DC that is way to gloomy,
regarding the comparison of returns. You say that you currently have 500,000 in your DC plan and a
15-20 years retirement horizon. I used a compound interest
calculator (here is one at
https://www.getsmarteraboutmoney.ca/calculators/compound-interest-calculator/
, there are many others of course) to find that with 500,000 start
capital and 1,000 biweekly contributions (RRSP maxed out to
26,000/year)), your capital will grow to about 1,600.000 over 15
years, *assuming a 5 per cent return*. If the SFUFA numbers are
correct and 500,000 buys a 35,000 pension, this would mean an
annual pension of about 105,000 for you (or 15,000 more than you
say DB would give you), after 15 years. Praise to the gods of
compound interest! More generally, I believe that DB has significant advantages for
faculty members that retire over the next 15-20 years -- assuming
they do *not* use DC money in their accounts to buy DB years.
This is because DB has the biggest advantages (relative to DC) in
the early years of a system switch. Leaving your existing capital
in DC means it grows until retirement at at a healthy rate. At the
same time, starting in the new DB plan means good initial returns.
For example, if you think about retiring at 65, have 10 years to
go, and expect a final (5-yr-avg) income of 160,000, DB will pay
32,000 per year. The alternative, saving 26,000 in DC for 10 years
at 5 per cent, would result in a retirement capital of 335000
which only buys 24,000 anual pension. So how does this 'trick'
work? In the transition period (until everybody starts his career
in DB), DB pays out quite a lot because the pension amount is
based on the final pay cheque which is high - for somebody who
starts at 30 and 'retires' after 10 years, the situation would be
different. (Fine print: of course I leave out any discussion of
employee contributions under DC and DB, assuming for simplicity
they are the same because the employee maxes out RRSP contribution
room). Over the short and medium run, the advantages of DB may well dominate. Most people currently at SFU will gain. Over the long run (and for your young colleagues in the system and those who like to retire late), I am less sure. A better option may be -- as noted by a colleague before -- to keep the DC system in place but to 'force' members to save more by making RRSP contributions mandatory. Christoph On 2018-11-13 9:17 AM, sspector wrote:
-- Christoph Luelfesmann Professor, Department of Economics Simon Fraser University |