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Thanks for another thoughtful contribution, Tamon. As you seem puzzled by the conclusion of my note, let me clarify. My argument was: - What would be best for most people depends to a large extent on personal preferences. - We cannot know how these are distributed - Thus there is no way to know how to vote altruistically. [I did not mention that everyone's voting for what is best for them will, in fact, give us an _expression_ of the distribution of personal preferences] So everyone should vote in their self-interest. In doing that, consider the fact that you do not now know which plan will give you the most cash ( I agree with Oliver that it looks like DB will be better, but I also agree his numbers are too optimistic). Only actual number crunching for your own case will tell you that. But if DB is adopted, you will have be able to make the decision to switch or not after the numbers are crunched. So (especially if you have only a few years of 10% contributions to make), self interest provides no reason not to vote for switching to DB. And if you were hired after 2001, upping that ridiculous health benefits cap is worth a lot (my own family would run out of benefits in 2-5 years in its present state of health.) Hope this makes my conclusion a bit less surprising. M
On 11/14/2018 12:30 AM, Tamon Stephen
wrote:
Hi all, Thanks for the many great and detailed comments. I find them very helpful. I would like to reply to all of them, but I don't want to fill everybody's e-mail box, so I will try to answer several in one e-mail. This one relates various discussions about what the trade-offs actually are in DC vs. DB. I agree with the view expressed by Derek Bingham and others that "The trade-off, for some, is choices now (e.g., paying down a mortgage faster, a nicer home, different investments, ...) or choices later (e.g., the proposed pension plan)." I also think that Derek's point about changing the rules in the middle game is a very important one, and is one of the reasons I focused my initial message on people with mortgages (who may get stung) vs. renters (who may get crushed, but it is harder to blame it on changing rules). Somewhat less important than the now vs. later, in my opinion, are questions about longevity and stock market risk, detailed for instance by Oliver Schulte, which are generally what SFUFA has emphasized in this discussion. Oliver's generic discussion of them is good, I expect that those that have been following SFUFA's information stream are familiar with these points. (Although I think it is not correct to characterize the DB plan as _risk-free_, many things can happen...) As detailed by Barbara Sanders and Christoph Luelfesmann, Oliver's numbers seem off. I'm guessing that the low numbers in the DC plan are in part because rather than making additional contributions to it, Oliver has probably been doing other things like buying a house or investing in RRSP. If indeed he used his early years at SFU to buy property, then I expect he has done very well with that 10% that he wasn't required to contribute a pension. Barbara (and also Christoph) also point out that joining a DB plan halfway through is in some respects a "windfall [...] that others will pay for" since "your service in the latter half of your career is more valuable in a DB plan but you’re paying the same flat 10% contribution for it". This is why I would like younger faculty to consider things very carefully before voting. For sure Oliver is a sharp guy who realizes he can have his cake and eat it too. Enjoy! I surely will not influence his vote. But I do think people from Dai Heide class should understand clearly before they vote that are they are ones paying under DB, rather than being distracted by the fact that they will contribute 2.35% more of their income to the pension that they could have contributed to an RRSP. I anticipate some genuine unhappiness if current younger faculty only really figure out what is happening now when they get renovicted and move to Halifax in 2027. Christoph ... your message made plenty of sense to me (echoing Barbara) until the end, when you completely threw me with the suggestion "... to keep the DC system in place but to 'force' members to save more by making RRSP contributions mandatory. " In my view, the outstanding strength of DC, which we should not give up lightly, is the *ability not to contribute*. This is especially critical for us given the significant impact that the housing market has on all of us. Derek pointed out that many places do have mandatory contributions, which is undoubtedly true. This may be fine for Ann Arbor, but I think it is wrong for Vancouver. One point from this discussion that I had missed previously was that faculty hired before ~2000 actually already have the kind of medical benefits that we would gain with the DB plan. This also helps clarify for me why Ellen felt that the DB plan would have little effect on her, and why this plan seems to be led by people in the "windfall" zone, rather than the most senior faculty. It sounds like to some degree in ~2000 faculty at the time kind of sold out future hires during a contract negotiation, and that perhaps we are heading for a replay of that. I can say for myself it looks like I'm halfway between Oliver and Dai - I am not shut out of the housing market, and have one foot in the windfall zone for the pension. But I am still in the NO camp. Partly this is because I agree with the sentiment mentioned at the start of Martin Hahn's comment at the start of his message "what would be best for most people depends to a large extent on personal preferences". Somewhat surprisingly Martin ends "there is really no reason not to vote for switching to the DB plan". (Other than maybe we should let people buy housing instead of pension plan if they prefer?) Incidentally, while a not a central point, I am also interested in an answer to Lisa Shapiro's questions about the mechanics of the continuance of the DC plan, especially since it seems the strategy for the windfall people to maximize their take is to keep the money currently in the DC where it is. Best regards, Tamon ________________________________________ From: Christoph Luelfesmann <cluelfes@sfu.ca> Sent: November 13, 2018 10:36 AM To: sspector; Derek Bingham Cc: Ronda Arab; Ellen Balka; Tamon Stephen; academic-discussion@sfu.ca Subject: Re: Pensions vs. Mortgages 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). Let me stop here but finally note that DB will have significant consequences for a faculty member's choice of his/her retirement date -- expect people to have much larger incentives to retire earlier than they do now. This in turn, might make it tempting for the SFU admiistration to scrap the current phase-out benefits that it offers to members to sweeten earlier retirement ... just say it. 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: Greetings all: An interesting discussion to say the least. My problem with all of this is that it is being discussed in hypothetical or general terms. Oliver Schulte’s response put some numbers on the table, but he notes that he still has 15-20 years to go before he retires. I am like Oliver, with far less than $500,000 in my DCP. The issue for me is that I have 7 MONTHS to go before I turn 71, so there appears to be little benefit to me to switch. All of the information I’ve read seems to suggest that participants have long horizons. I don’t. I am actually hoping that the switchover happens after June 2019 so it would not affect me. I know DCP contributions will end in May 2019. I also know I will have to convert my DCP to a RRIF by the end of 2019. The SFU plan is only part of my retirement planning, so I have other sources of income to enable me to manage. Why would I want to invest a significant amount of after-tax cash right now to join the college plan? Or am I missing something? Stephen One could view the proposed plan as beneficial to those that retire at 65 (I plan to be in my office well past 65). Alternatively, one could view the plan as providing choices as one gets older. Nobody says one has to retire, but future health and family issues may require that you do so – i.e., security. You never know. The trade-off, for some, is choices now (e.g., paying down a mortgage faster, a nicer home, different investments, ...) or choices later (e.g., the proposed pension plan). Finally, in the late 1990’s, the University and SFUFA agreed to a health benefits plan that allows for post-retirement benefits for existing SFUFA members, but not for those who started in the 2000’s. Under the proposed pension scheme, there is the (surprising?) benefit that allows for post-retirement health benefits for everyone… again, as I understand it. Derek Bingham Professor Department of Statistics and Actuarial Science Simon Fraser University |