Re: Pensions vs. Mortgages

Hi
In response to "A much more interesting comparison is between DB, and DC+RRSP maxout. Only such a comparison is fair because both systems assume private contributions, which as a first pass we ca take as being of similar maginitude. I have not seen this comparison being mprovided by our Faculty Association."

SFUFA did commission a report to make such comparisons, and it is available at:
http://www.sfufa.ca/wp-content/uploads/2014/07/actuarial-report-march-15.pdf

Short version: the better the market does, and the earlier you begin making contributions, the better the DC plan is compared with the DB plan in terms of expected income in retirement. Note that this is expected income (i.e., on average) and so does not take into account volatility. Also, I think that this analysis is also limited by an assumption that the benefit formula and contribution rates of the DB plan are fixed in all scenarios. If the markets did really well over a prolonged period, contribution rates to the DB plan would probably go down (and vice versa).

Cheers
Julian

________________________________________
From: Christoph Luelfesmann <cluelfes@sfu.ca>
Sent: Wednesday, November 14, 2018 12:23 PM
To: Tamon Stephen; academic-discussion@sfu.ca
Subject: Re: Pensions vs. Mortgages

Hello Tamon (and all),

just to clarify: Making private RRSP contributions madatory (to 'max
out' contribution room) would take away options from each of us --
namely, to contribute less or even nothing. Taking away these options
can therefore logically never benefit anyone of us. So you are right to
consider my suggestion off in this sense.

However, what SFUFA aims for with its DB proposal is -- at least to
some substantial degree -- reacting to the perceived problem that many
members do not save enough during their active years and therefore, reap
meagre pensions. Comparing returns from DB on the one hand, and DC *in
absence of* private contributions, however, is a comparison of apples
and pears. Since the fundamental benefits of DC rely on compounding
interest, DC works best with a large buildup of capital stock. A much
more interesting comparison is between DB, and DC+RRSP maxout. Only
such a comparison is fair because both systems assume private
contributions, which as a first pass we ca take as being of similar
maginitude. I have not seen this comparison being mprovided by our
Faculty Association.

DB will also induce members to retire early (this is, earlier than in
our current system), a point which has not received much attention so
far. And no, the reason is not that DB gives us so much money we do not
have to work anymore ... just joking.

Simple example given: suppose Tom is 65 (choose any other age if you
want) and has worked for 30 years in the DB system. His final 5-yr avg
income is 160,000
which means he is entitled to an annual pension of 60 per cent, ie
96,000, if he retires now. If Tom continues working instead for another
year, his pension amount will increase by another two per cent (3,200)
annually, for the rest of his life. Assuming he expects to live til 85
(as a man your statistical expectation at this point is 84, as a lady it
is 87), Tom will get these extra pension returns for 19 more years, for
a total extra cash flow of about 60,000. In total, working one more
year at age 65 will make Tom lose one year of pension (96,000), while
his gain is 60,000 (at best, ignoring discounting of future pensions).
He therefore loses 36,000 in total pension money when he works one more
year. Consider now Tom under DC: when he works one more year, he will
get a 16,000 employer contribution which adds to his pension stock. And
disregarding some secondary effects, that's basically it. Final
comparison: - 36,000 vs + 16,000 in favor of DC, which means DC
encourages Tom to continue work for a extra year, while DB discourages
him of doing so.

On that note, you might wonder why UBC as a research University (not a
'College') is not member of the BC College plan, and does not have a
mandatory DB system.

Having said all that, it is true that as Tamon has put it, the
transition to DB gives all of us currently midway or longer in their
careers, a 'windfall gain'. I also agree that for all those of us who
were hired after 2001, DB provides a nice extra benefit in terms of
better health care provision.

Christoph

On 2018-11-12 10:55 PM, Tamon Stephen wrote:
> Dear Ellen,
>
> Thank you for the comments. (And thanks as well to others for the additional thoughtful replies to my post - the age 65 stuff was off my radar, and I don't have clear thoughts on it other than it is probably not the main issue.)
>
> Your description of your early career provides a useful illustration of how the context of incoming faculty have changed in recent years. It's great that you were able to get a tenure-track job at 31 and max out your RRSP contributions every year since. You are indeed a saver and good with money and I admire that.
>
> That said, recently it is more common for faculty to start their first tenure-track job closer to or past 40. They are more likely to start with student loans. The housing market in Vancouver is very different. Younger faculty are also more likely to be from countries where their parents have no pensions whatsoever, and often they will invest quite a bit in supporting them there or moving to Canada. There are many good reasons why younger faculty may not be making the maximum RRSP contribution. I believe that in many cases these faculty are making the right choices in paying down debts or helping their families vs. investing.
>
> Your loss of pensionable benefits by changing employers early in your career is one of the biggest downsides of the proposed plan for young faculty who may move. Certainly people who do this will be hurt by the move
>
> Regarding your points below, I partially agree with a), insofar as the financial position of those close to retirement won't change much. My understanding is that the improved benefits are the main advantage for faculty near retirement. (Which would certainly be a good thing.)
>
> About b), the 10% becomes about 7% after taxes, using the figure from the SFUFA consolidated FAQ (question 4). For most of us, that is than $5000 to $10000/year after taxes.
>
> About c), SFUFA promotes the idea that we'll be back at 0 after 3 years via the calculator (etc.). That's one way of thinking about it, and sort of makes sense if your house is payed off and you are in a position to max out your RRSPs every year. Another way of looking at it is that the small raises that we get are basically keeping up with inflation. Maybe if you are doing well on the steps it is a little better. But ultimately if you are not paid off, the $5000+/year that we would have us put into this plan is money that could otherwise go to clearing these debts. It doesn't help that lending rates have gone up by a full % in the last 15 months, for many people this alone will already cancel out the raises they are getting this year, and this may well continue.
>
> You say that you are voting yes in spite of the fact that it will benefit you very little. If then your vote is motivated by altruism towards younger faculty, then as a (somewhat) younger faculty, perhaps I can ask you to reconsider and vote NO on this proposal.
>
> Best regards,
>
> Tamon
> ________________________________________
> From: Ellen Balka
> Sent: November 12, 2018 10:10 AM
> To: Tamon Stephen
> Cc: academic-discussion@sfu.ca
> Subject: Re: Pensions vs. Mortgages
>
> Hi all-
> As someone who is close to retirement who is both following this issue and has been to an information session I’ve decided to weigh in.
>
> I’ll be voting yes in spite of the fact that as someone closer to 60 than 50 it will benefit me very little if at all.
>
> In contrast to previous posters my sense is that
> a) it will not particularly benefit those of us close to retirement unless we choose to buy back years of service, which we will have to do at our current earning rate; and
>
> b) once taxes related to pension adjustments etc are accounted for I suspect that the difference in one’s net / take home pay for most people will be negligible;
>
> c) between cost of living raises and step progressions any potential shortfall related to paying down a mortgage would be short lived.
>
> I can’t comment on monetary grounds that it will be disadvantageous for people to work past 65 as I haven’t used that lens to evaluate options, but I can comment that in some circumstances having a top heavy department can be very problematic in that it can stifle change and contribute to disengagement which in turn can have long term consequences.
>
> I’m a saver and good with money. I’ve maxed my RRSP out every year I’ve worked and I was in a tenure track job at 31 (though I lost some pensionable years leaving my first employer just past tenure). Under the current pension system my income will drop considerably when I retire. Under the proposed system had I been in it at the start I’d have a much better income at retirement.
>
>
>
>
>
> Apologies for brevity- sent from my phone. -Ellen.
>
> On Nov 11, 2018, at 3:44 PM, Tamon Stephen <tamon@sfu.ca> wrote:
>
> Dear all,
>
> SFUFA will soon ask us to vote on significant changes to pension plans. I appreciate SFUFA's efforts on this, in particular in identifying issues with the current plan. I've learned a lot from their resources*. However, I believe that we should vote NO in the referendum.
>
> The proposal will _require_ all current SFUFA members to contribute 10% of salary (7% after taxes) to their pensions. This is a lot to ask, especially given the housing market here. Many SFUFA members have significant mortgages. For someone who is putting this 7% into reducing their mortgage, moving this to the pension is effectively having them borrow an extra $5000+/year to fund their contribution. Other members are saving for down payments, sending money to family overseas, etc. I do not think that we should require them to contribute this money to a pension plan instead.
>
> The question in the previous (2015) pension proposal was quite different, as people could opt out. Roughly, in that previous vote, 31% voted yes, 9% voted no, while 60% did not vote. So many people are not paying attention to SFUFA's pension proposals**. If anything, I feel there has been less discussion this time. I encourage those of you who are not paying attention to 1. learn about what is being proposed* and 2. if you are not sold on this to the extent of _requiring_ your colleagues to invest tens of thousands of dollars (which they may have to borrow), then please vote NO.
>
> Note that since SFUFA considers this a referendum, they will proceed to implement this on a mandate of half of cast votes. So e.g. 26% for, 24% against, 50% not voting means _required_ contributions from 100% of SFUFA members, including the 24% who voted NO and the 50% who did not vote.
>
> Best regards,
>
> Tamon Stephen
>
> * SFUFA has posted some resources which I found quite helpful:
> <http://www.sfufa.ca/current-issues/pensions/resources/>
>
> ** I expect that those close to retirement are following this very closely, while those far from retirement are paying very little attention. As I understand the proposal, it may be beneficial to someone very close to retirement (esp. people who own homes outright), but not for younger members (esp. those who have mortgages or plan to).
> .
>

--

Christoph Luelfesmann
Professor, Department of Economics
Simon Fraser University