pension and early/late retirement

[Christoph Luelfesmann <cluelfes@sfu.ca>]

Dear Colleagues,

one other comment on the point raised by Michael and others that working 
'longer' (to fix ideas,  beyond a retirement age of 65) will cost all of 
us in terms of a reduced total pension amount.

This is absolutely true when --- as in Michael's example and the one I 
contributed a few days ago -- the faculty member has been working *in 
the DB system for most or all of his/her career*, let's say, for 30 
years. When DB passes, this will of course be the most common scenario 
in the future for new generations of SFU faculty, and (in case we are 
'altruists'),  we should worry about it.

In the meantime, though, effects will be very different for those of us 
who at the start of DB (a) are mid-career or older, and (b) have not 
converted our DC capital into DB years. For those of us, the transition 
to DB will give us incentives to work longer instead of shorter. The 
simple reason is that with only few past DB years at age 65, a faculty 
member has a lot to gain (in terms of annual pension increases) and 
little to lose (in terms of pension payments  he did not take) when 
working a extra year, at least, for a number of extra years.

A simple example. Suppose you are 55 when DB starts and therefore have 
10 years until reaching age 65. Suppose your pension-relevant income is 
now 150,000, and first suppose you retire right away. Unless you 
convert(ed) your existing DC pension funds into DB years, you will be 
entitled to a 20 per cent (indexed) pension of 30,000 for the first 
year. Instead, assume you work 5 more years, to age 70 (note that under 
our present SFU phase-out benefits, it is attractive to do so). What 
will happen to your pension? First, you will lose pension benefits for 5 
years which (ignoring inflation) amounts to a total cash flow loss of 
150,000. At the same time, though, you gain an extra 2 per cent pension 
amount per year, or roughly 3,000 times 15 years (=remaining life 
expectancy at 70) = 45,000 per year. Deducting pension contributions of 
about 10,000 per year from that number, the annual gain is about 35,000. 
Multiplied by 5 (sum of the years 65-70), the total expected gain is 
175,000. (I ignore secondary issues such as discounting of pension 
payments, or the increase in average salary and therefore pension 
payments over thee 5 years).

Overall, we see that the 5 extra years of work not only earn a salary, 
but an extra 175,000-150,000 = 25000 in terms of extra total pension 
amount (slightly less tha under DC , but still ...).

Numbers would look even better in case the colleague works only until 68 
(the gain decreases every year and at some point before age 70 becomes a 
loss for the next 'marginal' year.) It should also be clear that the 
closer you currently are to age 65, the larger the benefits will be -- 
in the extreme where you are 65 at the start of DB, you lose *no* 
pension amount when working one more year, while the gain is the same as 
for everybody else.

Christoph







--

Christoph Luelfesmann
Professor, Department of Economics
Simon Fraser University