October 23 2012 | CanadianGlen
Once upon a time in Canada, Members of Parliament received no wage to sit as representatives. A pension was an unknown quantity. Senators were appointed and allowed to keep their position for the remainder of their lives. The natural tendency was for those who needed no payment to occupy the seats of Government. Only the rich need apply, as it were. Over time, this was seen as a little too limiting by the citizens, a little too elitist. The establishment of a salary for MP’s and Senators opened the door for all Canadians to be realistically considered to serve in the House of Commons. By the time the St-Laurent government was in office, pensions had been under way for years to help create deferred income for working people once they had retired. This Liberal administration established the retirement plan for Members of Parliament.
The standard model for pensions, up until a couple decades ago, was a “Defined Benefit” regime which guaranteed the payout for all contributing members. This worked well until life expectancy and the birth rate started to have serious effect. Private sector pension funds used to simply accrue value and loan funds to the Governments for capital projects and infrastructure. When the realities of the world proved returns from Government bonds to be insufficient, pension funds went into the markets to invest creating the monsters we are now familiar with. The next evolutionary process to pensions was the shift to “Defined Contribution”. No longer were all contributors guaranteed the same benefits. The more that was put in, the more that was paid out to each participant. Not much has changed on the landscape of pensions for a while for people even fortunate enough to have a plan to contribute to, be it public or private fund.
But there has been one glaring exception to this rule. One pension plan has escaped change forced on it by market and population changes. The Parliamentary pension plan. The original intent of the St-Laurent plan was that the pension for Parliamentarians would be self supporting, between contributions from MP’s and Senators and contributions of like size from the government, otherwise known as the taxpayer. Just like other pension plans of the day. Employee and employer, creating something for the twilight of workers’ days. It worked well enough, on paper, until other plans were allowed to venture into the markets out of necessity. The equity in pension funds needed assets to guarantee their worth, to have a basis in reality to make good on the benefits payable to participants. No longer were government bonds an adequate source of revenue as payments kept rising against contributions.
Pension plans have grown to previously unknown sizes to try and keep ahead of rising benefits as contributions have stagnated or even fallen. With this growth has come volatility of the markets and administration costs. The cost of which must be managed along with the payouts to entitled members. Meanwhile, the Parliamentary pension plan has only one method of supplement as it always has: the taxpayer of Canada. Administration of the plan for Parliamentarians has never been an issue, simply because the cost is added on as required, courtesy of the taxpayer.
As the ‘80’s roared along, an “adjustment” was made to the Parliamentary plan with over $150 million being added to the books from government (taxpayers) and two separate funds were established. The Income Tax Act stipulates that no more than 2% of annual income can be contributed into a pension plan without penalty. The Parliamentary pension funding model would be illegal anywhere else in Canada. The Members of Parliament Retiring Allowances (MPRA) follows the Income Tax Act. The Members of Parliament Retirement Compensation Arrangements (MPRCA) is for contributions and benefits that exceed the rules everyone else must follow. To satisfy the Canada Revenue Agency, the MPRCA is subject to a “refundable tax” of 50% of annual net gains minus 50% of annual payments from it. There is provision of re-imbursement if payouts exceed contributions. For FY2011, the fund paid the CRA a total of $16.8 million.
To the end of FY2012, these two funds hold over $800 million, on paper. Since these two funds are not invested in markets or assets, they are essentially just numbers on a ledger with all benefits being supplied by the taxpayer, resulting in a real world liability of anywhere up to a billion dollars. These two funds receive 10.4% annual interest by order of Cabinet, accrued at 2,5% per quarter, courtesy of the taxpayer. No matter the reality of market conditions, these two funds will never lose value on paper, thanks to the Canadian taxpayer. Unfunded liability? No problem. The taxpayer simply ups the contribution ratio to cover it. This is precisely how we got to the ratio of 24 to one in contributions between taxpayer and Parliamentarians for the MPRA and MPRCA.
The current desire to make “changes” to the pension plan for Parliamentarians surely comes from the present Government’s penchant for making noise and not accomplishing much that benefits Canadians at large. The 24 to 1 contribution ratio is a lightning rod. As of FY2011, the average allowance for retired Senators was $60,599. For MP’s it was $55,102. A total of 14 former Senators and 45 former MP’s collected over $90,000.
Anytime any piece of legislation receives unanimous consent in a body like the House of Commons, my suspicions are awakened. Considering the difference in position on many fundamental issues, what could bring all these forces to a common cause? Despite repeated insistence that omnibus legislation would not be dissected, here it was happening for the good of Canada. Or so the copy read. What changes have actually been made for the benefit of the taxpayer? Has the ratio of contribution been narrowed? Yes, it has somewhat but still remains far beyond other pension plans. Unlike the changes brought forward by the Chretien government in 1995, there is absolutely no reduction in benefits paid out. Name me one other pension plan that is restructured and benefits are not decreased to recipients along with increased contributions by employees. So perhaps this was too good to pass up for politicians of all stripes? Let’s look at the numbers.
The passed legislation covers changes from FY2012 to FY2017. Contributions from members will increase to close to 50% of the total by 2017. For MP’s, this means going from $11,000 per annum to $39,000 per annum. From my understanding, the first $5,600 yearly increase will be paid in 2013, with another $5,600 added every year to the total. Sounds impressive. An extra $5,600 per year to contribute to a pension or RRSP is a fair amount of cash to most Canadians. But not many of those Canadians receive a base salary of $157,000 per annum. Nor are they guaranteed a 2% annual raise on that figure. That’s right, the freeze on Parliamentary salaries expires this year, FY2012. The “cost of living” provision is again alive and well in the House of Commons and the Senate. Just like the arbitrary 10.4% yearly interest for the pension funds, this 2% figure was set by Cabinet. So right off the bat, before the increase in contributions takes effect, the base remuneration for MP’s increases to $160,140.
One other thing not mentioned widely, if at all, is that eligibility remains the same at six years of service, based on the same percentages currently used which has a starting benefit schedule at $54,000 annually. As the base salary increases, this figure will rise as well. If a sitting member retires or is defeated before 2015, the current plan will be available. That means the full benefits if the member is 55 years of age. Expect a few more than usual sitting members to not seek re-election if they have an uneasy feeling about their prospects facing the electorate.
So what about after 2015 in this scenario? Come 2016, an MP with six years of service leaving the House is eligible for benefits, including those under the new full benefit age requirement of 65 years of age. All pension plans have provision and formulae for so-called early entitlement. Most private sector plans take off anywhere between 3 to 5 percent for every year below full eligibility. So a private sector worker, fully vested retiring at 55, may only get half the benefits payable compared to waiting until 65 years of age. What about an MP? The reduction in full benefits will be a whopping 1% (fitting) for every year of age under 65. So an eligible MP at age 55 will still receive 90% of full benefits. At current levels, that would mean $49,500 instead of $54,000 on average. Far more generous than any other plan. Plus remember that by 2016, base salary will have increased by over $13,000, increasing the benefit level further.
The examples listed below have used a total tax burden of 50%, for ease of calculation and because that is a fairly accurate assumption moving into the future for this income bracket. These examples are based on a Member of Parliament remuneration scale, a backbencher with no committee or Parliamentary Secretary duties, never mind a Cabinet minister.
Year Gross Pension Taxable Net
2012 $160,140 $11,000 $149,140 $74,540
2015 $169,940 $27,800 $142,140 $71,070
2017 $176,306 $39,000 $137,306 $68,663
In six years, take home pay drops less than $6,000. So the campaign of those such as “Independent” MP Peter Goldring that the sacrifices will not attract suitable citizens to public service ring a little hollow. Additionally, is there any chance of the tax-free allowance given to members of Parliament increasing anywhere in the neighbourhood of $6,000 in the next six years?
Members still have the most generous pension scheme in Canada by far, with contributions above legal limits for anyone else. Could you see yourself dropping partisanship for one day to get this beauty passed and buried? It may not be 24 karat bullion any more, but 18 karat shines almost as bright.
In the News
Some of the gold scraped off MP pensions October 23 2012 | Times Colonist
Is the MPs’ new pension plan a clever manipulation? October 22 2012 | Back of the Book
MP pension reforms removed from omnibus bill October 19 2012 | CTV
Omnibus bill would quadruple MP pension payments October 18 2012 | CTV