The Hall of Cons: Web site exposes crooks, teaches a lesson
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#1 Jul 4, 2009
I note that the designer of Defined Benefit Pension Plans and the employers who sponsor them and the government regulators are not on the list. Certainly they qualify since they transfer a lot of money from pensioners, at least in Canada. I understand the Defined Benefit Pension Plans are world wide. It is the most popular plan in Canada and is used by all levels of government and large corporations. Perhaps it is of interest since Defined Benefit Plans are used in the U.S.
The mechanism that transfers money is the method of calculating the pensions to be paid. Typically, salaries over the last five years of employment are averaged and then multiplied by years of employment and 2%. Inflation during those averaging years affects equally the cost and purchasing power of the pension. Pensions of those retiring in 2009 will have about 6% less purchasing power and cost 6% less than is inflation were zero. The comparable figure for 1979 retirees is 25%.
Legislation effectively covered up this transfer of funds by diverting attention to the indexing of pensions. Indexing is a feature of the federal plans. An account was set up to pay indexing with 2% of salary legislated to go in to the account. The plan actuaries calculated the cost of indexing as 4.8% of salary. A $6 billion deficit quickly built up. The Auditor General included it in his report, without saying why there was a deficit. Ads and editorials followed and the public were left with the impression that indexing was expensive. Articles c/w misinformation still appear in the media.
The above details are in The 1980 Actuarial Report for the Public Service Plan, hardly a sought after document, therefore its info was known to only the really curious.
No one wrote of the transfer of money by inflation in the salary averaging years. Does that qualify for inclusion in the Hall of Infamy? I can't find how to make a nomination.
Nepean Ontario Canada
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