This week, I\u2019ll compare public- and private-sector pensions to show the ultimate value of three arrangements. <\/p>\n
One is the federal public service employees\u2019 plan, which I chose to represent the public sector because of its size and easy access to data. Other public-sector plans would have looked similar in the sense that most are defined-benefit pension plans with inflation protection after retirement<\/a>. <\/p>\n The second is an above-average private-sector plan \u2013 a defined-contribution (DC) plan that requires 12 per cent of employee and employer contributions each year. <\/p>\n Finally, I show results for a person with no pension coverage \u2013 a situation which applies to about 75 per cent of workers in the private sector; I assume they contribute 18 per cent of gross pay each year into an RRSP. This is the maximum tax-deductible contribution allowable (ignoring unused RRSP contribution room from prior years). <\/p>\n<\/p>\n In each case, the individual is 30 years old, hasn\u2019t started to save for retirement, and earns $80,000 a year. The salary level might seem high, but it is actually close to the average pay for a federal public sector worker age 30-34, with less than five years of service. Regular pay increases until retirement are assumed. <\/p>\n The individual who contributes the maximum possible to an RRSP can expect to accumulate savings equal to 5.1 times final pay versus 11.4 times final pay under the public-sector pension plan. <\/p>\n In fact, this understates the potential gap since I haven\u2019t reflected the additional amount that a public-sector employee can contribute to an RRSP. As for the \u201cgood\u201d DC plan, the account balance at retirement would be only 3.4 times final pay. <\/p>\n This comparison begs the question of what level of retirement savings the average Canadian should strive for. A definitive answer is beyond the scope of this article, except to say that it need not be much more than five times final pay. Otherwise, most private-sector workers will be in serious trouble in retirement. <\/p>\n Retirees who want to buy a life annuity are better off waiting<\/a><\/p>\n