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Defined benefit pension plans help the economy in many ways
Defined benefit pension plans are a boon to the Canadian economy. These plans invest billions of dollars into the economy, which relates to strong growth, more jobs and good news for all Canadians. They go beyond the point of investment, however, as they also provide billions of dollars in income to pensioners who spend and pay taxes.
In regard to supporting the economy, a study by consulting firm BCG (commissioned by a group of Ontario pension plans) estimated that up to 75 to 80 cents of each pension dollar paid out is the result of investment returns. In fact, MoneySense magazine reports that the top 10 defined benefit pensions in Canada have invested approximately $400 billion in a variety of Canadian assets. Those investments contribute to a stronger Canadian economy.
As an example, the Alberta Teachers’ Retirement Fund invests in a variety of infrastructure projects in Alberta and around the country. In the past four years it has invested in road projects, wind, solar and hydro power generators, airports, and medical facilities. Each of these investments plays an important role in providing critical infrastructure and creating jobs in local economies.
Members of these defined benefit pensions also pay far lower fees to manage their pension plans than individual investors in the market. In British Columbia, for example, the average management fee for a defined benefit plan is 0.245 per cent compared to the 2.14 per cent that an RRSP investor would pay, as estimated by the Conference Board of Canada. As a result of the management fee savings over their earning years (30-plus), contributors to defined benefit pensions save a far greater sum for their retirement.
With this money in their pockets during their retirement years, these same Canadians continue to pay taxes. In 2012, members of defined benefit plans in Canada paid between $14 billion and $16 billion in income tax, sales tax and property tax combined, the BCG study estimated. More taxes allow for government spending in education, health care, infrastructure and other essential services that Canadians require.
This same study also found that, as purchasers in the economy, members of defined benefit pension plans spent between $56 billion and $63 billion annually on both goods and services. The pension and benefits publication Benefits Canada estimates that in some parts of Canada, spending by members of defined benefit pensions and other pensions, including Canada Pension Plan (CPP) and Old Age Security (OAS), can be as much as 38 per cent of the local economy.
Even working members paying into their defined benefit plans contribute to the economy in a positive way. These workers receive a tax credit for their pension contributions. In turn, they have more disposable income to spend in the economy or to invest in an RRSP, tax-free savings account or registered education savings plan.
Defined benefit pensions save the Canadian government money, which in turn benefits the Canadian economy. The majority of people receiving a defined benefit pension tend not to access federal social programs such as the Guaranteed Income Supplement (GIS). A retired teacher in Alberta with 30 years of teaching experience would receive a pension equal to approximately half of his or her pre-retirement income. Add to that the Canada Pension Plan and Old Age Security at the age of 65, and that teacher is ineligible for the GIS. That is a savings to the federal government of between $2 billion and $3 billion per year.
Defined benefit pensions will always be a major pillar of the Canadian economy, as pension plans invest billions into Canadian assets, and pensioners continue to pay taxes and spend on goods and services. The next time you hear someone talk about the expense of a defined benefit pension plan to Canadian taxpayers, have him imagine a Canadian economy without the spending, taxes and investments of defined pension plans and their contributors. ❚
