Thursday, 2 February 2012

In defence of MP pensions - Part 2

Part 2
In a previous post, I argued that the standard criticism of MP pensions, that they are too generous compared to other pensions, fails to take adequate account of the reality that the duties and responsibilities of an MP simply cannot be compared with any other job.  The pension comparison argument is based on a false premise and therefore misleading.
In this post I intend to argue that MP pensions should not be examined in isolation from the rest of their compensation package.  In effect, an MP pension is compensation now, collectable later, for the burdens and risks of holding elected office.  
As we have seen, discussion of pension plans often involves comparing the amount which the worker contributes to his pension with the amount that his employer contributes.  The comparison is usually expressed in the form of a ratio, as in “for every dollar the employee contributes, his employer contributes three dollars.”
The higher the ratio, the “richer” the pension.  The federal government says that for every dollar contributed by an MP to his pension account, the government contributes $5.80.  (This figure has been criticized in a recent report published by the Canadian Taxpayers Federation.)  I have no idea if this figure is accurate.  My interest in this statement is in the part about how much the MP “contributes”.  
Where does that contribution come from?  From the MP’s income.  And where does that income originate?  The government, of course.
The fact is that taxpayers pay for the whole pension.  (This is true, of course, for all public sector pensions – teachers, nurses, civil servants, etc.)
Now I don’t say this to make MP pension grumps even grumpier.  My point is that the distinction between the employee and employer contribution is just an accounting exercise (driven in part by tax considerations), an allocation of compensation between salary, which is immediate and direct; and pension, which is deferred and conditional.  You don’t get the pension unless certain things happen; you have to both serve and live long enough, but that promise of an eventual benefit has value in the here and now.
I recognize that it is not possible to calculate ahead of exactly how much pension income each MP will earn over their lifetimes.   That’s because we can’t predict how long they will serve and live. But it is possible to make that calculation globally and actuarially, and indeed this is routinely done for most pensions in order to determine whether pension funds have sufficient assets to meet expected demands.  
It is also possible to turn the best estimate of how much pension income an MP will eventually receive into a present value amount for each year in which that person will serve.  We often see calculations of much pension a specific MP might earn for X years of service, starting at age Y, if he or she lives to age Z.  Less often do we see a calculation of the present value of that amount.
But if we saw that latter calculation, we would in my view have a number that is a much better representation of the actual, comprehensive, income of the MP.  It’s a number based on a range of assumptions, and is as vulnerable as those assumptions, but it’s a number all the same.
I’m not capable of doing that calculation, even for my own MLA pension entitlement.  Sorry, but I abandoned math right after high school.  But let’s just be hypothetical for a minute.  The salary of an MP in 2012 is $157,731.  Suppose we discovered that the net present value of MPs pension entitlement, and the cost of the additional benefits was, just for fun, $157,731.  In effect, what we’ve shown is that what might be called the comprehensive income of the MP is just over $315,000.
The reason I like this exercise is because it is a better way of asking the question about whether the work of an MP is worth what we are paying for it.  Instead of segregating the income into its discrete components - present income, the cost of health and other benefits, and the deferred pension income, adding these amounts together yields a figure which takes them all into account.
The “richness” of a pension entitlement, as a stand-alone ratio of contribution to contribution, tells us very little.  It may be that a generous pension is part of a compensation arrangement in which the salary is relatively low.  But the employee may be willing to take the lower salary now in return for the promise of a good pension later.  Adding the whole package together gives you a much better sense of whether someone is fairly paid for the work they do.

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