Senator Raymond Lavigne has been in the news lately after resigning to avoid getting kicked out of the senate and losing his $79,000 per year pension. The part of this that struck me was the article writer’s choice to describe the money at stake as a “$79,000 pension” rather than its full value which is clearly more than a million dollars. Similarly, generous pension plans make many government workers pension millionaires.
People tend to value spread out payments as less than their total cost. So, a couple spending a day at an amusement park spending a series of small amounts such as $30 each to get in, $25 for snacks, and $15 for parking won’t feel like they spent a total of $100. The Lavigne article would probably have drawn more ire if the pension’s present value of more than $1 million were quoted.
Moving to the subject of government workers, a Statistics Canada publication says the following:
“In fiscal year 2006/2007, the average age at retirement of the public servants studied was 58.4 and they retired on average with 29.2 years of pensionable service.”
From this information, we can estimate the value of the average public servant’s pension. (An interesting coincidence is that the average public servant retires with pensionable service of half their lives.)
According to a CBC article, life expectancy for someone who makes it to retirement age is a little under 85 years (as of 2005 to 2007). So, let’s say that the average public servant who makes it to retirement is retired for 26 years (85 minus 58.4, rounded down).
At 2% pension per year of service, the average pension is 58.4% of salary. We could just multiply this by 26 years, but this ignores cost of living increases (pension indexing to CPI) and it ignores the time value of money. If we say that the time value of money is 2% above inflation, then the present value of a 26-year pension is 20.5 times one year’s pension payments. For a pension at 58.4% of salary, the present value of an average pension is 12 times salary. Actuaries may take issue with some of the specific figures I’ve used, but my calculations are close to the mark.
So, the average public servant who retires with a salary above $83,000 has a pension worth more than a million dollars. The government employs many people who are pension millionaires, but I suspect that most of them don’t feel like millionaires.