Almost 75 per cent of Canadians have a pension problem.
As in: They don’t have one. Worse, they have to live alongside the 25 per cent of people who do.
A reassuring thought for the pension-less: Your retirement savings offer a level of financial flexibility that defined-benefit pensions do not. Try paying the bill for a kitchen reno with a monthly pension. Or, taking a long trip, helping your kids with a home down payment or retrofitting your home to age in place rather than moving to a retirement home.
I can report first-hand on the goodness of defined-benefit pensions because I’m fortunate enough to have one as a retired columnist for The Globe and Mail. It’s a middling amount of money, but I cannot deny that it’s nice to see the payments into our chequing account at the start of each month.
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But I also see some weaknesses in defined-benefit pensions. One is that your pension payments in retirement can be modest in size – the amount you and your employer contribute is a huge factor, and so is your job tenure and salary.
Also, DB pensions are income, not savings. Think of them like a monthly paycheque that you can use to pay for things such as utility bills, and that buy you groceries, gasoline and a weekend’s entertainment. What happens when life drops a big expense on you? For that, you need savings in a tax-free savings account, a registered retirement savings plan, or a non-registered savings or investment account.
The term “pension” generally includes defined-benefit and defined-contribution plans. DB plans pay you a set amount of money for life, whereas DC plans are more of a savings program for people still in the work force. Upon retirement, it’s your job to manage the money in your DC pension to keep it from running out.
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The percentage of workers covered by DB plans fell from 31.9 per cent in 2003 to 25.7 per cent in 2023, the most recent year tracked by Statistics Canada. DB pensions account for a bit more than two-thirds of total pension plan members, with DC covering much of the rest.
DB pensions are seen as the ultimate in security for retirement, and the reason is simple. Who doesn’t want to have their regular expenses in retirement covered by payments that arrive monthly, with no worry about the effects of financial markets or political events?
It’s therefore understandable that people with DB plans sometimes get carried away in conveying to others how pleased they are to have this workplace benefit. The pension-less need a counter-narrative when dealing with these moments of unintentional gloating. How about the full flexibility of controlling your own retirement money?
Retirement in the 2020s highlights the benefit of being able to withdraw from your retirements savings. Two of the top retirement planning questions today are: Do I have enough? Can I afford to help my kids buy a home?
Also, you could spend 25 to 30 years in retirement. Over that time, you’re going to want to do some home renovations, buy new cars, take trips, and take up new sports or hobbies. And then there are the unplanned whopper costs of home and vehicle repairs, pet care and dental work.
People fortunate enough to be in DB plans are sometimes drawn to the idea of commuting their pensions, which means converting the promise of payments for life into a lump-sum amount that goes into a locked-in retirement account, or LIRA. There may be a window to commute a pension if you leave an employer.
Commuting gives you control of your money, but then you have to ensure you don’t outlive your savings. Longevity risk is generally underplayed by retirees, a point that argues strongly against commuting a DB pension.
All the love for DB pensions is entirely justified because they do offer a level of security in retirement. But the DB plan member who doesn’t save additionally for retirement in TFSAs and RRSPs is missing something. Sometimes in retirement, you need access to a big chunk of money in addition to your regular monthly income.
Rob Carrick is a personal finance expert and former Globe and Mail staff columnist.