Path: utzoo!ncc!alberta!edson!doug
From: doug@edson.UUCP (Doug Konrad)
Newsgroups: can.general
Subject: Re: RRSP unfairness
Summary: Two types of pension plans
Message-ID: <118@edson.UUCP>
Date: 3 Mar 88 17:48:51 GMT
References: <5464@watdragon.waterloo.edu> <15565@onfcanim.UUCP>
Distribution: can
Organization: Dept. of E.E., U of Alberta, Edmonton,Canada
Lines: 56

In article <15565@onfcanim.UUCP>, dave@onfcanim.UUCP (Dave Martindale) writes:
> In article <5464@watdragon.waterloo.edu> hwarkentyne@watdragon.waterloo.edu (Kenneth Warkentyne) writes:
> 
> >When Mr. Martindale retires, he will get a retirement
> >income based on his salary that is indexed to inflation.  In most

[ text deleted ]

> 
> But, it just coincidental and perhaps ironic that I work for the
> government.  My main comment applies to anyone who is required to
> belong to a company pension plan, where the payback at retirement is
> probably not indexed to inflation but rather bears at least some
> resemblance to money that was invested many years previously.

You have hit upon two issues here. First, a few (mostly government) pension
plans are indexed to inflation. This means that if, when you retire, it is
determined that you will receive a pension of $30,000 per year, and inflation
turns out to be running at, say, 5%, you will receive a 5% increase in your
pension.

But this is not what most of the discussion is really about...

There are two types of pension plan. I'm not sure of the exact names, but
here's how they operated:

1) Deferred Benefit Plans:   You contribute, and your company contributes.
		When you retire, you pension reflects your income during your
		last 5 years (typically) of employment. Your pension is NOT
		really linked to how much you contribute. If there is a shortage
		in the plan, your employer has to pay.

2) Money Purchase Plans:   You contribute, and your company contributes. When
		you retire, the trustees of the pension plan take this pot of
		money which has accumulated over your employment, and buy an
		annuity. The annuity income is your pension.

Now to the tax law...

If you are a member of a deferred benefit plan, the lower RRSP contribution
limit applies. Presumably, this is because deferred benefit plans give you
inherent protection from inflation until retirement (and occaisonally, after).

If you are a member of a money purchase plan, the $7,500 limit applies, less
the contributions you make to the plan. Money purchase plans are definitely
poorer than deferred benefit plans (unless you expect 40 years of deflation).
This higher limit helps to compensate.

It appears that what the government wants to do is to encourage people to
provide for their own retirement. They want to do this equitably. If you chose
to work for an employer with the more desirable deferred benefit plan, you need
less help than the person with a money purchase plan.

Hope this helps...

Doug