The rest of us? Not so much. Welcome to the multi-tiered retirement system in Canada.

A two-tiered system

A while ago, I read an article discussing Canada’s evolution into a two-tier class system. No, we’re not talking about the 1% and everyone else, the class system referenced in this article is between public and private-sector workers. We Canadians appear to enjoy a decidedly comfortable middle-class existence, even post-recession, especially compared to our friends around the world. However, within this middle class society, there lurks an elephant in the room: the future of retirement, and our individual places within it.

According to a report entitled Canada’s Two-Tier Retirement by the Canadian Federation of Independent Business (CFIB), there are “stark discrepancies” between Canadian employees in the public and private sectors when it comes to retirement benefits. The report also provided two case studies comparing the employer pension plans of a public and private sector worker. Apparently, the gap in retirement nest eggs for these two types of workers is huge. Really huge. Over 35 years, these two workers, earning the exact same salary, will see a pension gap of $776,000. The private-sector worker will have $605,000 upon retirement, while the public sector worker will have a cool $1.38 million.

Defined-benefit vs. defined-contribution

Many people credit unions for the generous retirement benefits that public-sector workers enjoy, but that’s only part of the story. Employer-sponsored pension plans are either defined benefit (a DB plan) or defined contribution (a DC plan). DC pension plans depend on the accumulated value of invested funds, whereas DB pension plans guarantee you a monthly income amount up front, regardless of how the markets are doing. Guess which type of plan most public sector workers have? The DB plan.

Public-sector DB plans essentially guarantee a retirement income based on your years of service and income (often in your highest earning years), but those of us with DC plans? We’re at the mercy of how much we’re actually able to contribute over years of service, and market cycles and fluctuations.

When you guarantee a retirement income based on salary, the government (and therefore the taxpayers) are the ones ultimately responsible for making up the difference between what was promised and what was actually earned in these DB plans. This gets exacerbated by fact that we’re all living longer, including those with DB plans. The implications of this will be huge as the baby-boomer cohort of public-sector workers retire (with some retiring as early as 50 years old), and Canada’s shrinking population are left to pay for it. We are already beginning to feel the impact of these public-sector retirement policies.

Why it’s actually a three-tiered system

While the disparity between public and private-sector pension plans is discouraging enough, one could further argue that Canada has a three-tier retirement system because 60 per cent of the Canadian workforce has no access to a workforce pension plan, and will rely solely on their personal savings, investments and the government to pay for their retirement. Plus, the coverage rate for the registered pension plans in the private sector is only around 25 per cent. So there are public sector workers with their golden pensions, private sectors who are lucky enough to participate in any sort employer-sponsored pension at all, and everyone else.

What tier do you fall into? How do you plan on funding your retirement?

See also:

10 jobs that let you retire early
How much you need to earn to buy a house in every major Canadian city
The 10 most common job titles for the poor, the middle class, and the rich
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