4 Benefits

Figure 2 shows how the benefit multiplier looks to us today. Due to the retroactive nature of the U.S. plan’s $4.65 increase, this is something of a revisionist history but it does reflect how benefits are calculated today.2 We could not locate any historical data on the Canadian benefit multiplier. As far as we know, this is how it has always been in Canada.

Figure 2: Benefit Multiplier “Revisionist” history (all figures in USD).

As you can see, the U.S. multiplier was substantially higher than the Canadian one until 2004, when it began its decline to the $1.00 BM we have today. The Canadian BM took a bit longer to decay, but since 2013 it is barely higher than the U.S. multiplier ($1.26 USD/$1.625 CAD). Between May 2006 and January 2013, the Canadian Fund instituted a “progressive” benefit multiplier system where contributions of up to 10% of wages use a higher multiplier (red line) while contributions between 10%-12% of wages use a lower multiplier (purple line). Contributions over 12% of wages were returned to the employer. That limit was raised in January 2013 to 18%. This is not a decision of the pension fund, but a ruling of the CRA.

The Canadian Trustees chose an unusual method for their most recent benefit multiplier reduction. Instead of cutting the benefit multiplier in half, the pension contribution accrual for the participant is reduced by one-half. In other words, one half of a players’ contribution will apply to the benefit calculation; the rest will support the general health of the Canadian pension fund. So if a player had $1,000 in actual pension contributions, it would be treated as a contribution of $500 in calculating his monthly benefit. The other $500 goes into the general fund. Many commentators have claimed that the current Canadian benefit multiplier is three-times the size of the U.S. one. As you can see, after accounting for the reduction by half and the currency differences, it is only $0.26 higher. Since this claim seems to be controversial, here is the math:

Monthly benefits are calculated in the same way for each plan: Divide the contribution amount by 100 and then mulitply by the benefit multiplier. The current Canadian benefit multiplier is $3.25. Assuming $1,000 CAD of contributions, the monthly benefit for this amount would ordinarily be:

$1,000 ÷ 100 × 3.25 = $32.50

However, since 2013, only 50% of the participants’ contributions are used in the Canadian benefit calculations. So the actual monthly benefit today is:

$1,000 2 ÷ 100 × 3.25 = $16.25

A moment’s thought will show you that this is exactly the same as using a multiplier of 3.25 ÷ 2 = 1.625, or, in other words, the same as a 50% benefit reduction:

$1,000 ÷ 100 × 1.625 = $16.25

To compare the Canadian BM to the U.S. BM, you need to express them both in the same currency. We convert the Canadian one to U.S. dollars using an exchange rate of $1 CAD = $0.778349 USD:

$1.625 × 0.778349 = $1.264716125 $1.26

This odd method of benefit reduction seems like a sneaky way to make the Canadian Fund look better on paper. It has certainly fooled a few U.S. observers. But we do not believe this is the motivation. The Canadian Trustees are very open about the policy and state it clearly in several places. It appears that, since Canadian pension plans must apply to the tax authority for permission to raise the benefit multiplier, the Canadian trustees feared that if they cut the multiplier the tax authority might not let them grow it again. They chose this alternate route as being in the better interests of their members.

As a final comparison of benefits under the two plans, we take the Canadian Trustees’ example of “Mark”, a musician who retired in 2014 with $22,700 (CAD) in contributions. His pension would be $784 CAD/month. If the Canadian Pension Fund used the U.S. benefit multipliers, Mark’s pension would $762.50 CAD/month, or only 2.8% lower using the current U.S. methods.

2For more details on the benefit multiplier, please see our paper The AFM Pension Crisis Section 1.3