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.
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:
However, since 2013, only 50% of the participants’ contributions are used in the Canadian beneﬁt calculations. So the actual monthly beneﬁt today is:
A moment’s thought will show you that this is exactly the same as using a multiplier of , or, in other words, the same as a 50% beneﬁt reduction:
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:
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.