© Copyright 2000 Rogers Media. The following article first appeared in the October 2000 edition of BENEFITS CANADA magazine.

Sweet Deal

Politicians like Prime Minister Jean Chrétien aren't getting rich in office. But their retirement will be all peaches and cream.

By Wendy Mizuno

Recent changes to politicians' compensation programs have garnered media attention and helped rekindle one of this nation's favourite pastimes--debating how much our legislators make and whether or not they deserve the perks we pay for. Amendments have been made to the Parliament of Canada Act and the Members of Parliament Retiring Allowances Act in the House of Commons that provide all members of parliament (MPs) under the age of 55 with a reasonable severance allowance. The bill allows MPs who had opted out of their pension plan to opt back in. In fact, the ability to opt back in to this gold-plated plan--as the public has come to perceive it--is retroactive to election day. This fall promises debate on that and more. Members of provincial parliament (MPPs) in Ontario are in line for a hefty salary increase of more than 30%.

It's reasonable to ask if our politicians are worth what we pay them. After all, if we were running a business, we'd ask the same of our managers and employees. In most businesses, the people who contribute to its success are usually compensated--at least in part--on the value they bring to the organization. Similarly, shouldn't politicians be compensated for the value they bring to our country, or the province or territory they are managing?

In the public and private sectors, determining compensation often involves several considerations, including: the value of one position relative to another; who should be recruited for the position; and how the compensation package fares relative to external benchmarks. A similar approach could (some would argue, should) be adopted for politicians.

FEDERAL COMPENSATION

Federal MPs are entitled to many indemnities and allowances designed to compensate them for their service and reimburse them for expenses incurred in the course of their duties. These include:

Sessional indemnity. Together with any additional allowances, this is considered to be the MP's base salary. The 2000 sessional indemnity is $68,200 per annum. Some MPs receive an additional allowance ranging from $7,800 to $74,100 for extra responsibilities. Cabinet ministers receive an extra $49,300.

Non-taxable expense allowance.MPs receive a non-taxable expense allowance of about $22,500 per year. The amount varies with the electoral district and is for business costs, including housing. In a private business, these expenses are often covered under a typical reimbursement policy. Therefore, it may not be included as the MP's compensation.

Additional expense allowance. MPs also receive an expense allowance averaging $12,000 per annum.

Travel allowance. All MPs receive a travel allowance, which includes 64 return air trips per year in Canada. Spouses, dependents and staff can also use this perk.

Fully-indexed pension. MPs receive a defined benefit (DB) pension based on earnings and service. They must contribute 9% of their sessional indemnities, have the option to contribute on any additional allowances and are entitled to a pension after six years. For service after 1995, the benefit accrual rate is 4%. The Prime Minister is required to contribute 7% of his salary for a pension equal to two-thirds of his final annual salary. He is entitled to the pension after four years of contributions. Based on the March 31, 1998 actuarial valuation report on the pension plan for the members of parliament, the estimated value of pension earned in one year of contributory service is currently 59.5% of an MP's salary--9% of which is paid by the member--and 112.5% of the Prime Minister's salary--7% of which is paid by the Prime Minister.

Benefits. MPs have standard benefits including life, health and dental and airline flight insurance coverage paid entirely by the government.

Severance. MPs under the age of 55 are entitled to a generous severance package when they leave or are voted out of office.

Over the last few years, changes have been made to compensation for MPPs. In some provinces, the structure of MPPs' compensation is quite different from their federal counterparts. For example, in 1996, Ontario eliminated MPPs' rich pension plan and replaced it with a registered retirement savings plan (RRSP) similar to those used by professionals. The legislation also placed Ontario MPPs on straight salary, eliminating hidden tax-free allowances and extra tax-free pay for committee work. Ontario MPP salaries are now $78,007. Benefits are estimated at $7,000, plus there's a 5% employer-type RRSP contribution (or $3,900 per annum).

The Report of the Speaker's Commission on Member's Compensation, released in June, calls for a 32.6% raise that would see base salaries of Ontario MPPs increase from $78,007 to $103,458. The recommendation is based on a comparison of the salaries of federal MPs and Toronto city councillors.

MPPs have had no increase in compensation since April 1, 1996, following the last review in 1995. Had MPP compensation been increased in line with the industrial aggregate average wage (Ontario index series), the increase to February 2000, would be 9.1%. This would result in current salaries for MPPs of approximately $85,000. Similar changes have been made in several other provinces.

We need to offer compensation packages that attract and retain qualified individuals who provide the kind of leadership Canadians desire. But election to a government office should not be an opportunity for the member to reap financial gains. On the other hand, the individual must not be financially disadvantaged. Striking a balance is a challenging task.

There is a general feeling among Canadians that federal MPs earn relatively conservative base salaries that are compensated by excessive benefits--notably the non-taxable expense allowance and pension plan. These add-ons make it difficult to determine if the total compensation package is appropriate. The analysis becomes a little clearer when the packages are broken down into their various components and looked at in isolation.

Federal MPs are in the top ranks of Canadian income earners, according to Tax Statistics on Individuals, published by Revenue Canada in 1995. The report says 6.7% of Canadians filed tax returns with incomes between $60,000 and $100,000. Only 1.4% filed returns with incomes over $100,000.

Based on the Report of the Speaker's Commission on Member's Compensation, Ontario MPPs earn, on average, 11.2% less (base salary only) than the benchmark positions in the private and public sectors where skills similar to those of an MPP are required. According to this report, the average yearly base salary of the benchmark positions (staff lawyers, school principals and engineers) is $86,700.

Once again, it's the non-taxable expense allowance that clouds transparency and exacerbates the perception that compensation for our politicians is too high. It's worth noting that the non-taxable expense allowance is paid whether or not expenses are incurred. For those federal MPs who do not incur such expenses, a portion or all of the $22,500 allowance is an indirect form of compensation and should be considered the equivalent of approximately $45,000 ($22,500 x 2) of additional salary. If used as intended, the allowance reimburses MPs for legitimate expenses and has no compensation value.

Some provinces have eliminated the tax-free allowance. In British Columbia, Manitoba and Ontario, the allowance, annual indemnity and per diem for committee work have been replaced with a single, taxable salary.

The Canadian Taxpayers Foundation and the National Citizen Coalition suggest that the rich DB pension plan for federal MPs be replaced by a group RRSP or a defined contribution pension that would more readily identify the cost of the plan.

The NDP government of Saskatchewan was the first province to adopt a self-funding plan back in 1979. Manitoba took a similar move in 1995 while Ontario introduced an RRSP for MPPs in 1996. Alberta eliminated members of the legislative assembly pensions in 1993, as did British Columbia in 1996.

Another option is to reduce the current pension accumulation rate. Currently this rate is 4% of members' earnings--double the maximum accrual rate permitted under the Income Tax Act for private sector and public pension plans.

MPs and MPPs have usually accumulated retirement income in a pension plan or an RRSP during the period preceding their election, and possibly afterwards. During the maximum period of 10 years as a member of parliament, they should be able to accumulate a pension at the same rate as if they had not left their previous plan. This should be no more than 2% of earnings for each year of service.

Under the existing pension plan, federal MPs who remain in office for 10 years are entitled to an indexed pension equal to 40% of their compensation (4% x 10 years). In the private sector, individuals need at least 20 years under a DB pension plan (assuming that the plan formula matches the maximum accrual rate of 2%) to earn the same level of DB pension.

If members make contributions for 10 years between the ages of 40 and 50 in an RRSP, contributions in excess of 25% of salary per annum may be required in that period. The accumulated RRSP account balance based on these contributions could then provide a comparable indexed pension payable from age 55. This estimate is dependent on certain variables such as the investment return earned on the account balance, salary rates and cost-of-living adjustments. In addition, any limits on RRSP contributions have been ignored.

Any way you look at it, the pension plan for federal MPs is far more generous than any private sector retirement program and the RRSP programs implemented in certain provinces for MPPs.

Perhaps Canadians would be more accepting of higher compensation for their elected officials if they were paid based on their performance, in the form of incentive bonuses. This could prove difficult due to the number of issues and circumstances outside of politicians' control as well as varying election platforms. But it's not insurmountable. Bonuses could be based on any number of criteria, including the reduction of the government deficit and taxes.

Compensation adjustments are often perceived as politically self-serving, and therefore occur somewhat infrequently. After all, how many occupations are there where the employees can decide on, and approve, their own salary increases? Ideally, any changes should be based on reasonable, objective criteria. The components of the package should also be apparent and understandable to taxpayers.

If we want our best people to lead the country, it seems logical that the compensation levels for elected officials should be comparable with those granted in the private and public sectors. The compensation policy should contribute to making the members proud to serve their region and convinced that their reward for doing so is fair. Canadians, in turn, should be satisfied that the levels of compensation paid to their representatives are equitable.

There are differing opinions as to whether or not we have achieved these goals. The fortunate thing about our political system, though, is that politicians can decide if the compensation level is appropriate when choosing to run for election, and Canadians can decide come voting day if they got their money's worth.

Wendy Mizuno is a partner with Morneau Sobeco in Toronto. wmizuno@morneausobeco.com.

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Are they worth it?

(fully indexed)

* In 2000, 105.5% of the earnings of the Prime Minister, 50.5% of the earnings of federal MPs, 5% of the earnings of Ontario MPPs and 9% of base earnings for B.C. MPPs were contributed.

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."