Reaping the benefits of delayed retirement

By Sarah Dobson

Retirement ages in Canada’s social security safety net need to be updated — it just makes sense, according to the Canadian Institute of Actuaries (CIA).

Full Canada Pension Plan/Quebec Pension Plan (CPP/QPP) retirement benefits are currently paid at 65 years, with early retirement and reduced benefits possible at age 60, and deferred retirement with increased benefits possible up to age 70.

These ages should be deferred to 67, 62 and 75, respectively, said the institute, so Canadians can accrue more savings and, ultimately, receive higher benefits at a deferred age.

Similar changes are recommended for Old Age Security (OAS), increasing the age a retiree can start to receive benefits from between 65 and 70 to between 67 and 75.

In addition, sponsors of registered pension plans could set a target retirement date of age 67 instead of 65, and individuals could defer receipt of their RRSP income until age 75 instead of 71, said the CIA in its statement Retire Later for Greater Benefits: Updating Today’s Retirement Programs for Tomorrow’s Retirement Realities.

“In addition to the financial benefit of receiving higher lifetime retirement income, our proposal provides financial protection for retirees against the cost of living longer and the significant erosion of savings from the effects of inflation,” said Jacques Tremblay, ex officio, chair of the International Affairs Council at the CIA, and one of the lead authors.

‘Longevity risk’

There’s definitely an urgency to having a full, open, transparent discussion about Canada’s retirement system, with a careful understanding of the pros and cons, said Leo Kolivakis, senior analyst (company?) specializing in pension funds and investments in Montreal.

“People living longer, the longevity risk, is an issue, because there's a real risk they will outlive their savings.”

Unfortunately, Canadians aren't saving enough. As baby boomers retire, that logic by itself “suggests we’ll have a real serious retirement crisis on our hands. And this is going to affect our economy,” he said.

“Very simply, people that don't have enough money to retire don't spend as much money, and just by virtue of getting old, people are much more frugal with (their) spending. That affects the economy, the consumption part of it. So, people that have a defined benefit plan, i.e. public sector workers, have a safe, secure monthly benefit, are able to spend more and plan their spending because they have something safe and secure. That's not the case for people in the private sector (with mostly defined contribution pension plans).”

While some might suggest the proposed changes only benefit high net-worth individuals, that's the wrong perception, said Kolivakis.

“The right way to think about it is how we're going to help people save more for retirement. And especially people who are healthy enough to work past the age of 65 — we need to help these people retire properly,” he said.

“We know that the Canada Pension Plan is going to be enhancing the CPP benefits over the long run, but that's not coming into effect right away. So, what can we do on top of that?”

It’s about doing anything that helps build the savings, said Kolivakis.

“People that are working past the age of 65, they're working primarily for a reason, and that's because they don't have enough retirement savings to retire on. And those are the lucky ones, because most people cannot work past age 65 and are too old or frail.”

Employers have pretty much offloaded retirement risk, and there's a problem with a shortage of labour in Canada, he said.

“Any policies that incentivize people to work longer, I think, would be to the benefit of employers.”

‘Complicated system’

It’s not that there’s an urgent need to make the changes, but because it’s a difficult choice to make, it’s better to start earlier than later, said Michel St. Germain, a fellow of the CIA and partner at Mercer in Montreal.

“We have a complicated system in Canada, partly due to the fact that we have so many provinces, so the process will be very long.”

Overall, it’s about finding the money while you’re waiting for the government funds to kick in, he said.

“Some of it will come from working longer, or will come from your private savings.”

On the one hand, this addresses the issue of people who want to receive their pension at age 60, even though they are not retiring and keep working, said St. Germain.

“There's nothing wrong with doing that. If people look at their retirement capital and say, ‘Well, I want to spend my retirement capital while I'm healthy at age 60, enjoy it, and receive less when I'm older and sick,’ you cannot say that this is necessarily a wrong solution,” he said.

“But what we can say is it's not the role of the government to build programs that people will use to receive higher income between 60 and 70 and lower income after age 70. If people want to do that, they could do it with their private savings.”

The idea of postponing the receipt of a pension until age 75 is gaining ground, said St. Germain.

“It is a strategy that is based on the principle of spend your retirement capital immediately after retirement, defer the government benefits, (and) the government benefits will be substantially increased. So, once you use your private retirement capital, you can rely on the government.”

With that approach, the numbers are “quite impressive,” he said.

That discussion started in Quebec a few years ago, said St. Germain, “both in part (because) of the labour shortage, and also the fact that a lot of people in Quebec are likely to receive their QPP at age 60. Even though they don't retire, they keep working. So that issue has been noted.”

And the Quebec government needs to change the way it communicates with older people when it comes to entitlement to QPP, he said.

“Currently… it's almost like… ‘Hey, you're entitled to something at age 60? Why don't you ask for it?’ So we’ve got to move from that to ‘Hey, don't receive it, it will be increased, and it's going to be a great investment, and it will take care of you for the remainder of your life.’”

But changing the CPP can be very complicated, despite the enhancements that took effect Jan. 1, 2019 — largely triggered by Ontario, said St. Germain.

“I am not sure whether Ontario would want to take the lead here again and say, ‘Please, other provinces and federal government, let's move on it.’”

And when it comes to the OAS, that too would be difficult, he said, considering the saga when the federal Conservatives changed the age from 67 to 65 in 2012, and the Liberals cancelled the move in 2016.

But there’s a challenge, said St. Germain.

“Not only is the government telling employees or normal people ‘You are expected to work until age 67.’ But the corollary of this is ‘Employers, why don't you employ people until age 67?’”

And there are corporate tax incentives to keep people working, he said.

“There's a provision that for a certain level of income, if you employed somebody past age 67, there will be no payroll deduction for various contributions to health insurance, QPP etcetera.”

It’s a clear signal from government, said St. Germain.

“Currently, large employers are very reluctant to use older workers. So, the culture has to change there.”