Time to Increase Canada's Retirement Age?

The Canadian Institute of Actuaries put out a press release, Canada’s Actuaries Call for Discussions on Retirement Age:
It’s time for governments and Canadian workers to talk about updating retirement ages in Canada’s social security safety net, say members of the Canadian Institute of Actuaries (CIA) in a statement released today.

“Canadians are living longer than ever, and many are choosing to work beyond age 65,” says John Dark, FCIA, President of the CIA. “It makes sense to update our country’s retirement income programs to reflect this fact.”

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 as late as age 70. The CIA’s proposal recommends deferring these ages to 67, 62, and 75, respectively, giving Canadians the opportunity to 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. Additionally, sponsors of registered pension plans would be able to set a target retirement date of age 67 instead of 65, and individuals would be able to defer receipt of their RRSP income until age 75 instead of 71.

These changes mean Canadians could decide to take their retirement benefits later to receive higher lifetime retirement income.

The CIA’s proposal comes at a time when Canada’s population is living longer, private sector pensions are eroding, and Canada’s economy continues to run in a low interest rate environment. “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,” says Jacques Tremblay, FCIA, one of the statement’s lead authors.

Many industries are also experiencing or expect to see labour-force shortages in the future. “Allowing later retirement ages in our retirement income programs means people can have more flexibility to work to a later age,” says Joe Nunes, FCIA, the other lead author of the statement. “This gives Canadians a way to improve their retirement income security with the added benefit of easing the stresses on our labour force.”

Actuaries are tasked with ensuring the financial sustainability of pension plans in Canada, and the CIA includes more than 1,700 members working in this area. With this expertise, actuaries are well placed to help legislators and decision makers ensure the financial security of all Canadians.

“Our proposal is a starting point for discussion. We would welcome the opportunity to help governments review the country’s retirement programs and decide what changes work best for all Canadians,” says Mr. Dark.
Take the time to read the CIA's full report here. There is also additional information available here, including a podcast and infographics summary.

The CIA's report is intended to engage all Canadians in a healthy and much-needed discussion of changing societal needs and the best retirement program designs to support those needs.

I welcome this report, have immense respect for actuaries and think we need to engage in a serious public policy debate over designing the optimal retirement system given the changing longevity risk and the challenges Canadians are facing to save for retirement (click on image):


Put simply, as Canadians are living longer, there is a higher risk they will outlive their savings, especially if the low interest rate environment persists for decades.

In his latest article, the Globe and Mail's Rob Carrick explains why raising the age for CPP and OAS to 67 would benefit the whole country:
Starting CPP, QPP and OAS later will reduce the risk of outliving your savings because you’ll receive higher payouts of inflation-adjusted income as long as you live. Meanwhile, people working longer will help address the labour shortage and productivity issues caused by an aging population, and generate tax revenue for governments.

CPP and QPP benefits currently start at the regular rate at age 65, but you can take a reduced payout as early as 60 or delay as late as 70 to receive more money. In addition to making 67 the standard age to start benefits, the actuaries propose that 62 be the new minimum CPP age.

You could take CPP at 65 under the proposed changes and get the same amount as you would today. But if you waited to 67, you’d get 16.8 per cent more based on current numbers. If you waited until 75, you’d get something in the area of 42 per cent more than at 70 (that’s the current bonus for waiting until age 70 over starting at 65). Raising the default start for OAS to 67 from 65 would increase benefits by 14.4 per cent using 2019 numbers.

There will be opposition to these proposals, some of it legitimately based on the fact that people in lower income brackets have shorter lifespans and are thus penalized if their CPP and OAS start later. The actuaries pointedly didn’t recommend that the Guaranteed Income Supplement, targeted at the lowest income seniors, be raised to 65 as well.
Last week, I had a chance to discuss the key findings of this report with Joe Nunes, an actuary and lead author of the report.

What Joe told me is "71 is not old anymore" and that we need to have an appropriate discussion on retirement policy to reflect this new reality as the population ages.

We discussed their main proposals and I find them very sensible (click on image):


The key thing is these proposals wouldn't be enacted in one shot, they will be phased in over time, for example, by increasing the target retirement age by three months each year from 2021 to 2029.

Joe told me the proposals address longevity risk and investment risk because "allowing the money to be in the RRSP, CPP/ QPP, OAS longer will allow it to grow and provide a bigger payout."

As far as pushback, I stated that governments won't like deferring the age RRSPs have to be converted to RRIFs (from 71 to 75) because it means they will get less tax revenues up front, but I still think it makes perfect sense.

Joe told me he has read my comments on the benefits of defined-benefit plans and agrees, people who retire with more income, spend more and rely less on the social safety net. "So with these proposals, all you are doing is deferring taxes, not doing away with them altogether."

Michel St-Germain, another actuary who was on the conference call with us and a lead author of the report, did admit that "some people from Finance Canada might have an issue and that the perception might be the wealthy will benefit the most," but Joe said this is "short-term thinking and a false claim because eventually, the taxes will come in, just on a deferred basis."

Most importantly, just like enhancing the CPP makes sense, these proposals make sense because by bolstering our retirement policy, we are improving the economy over the long run. The proposals also address other issues too, like the labour shortages plaguing our country (click on image):


Still, let me be clear, while I'm in full agreement with Joe Nunes on these proposals, my preferred policy remains to enhance CPP for every working Canadian and to bolster our existing defined-benefit plans and expanding them to the private sector.

Deferring the age you have to convert an RRSP to a RRIF from 71 to 75 might prove to be great, especially if it's a bull market, but it doesn't guarantee you a higher payout down the road. Only deferring CPP/ QPP does.

Anyway, learn how updating Canada’s retirement programs will help grow the economy, decrease labour shortages and, most importantly, help protect Canadians against financial risks from increased longevity and inflation. Rob Brown discusses the CIA’s public statement on retirement age in a podcast which is available here.

Below, the Canadian Institute of Actuaries is calling for the government to raise the retirement age from 65 to 67 years. For more on this and why it's a good thing for Canadians, BNN Bloomberg is joined by Jacques Tremblay, partner in actuarial consulting with Oliver Wyman and one of the lead authors of the report. Listen carefully to his insights and start embracing "Freedom 67".

Update: Bernard Dussault, the former Chief Actuary of Canada shared this with me after reading this comment:
The CIA's proposal to increase from 65 to 67 the age of entitlement to unreduced pension benefits under a DB plan disappoints me because it fails to well address inter-generational equity by considering that life expectancy (let's say at age 65) is the same for all successive generations, which implicitly entails that current generations are subsidizing future generations' increase in life expectancy.

I commented to CIA by submitting the proposal that I made publicly on a few occasions since 2013 to the effect that the age of entitlement (AOE) should be based on the calendar year of birth (CYB), e.g.

AOE = 65 + (CYB-1955)/6

i.e. an increase of 2 months per year consistent with the approximate average (over last 40 years) increase in life expectancy at age 65.
I thank Bernard for sharing his insights on the CIA's proposals.

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