Time to question retirement rules

While Canada may not be facing a benefit crisis like many European nations, its rules on retirement should be updated to reflect how most people live and work, says the Canadian Institute of Actuaries.

“Canadians who are members of pension plans are living longer than previously predicted,” says Jacques Lafrance, president of the Canadian Institute of Actuaries.

A 65 year old woman in 2014 had been expected to live another 22.1 years. The actuaries’ new projection is she’ll live another 24.5 years. For a man aged 65, that number has increased over 2.5 years to 22.5 years.

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“Think about how living an unanticipated 2.5 more years might impact your retirement saving strategy—or your employer’s pension plan. These changes are significant to Canadians, their employers, and their governments,” says Lafrance.

While living longer poses financial challenges, the federal government won’t go bankrupt over the benefits, say the actuaries. Prior to the change in the OAS/GIS entitlement age, the cost of the programs was expected to increase from 2.3% of Canada’s gross domestic product in 2010 to a peak of 3.1% in 2030. With the high retirement age to be fully implemented in 2029, the cost is expected to peak at 2.9% of gross domestic product in 2023.

However, there are other pension problems policymakers should tackle. Current legislation forces individuals to start withdrawing registered retirement savings by age 71. Considering the longer life spans, and that investment returns have been low, the government should consider raising that age to provide more flexibility, the actuaries say.

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The concept of a retirement age itself may be outdated. Many older Canadians are transitioning gradually to retirement by working part-time or for reduced hours. But our current regulatory environment was designed in an era when workers moved immediately from full-time work to a complete cessation.

“While governments have made some progress in amending pension legislation and government programs to better accommodate phased retirement, a fresh look at these rules in order to make further progress would be a good idea,” Lafrance adds,

Another concept that should be re-examined is early retirement incentives. Many workplace defined benefit pension plans subsidize early retirement. While some private sector workers have this benefit, roughly 80% of government employees have plans with early retirement incentives.

These incentives are costly and their impact is not well understood, and as fewer private citizens have this benefit, it’s perceived as unfair that public sector workers continue to have it, say the actuaries.

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Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.