egg carton with one egg left / s-cphoto

To improve overall retirement security, the federal government should provide Canadians with increased retirement savings room and allow them to defer CPP and OAS to as late as age 80, argues a new report published by the C.D. Howe Institute on Thursday.

These and other recommended changes would also level the playing field between public-sector workers, the majority of whom have access to defined-benefit (DB) pension plans, and their private-sector counterparts, wrote authors Alexandre Laurin and George Turpie.

“In the private sector, defined-benefit pension coverage melted away by two-thirds in the last 30 years, from 26% of employees in 1989 to only 9% in 2019,” the study said. “At the same time, private sector participation in capital accumulation plans (CAPs) increased at a rapid pace.”

CAPs include defined-contribution (DC) plans, group RRSPs and deferred-profit sharing plans, as well as hybrid plans that have been converted to a DC plan with a legacy DB component. In 2019, 28% of private-sector workers were covered by a CAP or hybrid, compared to 4.5% in 1989.

The study suggested possible changes both during the accumulation and decumulation phases to help Canadians save for retirement.

Accumulation phase changes

The report recommended:

  • Increasing retirement savings room to the limits accessible to high-income members of public-sector DB plans.
  • Allowing sponsors of groups RRSPs to deduct administrative expenses and payroll taxes, similar to DC plans and pooled registered pension plans.
  • Introducing a tax-free pension account (TFPA), which would enable tax-free growth and withdrawals like a TFSA. Existing DC plans could include a locked-in TFPA option, which would provide a tax-prepaid alternative for retirement savings well-suited for middle- and low-income savers.

Decumulation phase changes

The report recommended:

  • Allowing Canadians younger than 65 to access the pension income tax credit and pension income splitting on pension benefits, lifetime annuity income from registered savings plans, variable benefits from a DC plan, and RRIF withdrawals. Currently, only pensioners of DB plans can claim these tax breaks under age 65.
  • Allowing for OAS and CPP deferral to 75 or 80, from the current 70, with corresponding higher payments for each month delayed. (Quebec introduced a change in its 2023 budget to allow QPP to be deferred to age 72 starting in 2024.)
  • Adjusting RRIF minimum withdrawals to reflect longer life spans and lower expected long-term investment returns. RRIF minimum withdrawal rates prior to age 71 should be eliminated.
  • Increasing the conversion age of RRSPs to RRIFs, and the age employers must stop contributing to tax-deferred savings plans, from the current age of 71.
  • Introducing changes to the new variable payment life annuity (VPLA) and advanced life deferred annuity (ALDA) savings products to allow them to gain more widespread acceptance.
  • Allow life annuities to be held within TFSAs, including VPLAs and ALDAs.