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.