How comfortable your clients are in retirement may depend on when they access various government benefits — and how flexible they are about their projected retirement date.
Covid-19 has forced many Canadians to become more flexible, and millions now work from home. Your clients may benefit from that new-found flexibility when mapping out their retirement, says Michel St-Germain, president of the Canadian Institute of Actuaries (CIA).
“There’s a blur now between private life and office work, and my sense is that this will contribute to much greater flexibility in retirement,” St-Germain says. The pandemic, he adds, “changed the notion” that people will simply stop working at age 65.
Raising the retirement age is an idea that has been discussed in Canada and abroad as a means of ensuring the financial viability of pension plans and government benefits. A 2019 report from the CIA argues the federal government should consider increasing the target age for receiving certain retirement benefits.
For example, the CIA report suggests increasing the CPP/QPP target eligibility age to 67 from 65 and raising the minimum age at which the benefits can be claimed to 62 from 60. The CIA report also recommends increasing the maximum age for deferring benefits to 75 from 70.
Like the existing CPP system, the CIA proposal would allow those who choose to retire later — at 67, for example — to receive a higher benefit payout, while those who retire at 65 would receive the same benefit that is available to them today. Similarly, the report suggests raising the eligibility age for claiming old age security (OAS) to 67 from 65 and increasing the maximum age for deferring that benefit to 75 from 70.
For registered pension plans (RPPs) and RRSPs, the CIA report argues the government should “provide greater flexibility for individuals to manage retirement income by deferring the maximum age for commencing receipt of income from 71 to 75.” As well, the report suggests employers that offer RPPs should be allowed to change the target retirement age from 65 to 67 on a “go-forward basis.”
One recent change to Canada’s retirement system is the adjustment to the CPP contribution rate. The contribution rate for employees will rise incrementally to 5.95% annually until 2023 — a change that began in 2019, when the rate was 4.95%.
The political will to make further changes to the retirement system may be lacking because of the pandemic, during which the federal government generously loosened its purse strings. (See sidebar.) But Avery Shenfeld, managing director and chief economist in the capital markets department of Canadian Imperial Bank of Commerce, argues that the retirement system should maintain flexibility while still offering people incentives to keep working, such as allowing people to defer CPP in order to receive increased benefits later.
“That leaves it up to the individual to decide [when to retire], but does create an incentive for some people to work longer,” Shenfeld says.
Perpetually low interest rates are another concern for retirees and people saving for retirement.
“The challenge to having a strong retirement income in a period where interest rates [are low] is not going to go away with Covid disappearing,” says Shenfeld, who adds that low interest rates also are problematic for private pension plans that need to generate income “in a world where government bonds yield less than inflation.”
Given the low-rate environment, Canadians may be faced with the choice of either reducing their consumption of assets in retirement or working longer, St-Germain says.
Automatic enrolment in workplace pension plans could potentially boost Canadians’ retirement savings, says Keith Ambachtsheer, president of Toronto-based KPA Advisory Services Ltd. and a senior fellow of the National Institute on Ageing at Ryerson University.
Automatic enrolment generally means that an employee has to opt out of a company pension plan rather than opt in, which may increase the likelihood of employees contributing to workplace pension plans.
The pandemic also highlights the rising costs of health care — and long-term care homes in particular, which have been hit hard by the novel coronavirus.
“Our retirement programs, OAS and [the guaranteed income supplement] are quite sustainable,” St-Germain says. “What’s not sustainable are the health-care costs of an aging population.” He adds that the pandemic has only added to those costs, which will be transferred to the next generation of workers.
When will the spending end?
Covid-19 relief programs such as the Canada Emergency Response Benefit have caused the federal government’s deficit to skyrocket. In late September, the Parliamentary Budget Officer predicted a deficit of $328.5 billion for 2020-21.
That number raises concerns about how the government will climb out of such a deep hole, but Avery Shenfeld, managing director and chief economist with Canadian Imperial Bank of Commerce, argues that government spending will be brought under control once pandemic-related programs are phased out.
“Presumably, two [or] three years from now, we won’t be paying massive wage subsidies [and] we won’t have a double-digit unemployment rate,” Shenfeld says. “A lot of the work to bring the deficit down will simply be to allow those programs to phase out.”