I’ve often said that Canada’s three-pillar retirement income system serves today’s seniors rather well, especially those who used to have lower working income. The system is far from perfect, however, and one of its more glaring flaws involves the ages at which people can retire. I have yet to hear a cogent justification for why the eligible retirement ages differ so drastically from one pillar to the next.
Consider the first pillar, which consists of old-age security and its income-tested companion, the guaranteed income supplement. The earliest the OAS pension can begin is age 65. A full pension requires 40 years of residency in Canada after the age of 18. If your taxable income is more than about $120,000, the government claw back the entire OAS pension.
What message is the federal government trying to send with the first pillar? It would appear to be something along these lines: “If you’re in a low-income group, we want to help you achieve retirement income security but we don’t want to encourage you to stop working too early; the earliest we’ll pay out the OAS pension is at 65.”
Now let’s jump to the third pillar, which includes registered pension plans. Every registered pension plan has to specify a normal retirement date. It’s usually the month following one’s 65th birthday and, while it may be earlier than that, it can never be later. The normal retirement date, however, is little more than a placeholder. The vast majority of members in defined benefit plans can and do retire with an unreduced pension well before 65, if they’ve been with the same employer for a lengthy period. As for reduced pensions, every plan member must be able to retire and receive an immediate pension by age 55.
The implicit message from the government with the third pillar is quite different: “If you’re employed on a regular basis and your employer is good enough to sponsor a pension plan, we want to ensure that you can retire by age 55. In fact, we’ll offer a significant tax break to your employer to facilitate that. We feel so strongly about this incentive that we’ve led by example; virtually every public sector employee is entitled to it.”
It’s difficult to reconcile these very different messages. OAS payments can’t begin earlier than 65, while normal retirement in workplace pensions isn’t traditionally later than 65.
That brings us to the second pillar: the Canada/Quebec Pension Plan. The CPP/QPP straddles the first and third pillars by allowing pensions to commence as early as age 60 or as late as 70. It tries to be neutral by applying a penalty for starting the pension early and a bonus for deferring it past 65. In fact, these aren’t really penalties or bonuses; they’re merely adjustments so the CPP/QPP pension at any age in a 10-year range is more or less actuarially equivalent to a pension starting at 65.
The underlying message of the second pillar is most in keeping with the times. People want to be able to retire early, but a growing number need to keep working past 65. With CPP/QPP, the government is essentially saying: “We want to give you the opportunity to retire as early as age 60 or as late as age 70. We’re not trying to influence when you retire within this 10-year range.”
What we have, then, are three pension pillars that send Canadians three very different messages. If we were to start a retirement income system today, that’s hardly how we’d build it. The disparity arises because different parts of the system date back to different eras at the hands of different political parties and levels of government. It’s sort of like successive homeowners renovating the same house over a couple of generations.
The system would be more sustainable and more rational if the allowable retirement ages were in harmony across the three pillars. To make that happen, it helps to have some guiding principles. What about flexibility, fairness and sustainability?
Space here allows me to address only the first principle. Flexibility is achieved by allowing pensions within each pillar to start as early as age 55 or as late as age 72, the latest that one can start to draw an income from an registered retirement income fund.
Will harmonization along those lines ever happen? I can see a lot of hurdles, but the naysayers should be ready to defend their position. If society considers collecting OAS or a CPP/QPP pension at age 60 to be much too early, we should be asking why it isn’t only acceptable to do so within the third pillar, but the tax system actually encourages it.