Realigning Canada’s three-tiered retirement system

The last actuarial report on the Canada Pension Plan (CPP) estimated that 38% of Canadians in 2010 started receiving their CPP at age 60. Another 38% or so started their pension at 65. The remaining 24% started their CPP at other ages, mainly between 61 and 64. To someone new to Canada, the “normal” retirement age would not be at all obvious. Yet ask any Canadian and he or she will tell you that normal retirement means age 65.

If we look at our three-tiered retirement system from an historical context, it is easy to see how we arrive at this conclusion. Old Age Security (OAS), which is part of Tier 1, starts at age 65. (It used to be 70.) The CPP and the Quebec Pension Plan, which comprise Tier 2, used to be available only at age 65. Registered pension plans, which are part of Tier 3 along with RRSPs, generally define normal retirement as age 65 even when unreduced benefits are available earlier. And when mandatory retirement was permitted, it was triggered at age 65.

The trend toward de-emphasizing age 65 has been in place for a number of years now. One reason is a change in work patterns as an increasing number of Canadians work beyond age 65—some through need but many more through choice. In addition, people are living longer, which makes 65 look increasingly arbitrary as an age to stop working. When the CPP was introduced in the 1960s, the average 65-year-old male could expect to live another 14 years. His modern-day counterpart can expect to live another 20 years, while 65-year-old women can expect to live another 23. There is a creeping realization that one has to do something meaningful with all that extra time; one can only play so many rounds of golf!

Of course, the rest of the world has already concluded that the normal retirement age has to rise. Steps have been taken to raise it to 67 or 68 in most European countries as well as in the U.S. and Australia. We could do the same, of course, and increase the normal retirement age under the CPP to 67 starting in 2030 or so, but why not go one step further? Why not realign all three tiers of our retirement system to restore some of the consistency it once had?

A realignment would correct some glaring anomalies. For instance, the CPP allows for pensions to commence at any age between 60 and 70—with actuarial adjustment—but not OAS, which is payable only from 65. In registered pension plans, the typical range in starting ages is from 55 to 70, but it can be earlier. To summarize, retirement is available by age 55 in Tier 3, age 60 in Tier 2 and age 65 in Tier 1. Why are they all different?

There are other anomalies. For a DB pension plan to be registered, it must provide for an unreduced pension to be payable at no later than age 65, even though our increased longevity has made 70 the new 65. Moreover, we now accept the notion that 65-year-olds can work productively, which is why we abolished mandatory retirement, yet we haven’t upped the retirement ages in Tier 1 and Tier 2, even though they were originally supposed to be a form of insurance against the “disability” of old age. What are they now? Finally, we know the worker-to-retiree ratio will drop from the current 4:1 to only 2:1 in the next 25 years, yet we devote enormous amounts of taxpayer money to allow public sector workers to exit the workforce by as early as age 55. If the retirement system is to be compatible with workforce management, these inconsistencies need to be addressed.

Against this backdrop, it is hard to be overly enthusiastic about pooled retirement pension plans at this particular time. Should we be adding another vehicle before we realign our current retirement vehicles? It is even harder to think about expanding the CPP if we haven’t yet figured out what we should do with the retirement age under the current CPP.

Consequently, the current three tiers should be modified to realign pension commencement ages and to recognize longer life spans. One possibility is to allow pension commencement at any age between 55 and 75, with the amounts actuarially adjusted so that no given age is favoured. In the process, we could dispense entirely with the concept of normal retirement age.