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July 5, 2018

"Saving privately for retirement, and spending the proceeds after retirement can be made easier and more secure with the flexibility provided in C/QPP and OAS."

Canadians want a reliable retirement income so they can enjoy life without worrying about outliving their savings. They also want flexibility so they can adapt to changing circumstances, particularly relative to their health. Delaying receipt of public-pension benefits — Canada or Quebec Pension Plans (C/QPP) and Old Age Security (OAS) — to age 75 can help on both counts.

Retirement planning is challenging. Most of us struggle with how much money we need to save, and we see post-retirement financial decisions as a separate and secondary consideration. Yet, as we show in our recent C.D. Howe Institute study, the manner in which savings are used in retirement has a direct impact on how much we need to accumulate prior to retirement and how much retirement security we will enjoy once retired.

Under the current Canadian public pension system, C/QPP benefits can start at any time between ages 60 and 70, and OAS benefits at any time between 65 and 70. C/QPP benefits are reduced if they start before age 65, and all public benefits are enhanced if commencement is after age 65. There is no requirement to cease work or employment to start these benefits.

Our recent study analyzes the implications of public-pension deferrals and opportunities to effectively convert private savings into secure, inflation-indexed public pensions. Post-retirement deferral of receipt of public-pension benefits reduce private savings required to reach one’s targeted retirement income. This is particularly attractive to self-employed and to middle- and upper-middle-income Canadians who use capital accumulation plans such as RRSPs, TFSAs, and other tax-assisted retirement-savings vehicles.

For instance, a worker retiring at 60 years old, having earned the average wage, and planning to maintain her targeted retirement income until 94 years old, would need a nest egg of $435,000 if she claims her C/QPP immediately and her OAS as soon as she becomes eligible at 65. If she deferred receipt of both public pensions until age 70, she would need a nest egg of $391,000 at retirement — thus enjoying a 10 per cent reduction of required savings and, most importantly, greater retirement security.

Effective January 1, 2019, C/QPP will gradually provide extra pension benefits. In order to limit inter-generational transfers, the expansion will be phased in over the next 40 years. Consequently, it will do little for Canadians who will retire within the next 20 to 25 years. To help them, we should extend the deferral period from age 70 to age 75 for all public pensions. This could be done immediately at very little cost. This increased flexibility should be combined with efforts to raise awareness and provide information on the flexibility built into public-pension programs.

Retirement is an individual decision that Canadians make depending on their particular health, work, financial and family circumstances. OAS, GIS, and C/QPP are foundational. They ensure low-income Canadians have a reliable pension income they can live on, and provide a secure stream of retirement income for life for others to build on.

The upcoming improvements to C/QPP will help all Canadians. However, middle- and upper-middle-income Canadians, especially those over age 40 today, will still need significant private savings if they want to maintain their standard of living after they retire. Saving privately for retirement, and spending the proceeds after retirement can be made easier and more secure with the flexibility provided in C/QPP and OAS. Extending that flexibility beyond age 70 will lead to increased public support for these plans and, ultimately, a stronger system and more enjoyable retirements.

Antoine Genest-Grégoire, is senior research associate, Université de Sherbrook. Bernard Morency is adjunct professor at HEC Montréal and senior fellow at the C.D. Howe Institute.

Published in the Financial Post