Government pensions have been much in the news lately and that’s not surprising given the demographic headwinds hitting retirement plans around the world.
The most dramatic events have been in France where there have been widespread, frequently violent protests against a government plan to raise the pension age to 64 from 62.
In the U.S., there’s an acrimonious debate going on among the political parties about a looming funding crisis for Social Security. The issue came into sharper focus recently with the release of a government report showing that Social Security won’t be able to make full payments to retirees starting in 2033 unless Congress does something to shore up its funding.
Meanwhile in Quebec, last month’s provincial budget introduced changes to the Quebec Pension Plan. Among the changes, the government moved up the latest age at which a QPP recipient can start receiving an enhanced pension, advancing it to 72 from 70. As well, Quebecers who are still working at 65 and older, and receiving a pension, will be able to opt out of contributing to the QPP.
The common factors in all these developments is an aging population, the retirement of the large baby-boom generation and longer life expectancies.
The OECD highlighted just how widespread pension problems are in its Pensions at a Glance 2021. It warned that “putting pension systems on a solid footing for the future will require painful policy decisions: either asking to pay more in contributions, work longer, or receive less pensions. But these decisions will also be painful because pension reforms are among the most contentious, least popular, and potentially perilous reforms.”
While demographic trends are challenging for Canada’s economy, it’s important to note that actuarial projections for both the QPP and CPP show their funding is on a solid footing for many decades into the future. (The QPP changes are mainly aimed at keeping more older Quebecers in the workforce, not shoring up its finances.)
However, the funding picture isn’t as rosy for the other principal government pension plan in Canada – Old Age Security. Unlike the other plans, OAS – and the Guaranteed Income Supplement for low-income retirees – are funded from the federal government’s general revenues, rather than a pool of accumulated savings.
As more baby boomers retire, these plans are taking an ever-larger chunk of the federal budget. OAS and GIS together already make up Ottawa’s largest spending program at nearly $60 billion in 2023-24.
Given their high cost, could OAS benefits be scaled back or the retirement age increased? It’s possible, but past attempts have proven a tough sell. Older readers will remember the famous “Goodbye, Charlie Brown” exchange between retiree Solange Denis and then prime minister Brian Mulroney that sank a 1985 attempt to limit OAS’s inflation protection.
More recently, a 2012 plan to move the OAS eligibility age up to 67 from 65 by Stephen Harper’s Conservative government, was reversed by the Liberals. Far from reducing OAS benefits, the Trudeau government increased payments in 2022 by 10% for those 75 and over.
One area where change may be in the offing is in how Registered Retirement Income Funds (RRIFs) are regulated. The Finance Department is currently studying potential changes to RRIF rules.
Several groups have advocated raising the conversion age and reducing or eliminating mandatory withdrawals as a way of ensuring that seniors’ savings last throughout their retirement years.
Currently, Canadians must convert their RRSPs into RRIFs by the end of the year they turn 71. They are then required to withdraw a rising percentage of their RRIF each year, which is taxed as income.
In a submission to the Finance Department, Laura Paglia, CEO of the Investment Industry Association of Canada, recommended raising the age at which RRSPs must be converted into RRIFs and reducing the RRIF annual withdrawal rates with the goal of abolishing them entirely.
“The existing rules date back to 1992 when interest rates were higher and seniors were not living as long,” Paglia writes. “Today, it’s unlikely real returns on safe investments will keep pace with the withdrawals. Seniors have a higher chance of outliving their savings.”
“Unnecessary RRIF payments may even trigger clawbacks in retirement income support programs such as Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and provincial supplements, causing some seniors to forfeit some or all of the government benefits they might otherwise have received.”
It’s unclear how Ottawa will come down on the issue of modifying RRIF rules, given the potential impact on government finances. What is not in doubt is that pension plans and how retirement are funded will remain front and centre as the population ages and the number of retirees grows.