Postponing retirement has become a new reality for many older workers in the wake of the market crash, underlining the need for reform of the rules around retirement saving in tax-deferred programs.
In “The Power of Postponed Retirement,” author Joseph Nunes argues Ottawa should raise the age at which workers must stop contributing to tax-deferred saving vehicles and start receiving income from them to age 75 from the current 71.
Working longer is one of the levers that savers in defined-contribution plans have to build up their nest eggs to the desired level. The author quantifies the relationship between saving more during a shorter work career versus saving less and working longer. He finds that starting with a salary of $50,000 and a baseline savings rate of 10 per cent of salary, saving an additional 1.5 per cent at age 30 is equivalent to postponing retirement by one year. Comparatively, at a starting salary of $100,000, a one-year postponement of retirement equates to only a 1.0 per cent increase in the career-long rate of savings.
“This means that given the COVID-19-related slump in the market, older workers may need to spend extra years on the workforce, or settle for a lower level of retirement income,” says Nunes.
The report notes workers whose pensions are provided through the traditional defined-benefit retirement system are fully, or at least partially, protected from the unpredictable costs of pensions since those costs are borne largely by the employers that fund their pension promises. In contrast, workers who rely on the defined-contribution pension system must, for the most part, bear responsibility for these unpredictable pension costs.
The report offers a number of recommendations to help aid workers seeking to rebuild their nest eggs:
In order to allow workers saving in a defined-contribution arrangement (most of the private sector) to accumulate sufficient savings to allow for retirement before age 65, Ottawa should raise the allowable contribution limits in the defined-contribution system to reflect the fact that retirement at age 60 requires a significant rate of savings during a much shorter working lifetime. If, in the alternative, the government wishes to discourage retirement before age 60, then the first step is the elimination of the generous early retirement benefits available to many public-sector workers before that age. Ultimately, the goal of equal outcomes in the defined-benefit and defined-contribution regimes should be restored, as was originally intended when the current tax-assisted retirement system was introduced in 1990.
Recognizing that working past age 70 will become more common in the future, Ottawa should also raise the age at which workers must stop contributing to tax-deferred saving vehicles and start receiving income from them to age 75 from the current 71. In addition, increasing the age threshold will be timely for savers looking to defer their retirement and rebuild their nest egg after the recent market crash. It would also give some breathing room to retirees forced to sell stocks at a loss to meet mandatory minimum withdrawals of their tax-deferred savings.
In support of longer work lives, the federal government, with cooperation from the provinces and territories, should amend OAS and the CPP to allow for the deferral of income from these programs to age 75, with appropriate rates of increase in the benefit rates. This change is especially important to workers past age 70 that would otherwise see some or all of their OAS benefit ‘clawed back’ under the current tax rules.
Joseph Nunes is Co-founder and Executive Chairman of Actuarial Solutions Inc; and David Blackwood is Communications Officer, the C.D. Howe Institute. firstname.lastname@example.org.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies.