Retirees could benefit from postponing the time when they begin drawing their pension benefits from public plans.
Luc Godbout, is a professor in the Department of Taxation at Université de Sherbrooke and he also holds the Research Chair in Taxation and Public Finance at the university. He illustrated this deferment strategy during the retirement panel at the APFF 2024 Congress, an event of the Association de planification fiscale et financière (fiscal and financial planning association) held in Gatineau, Quebec from October 9 to 11, 2024. The Insurance Portal attended the live broadcast of the event.
The Government of Canada's Old Age Security (OAS) pension begins at age 65, with each year's deferral increasing the amount of the benefit. The maximum increase is reached at age 70. The full Quebec Pension Plan (QPP) pension begins at age 65 (more on deferring the CPP later in this article). The QPP pension is available from age 60, but is reduced by 0.5% to 0.6% per month it is taken before age 65. As with the OAS, deferral beyond age 65 allows the amount of the benefit to be increased. The maximum increase is reached at age 72.
Godbout shared a chart from the Chair in Taxation and Public Finance that shows the increase in public benefits based on several deferral scenarios.
More public funds, less private savings
Is postponement within everyone's reach? Luc Godbout presented simulations that defy intuition: the longer you postpone the start of public pension benefits, the less private (personal) savings you'll need for retirement. Godbout demonstrated this using a Chair simulator called Retraite - Épargne requise et régimes publics de retraite (Retirement – required savings and public pension plans).
The simulator estimates the savings required at retirement, based on various QPP and OAS deferral scenarios. In his presentation, Luc Godbout used the 2024 projection assumption guidelines from the Institute of Financial Planning and the FP Canada Standards Council, including 2.1% inflation rate and a 3.1% increase in maximum pensionable earnings. Its simulations also assume a 3% return on private savings, after deduction of management fees.
In addition, they take into account a 25% probability of living to age 95. Retirement at 65 or 60 is assumed to begin in 2024, for a person who has been working since the age of 25.
Based on these parameters, Godbout presented various deferral scenarios for retirement at age 65:
- OAS at age 65 and QPP at age 60, while still working. Required savings at age 65: $581,524.
- Application for OAS and QPP pension at age 65. Required savings at age 65: $412,148.
- Apply for OAS and QPP pension at age 66. Required savings at age 65: $380,781.
- OAS at age 70 and QPP at age 72. Required savings at age 65: $268,437.
The tool shows that we must dissociate retirement age from the age at which public benefits begin - Luc Godbout
At age 75, the OAS pension is increased by 10%. At that point, according to Godbout, public plan benefits will meet almost all retirees' financial needs.
In his view, these simulations invalidate the adage “a bird in the hand is worth two in the bush”.
“The tool shows that we need to dissociate retirement age from the age at which public benefits begin, and that postponing them is often the best option,” he said.
Elsewhere in Canada
Elsewhere in the country, people will also benefit from deferring the start of their Canada Pension Plan (CPP) retirement benefits, the QPP's counterpart for workers outside Quebec. For example, workers aged 60 could see their monthly CPP retirement benefit more than double, if they decide to defer it until age 70 rather than withdraw it at 60.
The Government of Canada demonstrates this on its website, in a fictitious example (see the following graph). It also points out that the QPP and CPP retirement programs are similar, but not identical.
Postponement trend
According to data from Retraite Québec, as well as Statistics Canada's 2019 Labour Force Survey, adapted by the Institut de la Statistique du Québec, the average retirement age reached a low of 58.4 in Quebec in 1998. It had risen to 64.7 by 2022. Godbout added that the average retirement age in Ontario had risen to 65.1 in 2022.
According to the results of the study Quand débuter ses prestations publiques de retraite : les avantages de la flexibilité, published by the university’s Chair in Taxation and Public Finance in September 2023, the proportion of workers who asked to receive their QPP pension before age 65 has decreased. The proportion of Quebecers applying for a QPP pension after age 65 “has increased significantly in five years, and the proportion applying after age 65 has doubled,” adds Godbout. “Five years later, the proportion of those requesting the cheque as soon as possible has fallen by 17 percentage points,” he comments.
However, Quebecers are still more likely to ask for their pension in advance. Just over 2% are currently receiving the maximum QPP pension. More than four out of 10 receive between 70% and 99%. According to the Retraite Québec website, the maximum retirement pension from the basic QPP plan is $16,015 in 2024, for a person who applies for it at age 65 and had an annual employment income of $73,200, the maximum earnings eligible for the plan.
Living on hope
In Canada, life expectancy for people who reached the age of 65 between 2020 and 2022 averages 85.8 years. Life expectancy for women who reached age 65 between 2020 and 2022 averages 87.1 years, and 84.3 years for men (Statistics Canada, Life expectancy and other elements of the complete life table, 2023).
What's important is the life expectancy you'll have when you retire - Luc Godbout
Luc Godbout provided a profile of life expectancy in Quebec, based on data from the Institut de la statistique du Québec. “What's important is the life expectancy we'll have when we retire,” says Godbout on the subject of the timing of public pension benefits.
“Life expectancy at age 65 has risen from 79.9 years in 1971 to 85.9 years in 2023. A leap of six years,” he points out.
He believes it is equally important to consider the “distribution of deaths.” The highest proportion of deaths for people aged 65 and over is in the 89 age group,” notes Godbout. You're just as likely to die at 82 as at 100, and just as likely to die at 68 as at 94. You have a 50% chance of surviving to age 90, a one-in-four chance of surviving to age 95, and a one-in-10 chance of living to age 98.”
Improvements in life expectancy over the years will also influence mortality assumptions. “We need to keep these figures in mind when planning how much money we'll need for retirement,” he suggests.
This article is a Magazine Supplement of the December issue of the Insurance Journal.
