Buck Bond Group

Should we increase the retirement age for Canada’s C/QPP and OAS? Not yet.

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There is growing evidence that Canadians are living longer and it may make sense to start retirement later. Currently, the normal retirement age under the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) is age 65, and the normal retirement age for Old Age Security (OAS) is scheduled to increase from age 65 to age 67.

However, studies from both academics and professional organizations indicate that increasing the normal retirement age of these programs in Canada may not be needed from either a cost or a demographic perspective.

Delaying Retirement

In 2012, the Canadian federal government introduced changes to OAS to increase the eligibility age and introduce the option of delaying retirement, with the objective of encouraging longer labour force participation. The eligibility age for the basic OAS pension and the Guaranteed Income Supplement (GIS) will increase gradually from age 65 in April 2023 to age 67 in January 2029. The eligibility age for the Spouse’s Allowance (a benefit available to the spouse of an OAS pensioner, where the spouse is age 60 to 64) will increase from 60 to 62. As of July 2013, it’s possible to defer OAS payments for up to five years, with an actuarial increase of 0.6% per month of delay.

The normal C/QPP retirement age is 65. Pensions can start earlier or later by up to five years, with a constant 0.5% per month adjustment factor. Since 2011, the adjustment factor for early retirement has gradually increased to 0.6% per month from Jan. 1, 2012 to Dec. 31, 2016. For a postponed pension start date, the increase adjustment factor will grow to 0.7% per month for retirements on and after January 2014, as shown in the following table.

Effective Date Decrease Factor Increase Factor
January 2014 0.56% 0.70%
January 2015 0.58% 0.70%
January 2016 0.60% 0.70%

This means that, in the future, if a person starts a CPP pension at age 60, it will be reduced by 36%. Pension payments starting at age 70 will increase by 42%. Slightly different rules apply to QPP benefits.

In addition, the Work Cessation Test (for those retiring before age 65, where they had to stop working or significantly reduce their earnings for at least two months) was removed. Now, for both the CPP and the QPP, additional contributions are required, with slightly more pension benefits earned.

Are Social Security Costs Sustainable?

The University of Waterloo and the Canadian Institute of Actuaries looked into the cost issue a couple of years back. Their analysis was that increasing the normal retirement ages formally in OAS and GIS isn’t necessary, as the cost of these plans is expected to increase gradually over time and then recede back to current levels by 2050.

OAS/GIS costs are paid from general revenues (i.e., from taxpayers). In 2012, the cost was $36.5 billion, and this cost is projected to increase to $108 billion by 2030 (a 41% increase from baby boomer retirements, 32% from longevity increases and 27% from inflation). Under the OAS plan, OAS monthly payments increase with the Consumer Price Index (CPI). Meanwhile, Gross Domestic Product (GDP), from which OAS and GIS are paid, normally increases faster than the CPI, as it incorporates productivity and average age increases.

As a result, in spite of projected increases in the ratio of retirees to contributors in these plans, OAS/GIS costs are projected to remain relatively stable, increasing from 2.3% of GDP in 2012 to 3.1% in 2030 and then returning to 2.6% of GDP by 2050. Raising the OAS/GIS retirement age from 65 to 67 has mitigated some cost increases, but further changes in the retirement age should not be necessary to maintain cost stability.

Similar cost stability is reflected in projections for the C/QPP programs in the 25th CPP and QPP actuarial reports. The CPP is sustainable at 9.9% of pay and QPP at 10.8% of pay (as at 2017). The CPP has changed its early/late adjustment factors to reflect increases in life expectancy.

Raising the Retirement Age and Public Policy

Would it therefore still be good policy to raise the normal retirement age of Canada’s social security programs? To address this question, Robert Brown and Claire Bilodeau developed a model to determine a macroeconomic indicator of an optimal age at retirement under these programs. This model divides the total demand for consumption of goods and services among all members of Canadian society by the total supply of goods and services within the country’s working population. The balancing variable in the model is the retirement age.

The model projected that, from 2017 to 2034, Canadians should retire between ages 60.3 and 60.9 to keep supply and demand of GDP in balance.

Brown also noted that if productivity increases were a minimum of 1.29% per year, then no retirement age increases would be required. If productivity increases are lower or flat, the balancing retirement age becomes age 66, approximately.

In other words: even though many OECD countries have used the lever of increasing retirement age to address the sustainability of social security programs in their respective countries, Canada may not have to use this lever just yet.