April 14, 2010
The Mowat Centre features editorial by Thomas Klassen and Martin Hering on the merits of raising the retirement age in Canada.
Canadians can expect to live longer and healthier lives than ever before. Believe it or not, there is a downside.
The recent economic crisis highlighted the troubles facing pension plans worldwide. Both private and public pension plans are facing shortfalls not only because of plummeting returns on investments and depressed stock markets, but also due to the fact that the number of people 65 and older will rise dramatically in the next decades. Retirees will receive the same benefits for a longer period of time – which could lead to problems.
Making sure that Canadians continue to retire in comfort can be achieved in only two ways: Require workers to contribute more of their employment income to pension plans and/or require workers to stay employed longer. Neither will be popular, but there is no magic bullet.
Many countries, including the US, Britain and Germany, recently increased the eligibility age for pensions. In contrast, in Canada, early retirement is still encouraged, with Canada Pension Plan benefits available at age 60, and many employer plans enticing workers into retirement while in their 50s. Canada’s incentive structure encourages people to retire early – exactly the opposite of what we need today.
Not too surprisingly, when pension plans are structured to permit early retirement, pension payments to retirees are small. Over the past decades, governments, like individuals, have become enthralled with ‘Freedom 55.’ This is great marketing, but lousy public policy.
Canadians, at age 65, can expect to live another two decades, with most of these years healthy and active ones. In the coming decades, life expectancy will grow by another three to four years.
Raising the eligibility age for public (and private) pensions recognizes that people start work later now than ever before, and live longer. It would also significantly improve the financial sustainability of pension plans, make benefits more secure and, in the case of the Canada Pension Plan, create the possibility of higher benefits.
International experience shows that retirement age reform is more likely to succeed when initiated well before longevity increases or funding problems occur. The US made the decision to move the normal retirement age from 65 to 67 years in the early 1980s, but the implementation began only in 2000 and will end in 2024. Britain and Germany, which recently increased the normal age of retirement from 65 to 68 years and from 65 to 67 years, respectively, also gave workers advance notice and provided long transition periods.
British and German independent expert commissions played a crucial role in examining the challenges of rising life expectancy, developing recommendations, and building consensus. The commissions persuaded British and German policymakers that they needed to act and that a retirement age increase was the best option for pensioners over the long haul.
Increasing the retirement age will be more acceptable to workers if they understand the trade-offs: maintaining current retirement age leads to less secure pensions, higher contributions, and lower benefits; raising retirement age leads to more secure pensions, stable contributions, and higher benefits.
Fixing pensions and providing a comfortable retirement for Canadians cannot be accomplished painlessly. But retirement age has been changed before. For example, until the 1960s, age 70 was the age at which the government provided support. It then changed to 65 and in the 1980s – at a time of increasing life expectancy – the CPP lowered it again to age 60.
Given demographic realities, now is the time for a debate on retirement age. Understandably, politicians are loath to propose that people work longer. However, as with any medicine, the earlier you start, the more effective the results. The creation of an independent expert commission on pension reform, followed by extensive consultations with citizens, is a vital step to protect Canada’s workers.
This piece is based on “Strengthening Fairness and Funding in the Canada Pension Plan: Is Raising the Retirement Age an Option?,” SEDAP Research Paper 263 (January 2010).
Thomas Klassen & Martin Hering
April 14, 2010
ENTIRE ACTUAL ARTICLE PASTED AND HIDDEN HERE.