The federal government recently made significant changes to the Canada Pension Plan (CPP) and Old Age Security (OAS). Will the new rules make a big difference to Canadians' ability to start their retirement when they want to? We asked two advisors to take opposing positions in the following debate:
Be it resolved that new CPP and OAS rules mean Canadians born after 1965 will not be able to retire before age 75 without making significantly higher levels of investments and savings during their working lives than did their predecessors.
Gábor Vaski, CSWP Strategic Wealth, CFP, BMus
Senior Financial Consultant
Investors Group Financial Services
People born after 1965 will have to save significantly more during their working lives than their predecessors—though the reasons go deeper than changes to the CPP and OAS rules.
First, different generations have different commitments to saving. Canadians born around 1965 started their careers during the recession of the early 1990s. As a result, many average 50-year-olds are much better savers than the average 60-year-old. There was an anticipation that we weren't going to get anything from CPP—and, in fact, much of the financial planning done in the early to late 1990s looked at CPP as a bonus and didn't calculate it into retirement plans. But the children of baby boomers—a big demographic—have very different attitudes. They don't have as much fear about the long term. If you come along at a time of abundance, it affects your attitude for life. Unless they save a lot and soon, they may well have to work to age 75, despite the fact that CPP is now on solid ground.
Other factors that come into play are longevity and lifestyle. When CPP was first introduced, the average lifespan was 66 or 67. Today, it's around 80. Meanwhile, our lifestyle expectations have soared. How many people live in this country compared to 30 years ago? Maybe 20% more. How many more houses are in this country? Maybe 100% more, and they're bigger than houses built decades ago. More years of spending in retirement combined with more money spent each year means people will need much more than the typical $500,000 nest egg before CPP and OAS. Working to 75 may be the only solution.
And it's not an unappealing choice. For many years, there was a rush to retire. But now more and more of my clients are not looking at full retirement. They're looking at a transition stage that lasts three, five or even 10 years—consulting, working part-time, being self-employed or working for someone else.
Overall, I encourage clients to save as much as they can while enjoying today's lifestyle—and to recognize that fortunes change so basing your strategy for the next 30 years on where you are today may not be realistic.
John De Goey, CFP
Vice President, Associate Portfolio Manager
Burgeonvest Bick Securities Limited
Assuming savings rates and expected rates of return for different asset classes neither improve nor get worse, the recent changes to CPP and OAS will not delay retirement for Canadians born after 1965 until they are age 75. Directionally, it's true the retirement age will increase, but I don't think we'll reach age 75 in our lifetime.
Actuarially speaking, life expectancy is increasing by about two years per decade, and that rate has held steady for a number of generations. Let's compare the situations of two people, one 65 and one 35. All else being equal, the 35-year-old has a life expectancy six years longer than the 65-year-old. To support the same average length of time in retirement, he or she may have to work to age 71. Keep in mind this provides six more years of saving and not taking money out—and is nowhere close to age 75.
And public policy makers are already thinking along these lines. By setting the RRSP to RRIF conversion deadline at 71, increasing the incentive to delay receiving CPP post-65 and raising the age at which you can collect full OAS to 67 from 65, the government is sending a signal they're moving towards a homogenized public policy retirement date somewhere in the very late 60s or very early 70s. Again, there is a shift, but it is not nearly as severe as age 75.
Finally, the advantages of taking CPP later—but not past age 70—are substantial. Previously, you lost 0.5% per month for taking CPP before your 65th birthday and gained 0.5% per month for taking CPP after your 65th birthday. Now, you lose more before 65 (0.6% per month) and gain more after 65 (0.7% per month). That 0.7% adds up to 8.4% per year. If you delay for the maximum five years, until age 70, you get 142% of your CPP benefit.
So, if you are 35 years old and retire at age 71—a full four years earlier than 75—you will already have been receiving OAS for some time and CPP for a year, and you could actually be better off than today's 65-year-old. All in all, I am very confident those in their mid-40s and younger will be able to retire with the same quality of life well before age 75.